For most of us, our daily pricing goal is to find the number(s) that will win work. That’s a great business development goal, but it cheapens the mission of Pricing to say its goal is a number. Our nacent profession has been so focused on the detail and the tasks of pricing — driven by our attorneys’ rightful need to get a number to the prospect/client — that we seemed to have missed the bigger picture of Price.
What, then, is the goal of pricing? Pricing is the process of determining what a firm will receive in exchange for its services. Its goal is not to win clients or increase revenue, but to maximize profitability. In this quest, pricing professionals should purse Price in three independent–but interrelated–objectives, and each begins with a P: Positioning, Purchasing, Profitability.
THREE Ps OF PRICING:
Positioning, Purchasing, Profitability
Positioning
Price is the ultimate positioning tool. Price explicitly conveys value (unlike branding, which is implicit) and allows for easy comparision among competitors. Do you have a different opinion of an attorney whose hourly billing rate is $100 v. $1,000? Yes, you do (even without knowing the firm’s brand). That is why billing rates are a substitute for price tags and why pricing professionals need to play a role in setting attorneys’ annual billing rates.
Purchasing
Price is designed to induce customer purchase. Ultimately, every exchange is determined by value, which is expressed as a price. The lower the price is from the buyer’s perception of value, the greater the likelihood for the sale. If the price of gasoline goes up on the day you want to fill your tank, do you wait for a price drop? If you can, yes, because the value of the gasoline didn’t rise with the price. Law firm pricers spend nearly 100% of their time on calculating the right inducement, completely ignoring Positioning and not spending enough time on Profitability.
Profitability
Price is a major driver of profitability. In fact, of the four profitability ‘levers’ studied by economists (fixed costs, variable costs, price, volume), price is the clear frontrunner, yielding the highest profit gains. Therefore, any firm serious about profits (or, perhaps, AmLaw rankings) must be concerned about profitability…and profits start with Price.
As our profession matures, I hope we can foster a more balanced dialogue on all three pricing objectives. We certainly cannot continue to balance on a one-legged stool supported by Purchasing alone, can we?
N.B. The first two objectives are client-focused (how does the firm’s price affect–or persuade–market behavior?) and only one, Profitability, is focused on the internal workings of the firm. Isn’t that enough reason for pricing professional to be in the Marketing/BD department, and not Finance?