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:

• a 1% Price increase yielded an 11% Profit increase.
• a 1% Variable Cost decrease yielded an 8% Profit increase.
• a 1% Volume increase yielded a 3% Profit increase.
• a 1% Fixed Cost decrease yielded a 2% Profit increase.

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?

• Value Creation: What services are you adding to the marketplace?
• Value Communication: How are your services different and/or unique?

Does Your Price Take Into Consideration What Your Buyer Values?

• Value Capture: What services does each buyer want/need to purchase?
• Willingness-to-Pay: How much are your services worth to each buyer?

Is Your Price Competitive?

• Next-Best Alternative: How do your Prices compare among your buyer’s options?
  Value Differential: What is your difference (to avoid being a commodity), and how is it reflected in your Price?

Does Your Firm Leverage Price Psychology?

• Anchor: What reference are you providing for your buyers?
• Versioning: What options are you giving your buyers?

Does Your Firm Train Attorneys for Price Negotiation?

• Discounts: Do your lawyers know to trade-off rather than give-away?
• Rejection: Do your lawyers know getting to “Yes” means starting with “No”?

Pricing is a complex — not necessarily complicated — process. Contact Patrick to help your firm Harness the Power of Pricing to Increase Profitability: patrick@lawfirmpricing.com or 312.504.4142.