Annuity revenue – a predictable revenue stream from new or existing customers who buy products and services associated with new or previously purchased products.
As the Managing Partner of a law firm today, what would you say if I walked into your office and told you that I could:
- provide you with a guaranteed monthly revenue income,
- with a product that creates loyal customers, and
- where those customers become – at no additional cost to you – brand champions and refer your services to their network, free of charge, via the Holy Grail of marketing – positive ‘word of mouth’ referrals.
Sounds great doesn’t it. Almost too good to be true.
Well all I can say is that if you were anything like one of the Managing Partners servicing customers who responded to the Pitcher Partners recent ‘Legal Survey 2020 Report‘, that’s exactly what you would be saying: “thanks, but no thanks we are happy with the billable hour”.
The fact that the billable hour remains the ‘go to’ method of billing (not the same as pricing) for Australian law firms and their customers does not, in and of itself, surprise me. I must admit, however, to being a little surprised with the 1% increase in this billing method (up from 58% to 59%) year-on-year.
Given the times (even pre Covid-19), I was also a little surprised to see that both ‘fixed fee’ and ‘value-based’ pricing remain relatively static (although it should be added that from what I could see the report lacks a definition of ‘value-based’, probably purposely so).
To me this represents a massive lack of foresight on the part of law firms and a significant lost opportunity.
In much the same way as software as a service (SaaS) companies have come to realise that one-off payments around shrink wrap contracts were not servicing the long-term financial interests of the company (unless it’s a legacy product that will no longer be supported), the time has come for law firms (and professional services firms more broadly) to realise that if we want to maximise revenue and, potentially, profit we need to rethink how we generate that revenue.
One alternative that the likes of Ron Baker and Mark Stiving have been banging the drum about for some time is ‘subscription based pricing’.
The benefits of adopting a subscription based pricing model
I have posted previously on this blog about the benefits of subscription based pricing (see here), but leaving all that aside for a second; as Amy Gallo wrote way back in October 2014 in the Harvard Business Review (see ‘The Value of Keeping the Right Customers‘) with the acquisition costs of acquiring new customers running being between 5 and 25 times more expensive than servicing existing customers, it makes economic and financial sense to find, and keep, the right customers.
How you price this is probably the most important step along that path.
The weakness of having billable hours as your default billing method is that you are pricing to the transaction. Whereas one of the greatest benefits of the subscription based pricing model – or even a retainer based pricing model if you must at the start- is that you start thinking about pricing the customer or even the portfolio.
In other words, you start to think about the customer and their needs first. And for an industry that always talks about the customer being at the centre of everything we do, doesn’t it makes sense that our pricing structure reflect this claim?
But it also makes sense internally, because it:
- is smarter pricing
- leads to smarter collaboration
- moves you away from seasonal end of financial and calendar year pressures, and
- helps remove any discussion around the ‘commodity’ tag.
Not to say, in these COVID-19 times, when you are talking working capital facilities with your bank, it provides you with a guaranteed annuity revenue stream.
Now who would not want that comfort right now?!
These just represent my thoughts though and always interested to hear your views.