Harnessing the Power of Pricing to Increase Profitability
Price is a number. Price is a tool. Determining when and how to use each is Pricing. Leveraging each effectively is the Power of Pricing, which leads to increased Profitability. It also leads to a better understanding about the role Price plays in the buying and selling of legal services.
The Four Levers of Profit
Like all businesses, law firms have four opportunities to improve Profitability: reduce fixed costs, reduce variable costs, increase volume, increase price. The first two are Operations-related, and negative (i.e., to be minimized); the second two are Sales-related, and positive (i.e., to be maximized). Post-Great Recession, law firms focused first on variable costs (e.g., headcount), then on volume (e.g., business development), then on fixed costs (e.g., real estate), and finally, in the last few years, there has been an increased focus on price. For good reason.
The ‘Best’ Lever: Price
Although law leaders love to cut costs, they are misguided in their efforts: Price has the greatest impact on Profitability. In a 1992 issue of the Harvard Business Review, McKinsey & Company published a study of the effects that a 1% improvement in each of the four levers had on profits:
Legal Industry Price Lever: Rates
A recent Georgetown University Law Center, Legal Executive Institute and Peer Monitor report highlighted the central role Price has in law firm Profitability:
“The financial performance of law firms over the past 10 years has essentially been driven by only one factor: rate increases.”
At a minimum, law leaders should be focused on improving their firm’s Hourly rates (aka Price Tags). This effort requires two approaches: one for clients, and one for buyers.
More broadly, law leaders who go beyond Price and focus on Pricing will ensure a stronger financial future. Recall the old saying: if you give a man a fish, you feed him for a day; if you teach a man to fish, you feed him for a lifetime. Improving Price is helpful, but short-lived. Improving Pricing is the more strategic choice.
Five Ways to ‘Pull’ the Price Lever
Does Your Price Reflect Your Value?
Does Your Price Take Into Consideration What Your Buyer Values?
Is Your Price Competitive?
Does Your Firm Leverage Price Psychology?
Does Your Firm Train Attorneys for Price Negotiation?
Pricing is a complex — not necessarily complicated — process. Contact Patrick to help your firm Harness the Power of Pricing to Increase Profitability: email@example.com or 312.504.4142.