Nigel Haddon, senior consultant at pricing and costs consultancy Burcher Jennings and a former managing partner, looks at how to develop a winning pricing strategy.
There can't be many lawyers who enjoy negotiating fees or taking calls from unhappy clients who have just looked at their fee note. Pricing and price discussions tend to feel like problems, to be avoided as far as possible.
At the same time, maximising fee income is clearly critical to the success of the firm – and of individual partners and associates, whose status and career prospects are closely linked to the income they generate.
The days when lawyers could rely on working on an hourly rate, increasing year on year, are fast disappearing. A more sophisticated approach to pricing helps you win new clients, strengthens relationships and builds your reputation for offering good value.
As a lawyer, it's tempting to think that clients are paying for your legal expertise. The more expert you are, the more they will be prepared to pay. But research suggests otherwise.
Domestic conveyancing offers a clear example. Clients expect conveyancing to be done right, whichever lawyer they use. Cut-price, fixed-fee conveyancing services have proliferated. Your ability to charge a higher price has to come from the quality of service you offer, and the relationships and reputation this has helped you build.
Whatever legal services you provide, the challenge is to understand what clients value – and how you can communicate the value you offer in a consistent, compelling and memorable way.
This may be explicit service features: for example, visiting clients who are in care homes, or offering a fast-track service when clients need a quick response. More often than not, it's about the culture of your firm and the quality of the staff you hire. Everything you do should reinforce the value message.
"Most clients aren't interested in how hard a firm has to work. Instead, clients concentrate on the value or utility of the service they receive"
Sally Dyson, consultant and coach, Firm Sense
You should aim to maximise profitability, not turnover. That has significant implications for how you approach pricing.
Clearly you should prioritise high margin opportunities. At the other end of the scale, be prepared to decline work that fails to offer adequate profits and can also damage your brand.
Be selective about which new business opportunities you pitch for. Check in advance that you have a realistic opportunity of winning the bid, at an acceptable price. If a tender is going to be decided on price alone, do you really want to be involved?
More broadly, think about how you can align the incentives for individual lawyers with the firm's objectives and clients' priorities. Focusing purely on billable hours does this badly. Instead you want to move towards a more detailed analysis of how everyone is contributing to overall profitability, including generating referrals.
When you're thinking about pricing, seeing things from the client's point of view can be instructive.
Simon Macaulay of Anglo Recycling Technology speaks for many small business clients when he says "I can see why lawyers like charging hourly rates, and even accept that they need to charge more for work that takes longer. But I need to know that the fees I pay will bear some relationship to what the advice is worth to me. Sometimes I worry that lawyers might stretch things out for their own benefit, rather than mine."
As a consequence, Simon says, he often does without legal advice unless it's absolutely essential. Simon reckons that fee arrangements that offer more transparency and certainty "like the way the accountants charges us" would make a difference.
Alternatives to the traditional hourly rate include:
- Fixed fees or retainers. An all-in price for a clearly defined service offers much clearer value to the client.
- Versioning. Clients don't always want (or can afford) the Rolls Royce service which lawyers tend to default to.
- Conditional or contingent fee arrangements. As well as sharing the risk between lawyer and client, these help ensure fees are affordable.
- Additional charges. Choosing not to add minor costs (such as photocopying) eliminates a major source of client irritation at little cost.
"We see a 7-year trend of compelling success enjoyed by firms that take a proactive approach to alternative fee arrangements
2016 Law Firms in Transition report, Altman Weil (USA)
The right price
The right price balances your objectives and priorities with those of your client.
From your point of view, you will want to cover your ‘production costs' – the time and expertise needed to do the work, along with the additional time involved in initially winning the business and following up afterwards. You also need to be contributing towards the firm's overhead costs.
Other factors will also influence your view of pricing. Ask yourself how important the client is – how profitable is the work you do for them, do they produce referrals, are they easy to deal with? Take into account any potential downside – for example, reputational risk or conflicts with other clients.
For the client, none of these matter. Instead, they are concerned about how important a particular deal or project is, how urgently they need the work done and getting the right result. And of course they are likely to have an eye on what your competitors are offering.
"Pricing has energised fee-earners and given them the confidence to quote properly for the work they do and the experience they offer. There is no doubt that this leads to an increase in fees and happier fee earners"
Peter Stafford, managing director, solicitors Cartmell Shepherd
Pricing becomes much easier if you take a systematic approach.
Develop templates for pricing different types of services, so that you can price projects consistently. Set clear ground rules on what scope individual lawyers have to vary these (or to write off costs in negotiations at the end of an hourly billed project).
Make sure you have strong marketing collateral to help sell the value in what you are offering. Develop an approach to engagement letters that clearly highlights all the key information – what will be done, when, by who, at what cost – before all the compliance and liability details.
Continually monitor how effective your pricing is – which opportunities did you win and lose, and how profitable was each project? Are alternative fee arrangements delivering the profits you expect?
Look across the whole firm, analysing who prices well and where there are areas of weakness. Good data lets you establish the profitability of each project, client, team and type of legal service. All of this then feeds back in to help you improve future pricing and profitability.
"Using data to understand the underlying drivers to profitability is central to pricing each opportunity more accurately and knowing where to be more competitive"
Aoibheann Baskiran, UK Small Business General Manager, Travelers
Increasing prices for existing clients is never an easy conversation. When it's right to put your prices up, these tactics can help:
- Float – and justify – a large increase before explaining that you are asking your valued client for a smaller rise.
- Blame increases in your own costs – salaries, rent, professional indemnity insurance premiums.
- Appeal to fairness, particularly if you haven't increased prices for several years.
- Remind the client of the excellence of the service you continue to provide.
- Reference any third-party endorsements (eg from legal directories such as Chambers).
- Highlight offsetting value – for example, if you are introducing a legal bulletin or offering free seminars.
- Consider offering price and service options, so the client can choose to pay for what they value.
- Be resolute, regardless of what the client may tell you other law firms are doing.
Pricing top ten
- Clients find it easier to recognise – and pay for – quality of service rather than legal expertise.
- Focus on profitability, not turnover.
- Understand the client's point of view.
- Be proactive in discussing alternative fee arrangements.
- Take into account hidden costs and overheads.
- Incentivise lawyers by contribution to profitability, not billable hours.
- Prioritise your best clients.
- Be prepared to decline low margin opportunities.
- Develop pricing systems and templates.
- Learn continuously – monitor performance and identify opportunities to improve.