Pareto principle

Does your law firm apply a Minimum Discount Benchmark?

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Pareto Principle‘: The Pareto Principle, named after esteemed economist Vilfredo Pareto, specifies that 80% of consequences come from 20% of the causes, asserting an unequal relationship between inputs and outputs. This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. The Pareto Principle is also known as the Pareto Rule or the 80/20 Rule.

source: Investopedia

Most of us are aware of the Pareto Principle, but it wasn’t until recently, when I was listening to Episode 47 of Mark Stiving’s weekly Impact Pricing podcast, that it occurred to me that we could use this same theory in respect to the discounts we offer customers.

Now don’t get me wrong, I haven’t suddenly gone soft and think discounts are great. I’m still very opposed to them! But I’m also realistic enough to know that most law firms offer customers discounts and customers happily accept them.

If this sounds familiar, then here is a little tip that Kevin Christian gives Mark in the podcast:

  • Look at your historical [discounting] data for the last 12 months. Lop-off the bottom 25% of these discounts – by percentage – that you have been offering clients. This new figure becomes your new Minimum Discount Benchmark. Any new discounts you offer customers must exceed this new minimum threshold.

Which is to say, if you offer customers a range of discounts from 30% to 5%, then the 25% of discounts at the 30% end need to be discarded to give you a new Minimum Discount Benchmark – say, hopefully, a 20% discount rate.

Now any new discount you offer customers cannot be greater than 20% – as this has become your new Minimum Discount Benchmark.

Three months later repeat the process.

At this point your minimum Discount Benchmark should be closer to 10 to 15%.

Repeat again at 6 months.

And within a year, you should be close to a 0% Minimum Discount Benchmark.

Word of warning: if utilisation is your primary reward mechanism, then offering customers a discount is an incentive scheme and the above process likely won’t work as there are competing/conflicting interests between the customer and the lawyer.

As always, interested in your thoughts/views/feedback.

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