Posted by Michael Porter, a director of Legal Futures Associate Legal Mentors
The price of everything and value of nothing: do you understand value pricing?
… or should that be beauty? The beholder wants your service to be a thing of beauty, but above all the beholder (your client) wants ‘value’ for your advice and a solution to their issue.
Now a question. Do you think that your hourly billing rate provides value to your client? Sit for a moment on the other side of the desk and ask yourself, ‘How happy would I be personally to buy a service or a product that has an open-ended cost?’ I suggest the answer is ‘not very happy’.
Nowadays we expect things to have a known or certain price and everything we buy has to have a value to us. Our perception of value varies; a bottle of water for example might only cost £1 from the petrol station or supermarket but if you had been stuck in the fierce heat of the desert for two days with nothing to drink, then what, in desperation, might you be prepared to pay if by magic you came across a man selling ice cold water? A lot more, I suggest.
Why, therefore, should any solicitor expect a client to buy legal services by the hour when that solicitor has little incentive to do the work in the shortest possible timescale? Now the hourly rate is not, of course, dead yet, but is, I suggest, approaching its ‘best before’ date.
Your hourly rate, based on your costs plus a mark-up, has no relevance to your client – your costs are your issue and need to be managed accordingly. Clients want and expect certainty and are increasingly disinclined to buy legal services on the basis of an open-ended cheque.
There are, of course, many forms of charging for legal services in addition to the hourly rate such as fixed, capped, ‘no win no fee’, payment on account ‘retainer’ etc. Some clients might think they want a ‘cheap’ price but simply lowering your prices is a race to the bottom and does not make for a sustainable business model. It also devalues your service and suggests you were overcharging before. There will always be someone with lower overheads undercutting you.
Nor is ‘cheap’ actually in the client’s best interest. Would they really want to use the cheapest brain surgeon?
As a lawyer you will know of the things that can and do go wrong. ‘Cheap’ will lead to very fine profit margins (if indeed on occasions no profit margin at all), which in turn will likely lead to corner-cutting. There is a saying we all know well, ‘You get what you pay for’.
The new competitors recognise this. Co-op Legal Services has chosen not to be the cheapest, but looks to provide “a range of fixed price, value for money services agreed upfront with no hidden or additional costs”.
On your website and marketing materials, promote value rather than quote prices, state that you are not the cheapest but believe your charges are fair and represent good value. By telephone you could say, “If it’s a cheap job you want, then we are not the right solicitors for you. We have established our reputation by providing high-quality advice to our clients in order to best protect their interests at a fair price. You should understand that a poorly executed (for example) conveyance could potentially cost you hundreds and, more likely, thousands of pounds later. I could send you a copy of our ‘21 Things that can go wrong with a cheap conveyance’ publication or perhaps you would prefer that we make an appointment now to meet with….”
The same can apply to will writing and a number of other services too. Let others do ‘cheap’ if they want to; it is not a sound strategy for long-term success unless you are in the volume market.
Most law firms need to grow their income on better margins to improve their profitability. Solicitors need to understand ‘value’ and ‘pricing’. Royal Mail has long recognised that with first and second-class post, and now also by sizing and weight. Need a large, heavy parcel to arrive tomorrow morning and you will pay more.
Using an average price, your hourly rate, almost certainly means that you are leaving money on the table with some customers paying less than the value they both receive and perceive.
Because you’re worth it
Solicitors need to understand ‘value’; value themselves, the value of their advice as well as understanding their client’s perception of value. I accept that few customers wake up wanting to pay a higher price but most certainly seek value. Only by asking the right questions up-front will you uncover your client’s real need and their value of your solution.
It is both the solicitor’s right and responsibility to frame and deliver value and agree the price accordingly. Not only are you likely to be able to charge more for your valuable services, but I suggest you are also likely to have a more satisfied client. Satisfied clients tend to buy more of your services and become a source of referrals and recommendation for you.
Once you are making better profits, you will be able to make important choices. You might decide not to draw out your profits in full, for example, but to re-invest a proportion into your business to ensure a better future for the firm. To continue to compete in the new world of the Legal Services Act and alternative business structures, law firms need to make better use of IT, develop better work processes to improve client service levels whilst continuing also to drive efficiencies throughout their business.
Law firms are in business to make a profit so you need to really understand your costs and profitability and, in conjunction with the client, how to price work properly. Too often money is left on the table, money that the client was willing to pay to you for your help and advice.
Value pricing should be seen as a thing of beauty by solicitors. Pricing is a skill that needs to be learned and applied. If you need help, seek it. You owe it to yourself, your business and your clients.
Legal Mentors has teamed up with pricing expert David Winch to help solicitors understand value pricing and how to apply it in their law firm. The next full day CPD courses are in London on Wednesday 18 September and Cambridge on Thursday 10 October. For course details and booking, click here.
Customers and clients of any and every business are only interested in three things: The value they will derive from having their issue resolved, the date (and possibly time) by which it will be resolved, and the amount they know at the outset they will have to invest to resolve it – aka the Price!
These thoughts apply equally to legal services, an Olympic stadium and cups of tea!
Clients will take the high quality of the result for granted, but will conduct some ‘due diligence’ to ensure this can be delivered, and they are often prepared to pay a premium for a rapid result.
The supplier’s internal systems and accounting procedures are of no consequence to the client.
Charging by the hour therefore meets none of the client’s requirements. Fixed fees based on estimated hours times charge-out rate are hardly any better.
Becoming skilled at Value-Based pricing enables you to meet all the client’s requirements – and your own as supplier at the same time.
This is win-win!