pricing

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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Progressive pricing – the “essence of fairness”

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Value is shared with customers rather than extracted from them

Following on from my ‘Will We See Hourly Rate Load Pricing In The Legal Industry?‘ post of last week, during the course of this week I had the chance to read a January 2019 Whitepaper by Jean-Manuel Izaret and Just Schurmann ‘Why Progressive Pricing Is Becoming a Competitive Necessity‘ published by Boston Consulting Group and the Henderson Institute.

For those who have not read it, Izaret and Schurmann’s Whitepaper provides some really thought-provoking insights, including:

  • Progressive pricing scales prices up or down on the basis of the value an individual customer derives.
  • the levels of pricing under progressive pricing are value-based, not means-based
  • Progressive pricing seems to violate the rules of traditional economics, which assume that customers buying the same product or service will pay the same price.
  • Progress pricing enables providers to offer each customer a fair, personalized product and price point.

In essence, progressive pricing enables service providers, such as law firms, to calibrate the value they provide at an individual customer level.

But, importantly to Izaret and Schurmann (see #4 of their ‘four most important differences between progressive and traditional pricing approaches‘):

Progressive pricing is a fairer way to determine prices, because customers pay a price proportional to the value they receive, rather than paying the same fixed price others pay.

For any supporters of value-based pricing, the above quote is pure gold.

But, the caveat in next line of Izaret and Schurmann’s piece is probably more crucial:

But the firm must make the case for this perceived fairness

QED, it is the duty of the firm to communicate the value the customer is getting, not the customer!

As a growing advocate of value-based pricing in professional services, one of the greatest take-outs for me was this line:

Making progressive pricing a profitable day-to-day reality can happen only if firms change how they create, define, and measure value so that they can share it fairly.

All I can say to that is “amen” – because it isn’t going to come out of utilisation and realisation rates, no matter how hard you look!

It is such a great piece I’m going to leave you with the following three quotes from this paper:

  1. Companies must first step back and re-imagine the concept of value in their market. How can a business combine its own capabilities with the close personal knowledge of its customers to create something that fundamentally changes a customer’s life?
  2. Can you define value, measure it, and get everyone to agree on what value is?
  3. Most firms are accustomed to expressing prices in units of product or some other basic metric such as hours. If they can instead calibrate prices in terms of unit of value, then the price per unit of value can remain constant and the amount a customer pays can scale in proportion to the value demanded. That is the essence of fairness.

Great read. If it is not on your list – add it* (*then get back to me and let me know if you agree)!

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Will We See Hourly Rate Load Pricing In The Legal Industry?

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Rational choice theory hypothesises that individuals use rational calculations to make rational choices to achieve outcomes that are aligned with their own personal objectives.

One of the biggest (of many) problems I have had with the hourly rate in the legal industry – dating back to my start in the early 1990s – is that it assumes every hour in the day is equal. But, as anyone who has worked in private practice law will tell you, this simply isn’t true.

What do I mean?

Well, to say that the value of the work that we do at 6am, is the same as the value of the work that we do at 12am, is the same of the value of the work that we do at 9pm, is the same as the value of the work that we do at 12pm is simply false in my opinion.

And, critically, this doesn’t take into account an important factor; namely to anyone who has worked in private practice for any length of time, saying that an hour of work (from a personal cost perspective) at 10% utilisation is the same as an hour of work at 130% utilisation is simply insulting.

So what’s the answer?

Well, if hourly billing is your thing, has the time come to consider load weighting?

How would load weighting work?

Well, if you’re a morning person, what if you told your customer that your time between 6am and 10am was going to be at a higher premium than your time between 6pm and 10pm?

Conversely; if you are an evening person, what if you told your customer that your time between 6pm and 10pm was going to be at a higher premium than your time between 6am and 10am?

Or, alternatively, if you haven’t seen your family for several days because of a busy workload, you tell your customer that your 40th working hour that week was (emotionally, because it will rarely be economically) worth than your first or tenth hour (as opposed to the scaling discount most firms apply)?

