These are the “Core 50” concepts that I believe are necessary to understand law firm pricing. I hope this collection provides a basic introduction and enables our industry to have a common lexicon. (N.B. Where appropriate, terms are explained within the context of the legal industry and are not necessarily an economic or financial definition.)

Alternative Fee Arrangements (AFAs)
method of payment not based on hours-times-rates basis; examples include Contingency Fee, Fixed Fee

firm attribute from which a client would derive value (see Value Proposition); one of the key elements in the value formula (see Value)

Blended Rate
single rate charged by a firm for all timekeepers, regardless of status; a type of hourly rate; not a true AFA

extra payment by a client to a firm at the conclusion of a matter in recognition of the firm’s performance (see also Success Fee)

strategy that communicates a firm’s unique benefit; often associated with the creation of an image or identity (also known as Brand Positioning)

discount strategy that combines multiple attorneys and/or multiple practice groups into a single fee (for example, Blended Rate)

Capped Fee
upper limit of what a firm can charge under an Alternative Fee Arrangement; can be task-based or matter-based (see also Not-to-Exceed)

Client Feedback
method by which a firm understands its performance and what a client values; useful in collecting Competitive Intelligence

any firm that a (prospective) client considers a suitable alternative; key competitor also known as Next-Best Alternative; can be based on geography, industry, reputation, practice group

Competition-Based Pricing
pricing model rooted in competitive information; key factor in a client’s Willingness-To-Pay

Competitive Advantage
“Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it.” (Michael Porter, Competitive Advantage, 1985)

Competitive Intelligence
gathering of information about other firms; necessary to understand fully a client’s expectations regardings costs, benefits, price and value

Contingency Fee
payment made at the end of a matter, based on matter’s outcome; type of Fixed Fee

the resources needed to acquire a desired benefit; for firms, the sum of total cost (fixed plus variable); for clients, the sum of all invoices (hours plus disbursements) and, ideally, opportunity costs; one of the key elements in the value formula (see Value)

Cost-Plus Pricing
pricing model rooted in a firm’s costs: fees are determined by calculating all fixed, variable, direct and indirect costs, then adding a profit mark-up

Defensive Pricing
reactive strategy to defend market position from a lower-priced competitor

how a firm distinguishes itself from its competition to stand out in the market; articulated through Value Proposition(s); one of two key elements of Competitive Advantage

any offer by a firm to accept less than full price for full service; most commonly utilized with Hourly Rates (not the same as a write-up or write-down)

Fees Billed
amount charged to a client for professional activity, not including specific charges (e.g., disbursements)

Fees Received
amount paid by a client for a firm’s professional activity; key component in realization

invisible boundary established to distinguish between Segments; also used to define AFA parameters

Financial Value
cost of the prospect’s Next-Best-Alternative plus the value of whatever differentiates your offer

Five Cs
Create value, Comprehend value, Communicate value, Convince, Capture value; utilized in Value-Based Pricing

Fixed Fee/Flat Fee
single charge for specific engagement, regardless of hours worked

Four Ps (Marketing Mix)
core marketing principle, first introduced in 1960: product, place, price, promotion (price is the only element that produces revenue); in the 1990s, a ‘services’ model introduced client, convenience, cost, communication; in 2013, a B2B framework was proffered: solution, access, value, education (SAVE)

portion of a Fixed Fee or budget withheld by a client until an agreed-upon milestone or the matter’s completion; often expressed as a percentage (e.g., 10% holdback)

Hourly Rate
price of one hour of professional activity

difference between Fees Received and Cost (labor + overhead); a key indicator of profit (aka Contribution Margin)

Next-Best Alternative (NBA)
the firm a (prospective) client perceives to be your competition; critical factor in determining a client’s Willingness-To-Pay

Not-to-Exceed (NTE)
upper limit of what a firm can charge under an Alternative Fee Arrangement; can be task-based or matter-based (see also Capped Fee)

Penetration Pricing
charging a below-market fee in order to gain a prospect’s work; often utilized in AFAs (opposite of Premium Pricing)

Premium Pricing
charging a high price when there is a uniqueness about your service; typically utilized by well-branded firms and boutiques (opposite of Penetration Pricing)

Phase(d) Fee
establishing a timeline and budget based on discrete work; used for “unbundling” services

process of determining what a firm will receive in exchange for its services; used to communicate and shift the firm’s competitive position; one of the Four Ps

Pricing Process
three-stage process that helps a business optimize Price: price strategy > price setting > price implementation 

Reference Price
comparative evaluation a (prospective) client makes based on four factors: last paid, pereceived market price, perceived fair price, expected price

Risk Collar
strategy for client and firm to share risk; common example is 10-20%

Segmentation (aka Price Discrimination)
setting different prices for different services; also utilized to capture different types of clients

template-based proposal form submitted by a (prospective) client (most often Excel); helps in-house counsel quickly and accurately compare bids; antithesis of Value-Based Pricing

Shadow Billing
tracking of attorney time for non-hourly matters; helps measure profitability

Strategic Pricing
synthesizing information from accounting and finance, business development and marketing, technology, and sales (i.e., attorneys) to improve a firm’s pricing efforts

Success Fee
extra payment by a client to a firm at the conclusion of a matter in recognition of the firm’s performance (see also Bonus)

Switching Cost
cost incurred when a client decides to change firms; creates inherent advantage for incumbent firms (a type of switching cost is file transfer fees)

Task-Based Billing
a firm charges a certain fee for a discrete service, such as a deposition; type of Fixed Fee

relative concept rooted in the worth of your service to a client; the maximum amount a client is Willing-To-Pay for your service; a key point of Competitive Advantage; can be expressed as a mathematical formula: Value = Benefits – Costs

Value-Based Billing
altering a client’s bill (e.g., a write down or write-off); allowing a client to add/subtract to its final bill; can include a Bonus or Success Fee

Value-Based Pricing
pricing model based on the benefits a firm provides its client

Value Challenge
Association of Corporate Counsel’s 2008 initiative to emphasize value–not costs–in firm/client relationships

Value Proposition
statement summarizing why a prospect will benefit from engaging you/your firm; first developed by McKinsey & Co. in the 1980s

amount of work a client sends to a firm; critical variable in calculating AFAs

Willingness-To-Pay (WTP)
maximum amount a client will pay for services; rarely captured in final bill; reflection of perceived value, usually based on competitive comparisons