In my series on using intel to optimally price legal matters (Part 1, Part 2, Part 3) I mentioned that the calculation of profitability requires that a firm have the discipline to promptly close matters. I have since been asked how to accomplish this feat, seemingly impossible in certain firm cultures.
“(Pricing) can just destroy you if you don’t do it right. It doesn’t matter whether you’re putting out a novel you’ve written or providing a service through a pest control company or you’re a veterinarian. The bottom line is that pricing is extraordinarily important.”1
Until the past decade, most law firms simply billed clients according to their current rate sheet (with occasional discounts) and gave pricing scant thought. In today’s market, that won’t do. Pricing is much more important than in those good old days, not just in terms of the amount charged, but in terms of the billing structure (e.g., caps, collars, fixed fees, contingencies, hold-backs, success bonuses.)
With law firm margins thinner than before, it’s necessary to understand the profitability of each matter and client. Effective pricing means structuring fees so the firm wins the work and that the work is profitable. This is also a marketing opportunity in that optimal pricing helps clients meet their strategic goals (e.g., predictability, and “win at all costs” when needed); and it’s an opportunity to strengthen client relationships by increasing transparency.
Business Intelligence and Competitive Intelligence can substantially help manage the risk inherent in those pricing decisions. Optimal pricing requires three types of intelligence:
- Profitability of the matter and of the client under various fee models.
- Understanding of the fees being charged by competitors for similar services.
- Buyer price sensitivity.
At its core, the pricing of legal services is like pricing anything else, a matter of supply and demand, elasticity, competitive forces and buyer values.