Law firms have four opportunities to improve Profitability: reduce fixed costs, reduce variable costs, increase volume, increase price.
The Great Recession forced firms to reduce costs. Unwisely, many firms also reduced prices to maintain volume, at the expense of profits: discounting diminishes profits.
Today, the industry has recovered. Forward-thinking firms are turning to Pricing professionals to protect and drive profitability. By harnessing the power of Pricing, firm leaders can count on more profit.
Maybe the Great Recession wasn’t all that bad for the legal industry. Alternative Fee Arrangements (AFAs) are a growing choice among clients and firms. And firm leaders are learning AFAs deliver more profit than hourly rates.
The greatest threat to a law firm’s profits is competition. Competitors, also known as Next- Alternatives (NBAs), play a significant role in the buying process. Without a Competitive Intelligence (CI) initiative, your Practice Group or Firm cannot appreciate the breadth or depth of its benefits; that knowledge is useless without knowing what your competitors offer and at what price. Having a strong understanding of the marketplace will help you earn more profit.
The greatest weakness of a law firm’s profit is discounting. When confronted with buyer demands, attorneys are quick to discount (10%, 15%, 20%). The “fives” may sound good and be easy to calculate; often, they go too far. To add more profit firm leaders should forbid the fives.
As the legal industry thinks more about its services as products, law firm leaders are understanding that the delivery of legal services can be more than all-or-nothing. By creating versions of its services (e.g., Good, Better, Best), Practice Groups and Firms can match the proper resources to meet client expectations, thereby earning more profit. (see Beer Test below)
Value is what your Practice Group or Firm provides to a client over and above the client’s expenses. By agreeing to hire you, your client believes that your services (their Beneﬁts) will be worth more than your billings (their Costs). Mathematically, the Value Equation looks like this: V=B-C. The more your Practice Group or Firm can emphasize the Benefits, the more profit you can make.
Two comparable beers are priced at $1.80 and $2.50.
With two choices, the more-expensive beer wins:
$1.80 – $2.50
20% – 80%
A third, low-cost option drove buyers to the middle:
$1.60 – $1.80 – $2.50
0% – 80% – 20%
A third, premium option shifted buyer behavior:
$1.80 – $2.50 – $3.40
0% – 84% – 16%
The result? More Profit by offering three options.