AFA

A lesson in pricing from Tesla

Tesla, Elon Musk’s EV carmaker, published its Q3 results earlier today (Australia time). Profits plunged 44 per cent. But, from my perspective this was the interesting part: “after it cuts prices to boost sales“.

Let’s unpack that for a second: Tesla “slashed prices by around 25 per cent in the United States during the last year” – “putting the priority on sales rather than profit“.

As it happens, this is also a common trait of professional services firms: prioritizing getting the deal done over making an actual profit – including agreeing to heavy “volume discounts”.

As the Tesla results show though, any price discount you give comes directly from profit – not sales revenue.

So the price discount you offer your clients is essentially compounded on your bottom line – 10% is not 10%, it’s more like 30%.

Or in the case of Tesla: a 25% price discount has resulted in a 44% plunge in profit.

Something to think about when you are next thinking about what pricing options you have available to you.

And please, don’t follow this advice:

“I view it as a way to defend market share at the expense of margin” .

Kevin Roberts, director of industry insights and analytics at CarGurus, an online auto sales site

In professional services firms, market share should never Trump (pun intended) profit.

As usual, if you need any help with any of this, feel free to reach out.

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What percentage of legal spend is via alternative fee arrangements?

The Ninth Annual Law Department Operation Survey was published late last month (Nov 2016). A survey of – a record number of – 133 law department professional, one of the questions asked in this year’s survey was:

‘What percentage of legal spend is via alternative fee arrangement?’

Unlike other legal market surveys undertaken during the course of the year, the results here are telling in that they are from those running the legal department, as opposed to those practising, and therefore, arguably, are more reflective of the market’s aptitude to Alternative Fee Arrangements (AFAs).

Overwhelmingly – at 87 percent – US in-house law departments make some use of AFAs with their private practice suppliers. Tellingly though, only 14.1% of this is over 50% of spend and more than a third – 34.4% – is in the one to 10 percent space (making me wonder if this is just discounts disguised as AFAs).

 

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