Pricing in law firms began, and to a shocking degree still continues, as an exercise in sticking your finger in the wind combined with intensive (but plausibly deniable!) efforts to find out what they're doing down the block, finalized by Kentucky windage in the form of a percentage increase over your rates last year. Low-tech, impressionistic and intuitive, data-free, and almost certain to be random in its accuracy in correlating clients' perception of value with marketplace dynamics. Or, as one managing partner we're fond of described it: "The dark art."
This superb post first appeared in Adam Smith Esq...An Inquiry Into The Economics of Law Firms (Bruce MacEwen) and is reprinted with kind permission.
The growth of professionals in Law Land with the word "pricing" in their title has been explosive over the past couple of years. It's a trend we applaud loudly and fervently, so perhaps it's worth a primer on how it's done in the major leagues: When B2B companies with thousands of SKU's and tens or even hundreds of thousands of individual prices engage in "pricing-excellence" programs.
A bit by way of background. Pricing in law firms began, and to a shocking degree still continues, as an exercise in sticking your finger in the wind combined with intensive (but plausibly deniable!) efforts to find out what they're doing down the block, finalized by Kentucky windage in the form of a percentage increase over your rates last year. Low-tech, impressionistic and intuitive, data-free, and almost certain to be random in its accuracy in correlating clients' perception of value with marketplace dynamics.
Or, as one managing partner we're fond of described it: "The dark art."
We're making progress, but meet how they do it when they have (quasi-) Big Data and experts who do this for a living, as reported by McKinsey in Turning pricing power into profit. The goal is so simple as to border on the self-evident: Apply analytical rigor and cultural behavior-modification techniques to systematically improve top and bottom lines.
According to McKinsey, across more than 1,000 such initiatives they researched in a broad range of industries, "such efforts typically translate into an increase in return on sales of two to seven percentage points" without significant changes in volume. Interested now? Read on.
First, be transparent about how you actually do price
The example opening the McKinsey article sounds all too familiar, even if you'd need to decrease the numerical quantities involved by one or two orders of magnitude:
An international provider of technical gases had a problem. With a large, highly fragmented product portfolio of more than 500 SKUs, customers in a range of industries, and a broad segmentation of customers by size, prices varied widely even for the same product. And while managers believed there was room to increase prices overall, they had no rational basis from which to challenge current pricing practices. The solution? An analytical tool to pinpoint new price drivers, redraw customer segments, and recommend updated prices.
The complexity of the challenge cries out for "transparency." This perfectly innocent word has recently been pressed into widespread involuntary servitude, which tends to denature any word and, through promiscuous use, deprive it of its once clear meaning, so perhaps it's more helpful here to talk about meaningful information. Our McKinsey authors could have have had law firms in mind when they wrote:
In B2B companies, existing analytics capabilities are often not sophisticated enough to create the right kind of pricing-opportunity algorithms to cope with the large amounts of data available. We often see managers make broad pricing decisions (such as proportional price increases) armed with little more than an Excel spreadsheet.
Sound familiar? So the answer would be what? Instead of one-size-fits-all pricing, think about one or more of these dimensions:
If the client is talking about alternatives to the billable hour, how serious are they? We would suggest being creative (within reason) but then testing to see whether that's really what they want or whether at the end of the discussions they simply ask for an XX% discount. Learn from this experience with that client.
Who, or at what level, within the client, is making the decision to hire your firm? What's their price elasticity for an engagement like this?
Can you point to comparable engagements for similar clients as benchmarks? (Preferably ones that worked out well for you.)
You get the idea. Be granular.
What does the client think it's worth?
I don't know about you, but to me the word "value" has had all the juice squeezed out of it by now and is sitting on the countertop looking like an exhausted orange rind. That does not mean our obsession with it was wrong, nor is to indict this also innocent word.
A worthy tradition in economics that has gotten an undeserved bad name is "price discrimination," which can mean the politically incorrect but utterly understandable and rational impulse of charging more for snow shovels on the eve of a blizzard, but can also mean practices we readily accept such as charging last-minute travelers a higher airfare than those who book months in advance. In essence, price discrimination means charging different clients different amounts for the same product/service depending on how badly they want it.
I won't go into the theoretical justifications for price discrimination, but they are many and importantly they include two critical components that are a pure-good gift when they come together: Higher profits for the seller/producer and a greater number of buyers/clients satisfied. What's not to like?
Here's a very simple alternative McKinsey suggests: "Next best alternative pricing." That is, have your client team engage with themselves in deep discussion—including role-playing—about how a pricing discussion with the client would go. This will be daunting at first and will surely take practice, but try it out. I have high hopes and you should too.
You may need to coach people on this stuff
Partners may need coaching for a variety of reasons:
As they will all too happily tell you, they "didn't go to law school to be used-car salesmen." Having a seriousconversation negotiation with clients about price lands in the innermost rings of their discomfort zone.
I just mentioned role-playing, as in partners actually playing the roles of partners and of clients. Horrors. Send in the coaches.
Anyone, including most definitely your firm's partners, who isn't used to negotiating on price on behalf of themselves needs to identify some concrete decisions and "break points" in advance. Such as:
Your starting point
Your drop-dead/walking away point
What clients actually do value mostly highly (hint: keep reminding them of this)
Even McKinsey, whose audience is presumably more mainstream businesspeople (dare I say an audience that is statistically more "normal" than lawyers?), advises training.
Specifically, McKinsey advises a type of "experiential learning" called "field and forum." This technique starts with a two or three-day workshop consisting of case studies and interactive periods. After each "forum," participants go into (you guessed it) the "field," where they test-drive their new skills in the company of some of the experts or managers who can provide tips and guidance going forward.
So: Does this actually pay off?
According to McKinsey, one global firm that tried it on a pilot basis increased its bottom-line by £10-million (about $16-million) in five months. (We aren't given the baseline, but let's assume $16-million is enough money that you'd want to pick it up off the sidewalk if you could.)
Follow through, follow through, follow through
We know what happens to the best of intentions:
In our experience, even the best pricing programs will fail in the long term without a deliberate commitment to overcome the entrenched habits and shifting priorities that doom most change programs. Ingraining pricing success over the long term requires putting in place an "influence model" that includes role modeling, fostering understanding and conviction, developing talent and skills, and implementing reinforcement mechanisms.
Yes, changing behavior—particularly the behavior of partners interacting with clients in what will at first seem like a semi-adversarial posture—is tough. But if you're serious about running your firm as a professional business operation, and if your partners would agree finding another (say) $16-million is worth a bit of initial effort on their part, this is something you should try.