As an industry we need to move away from the one set billable hour value; but to do that we first need to accept that not all billable hours are equal and to start talking to our customers about charging a premium for those hours in the day/week/month/year that are worth more – to both us and them – than others!

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‘Bears and Alligators’

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Happy New Year to all.

I trust everyone had a relaxing and enjoyable holiday period. I certainly did, and took the opportunity to catch-up on some podcasts I had missed towards to the end of 2019. One of those was Episode 47 of Mark Stiving’s weekly Impact Pricing.

In this episode Mark has a free-ranging talk with Kevin Christian on all things pricing related under the appropriately named ‘Two Pricing Experts Talk Pricing(published 9 December 2019) and, while the whole podcast is great, things get particularly interesting  around the 19 minute mark when Kevin asks Mark:

“If a bear gets in a fight with an alligator, who wins?”

Now I can hear you saying: “What has this got to do with law firm business development and pricing issues?”, but – pun intended – ‘bear’ with me.

Because, as is music to the ears of every lawyer, Kevin explains,

‘it depends’ –

on where the fight is taking place.

If the fight is taking place on land then the bear is more likely to win; but if the fight is taking place in water then the alligator is more likely to win.

Que?

Here goes – bears and alligators are analogies to the ‘value’ discussion such that, as Kevin states, if you are:

  • Talking about the ‘Value of your Solution’: then you are in the seller/vendor territory and the seller/vendor is going to be leading and benefiting from the conversation;

whereas:

  • If you are only talking about the ‘Price of your Solution‘, without talking about the value, then you are in the buyer’s territory.

Takeout – what does this mean?

In a world when we deal with procurement and other agents who are not looking at the value of the service we provide, but are constantly looking at the cost of that service; then, as law firms, it becomes imperative that we explain the value being provided and have ourselves a land battle with the alligators.

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It doesn’t pay to be a loyal customer

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The Chanticleer column in this weekend’s Australian Financial Review is titled ‘It doesn’t pay to be a loyal customer’. The article is a post-Hayne, post several reductions in interest rates, look at bank mortgage rates and analysis undertaken by Matthew Wilson at Evans & Partners that suggests:

“In Australia, the banks enjoy a profit benefit of about $3 billion a year from exploiting the difference in mortgage rates between existing and new customers”.

I’m not going to comment on whether or not that statement is correct/true (although a hunch would suggest it is), but it did make me think that in the professional services (read ‘legal’) sector it absolutely holds true that it doesn’t pay to be a loyal customer/client.

What do I mean by this?

Well when pricing services to new customers/clients – especially in tender situations, law firms are far more willing to:

  • Buy the work to cement the relationship
  • Offer volume discounts
  • Deeply discount on rack-rates
  • Agree to discounted fixed fee arrangements
  • Agree to risk-sharing arrangements

Indeed, more often than not the average billing rate (ABR) and the average realisation rate of a long-term customer/client will be higher than a new client, while lock-up days will be lower.

As Chanticleer says, it really doesn’t pay to be a loyal customer these days!

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

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Report: Eight of the biggest challenges law firms associate with rates and pricing

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After a great holiday enjoying the Northern Hemisphere summer – and thereby avoiding some of the cold winter of Sydney – I returned last week to a read about law firm rates and pricing that really caught my attention, the ‘LawVision & Peer Monitor Pricing Survey: The Growing Prominence of Pricing within Law Firms‘.

Predominately North American based, it’s nonetheless an interesting read – with some contentious stuff (see the ‘LawVision Maturity Curve’ for example) – for anyone even remotely interested in following the current trends and traits affecting law firm pricing issues. But what particularly grabbed my attention in this Report was the ‘8 biggest challenges law firms associate with rates and pricing’ (Figure 3):

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And what really, really fascinated me about this list is how few of them actually have anything to do with either rates (if that’s the way you want to do things) or pricing.

As you can see from the list, in desending order they are:

  1. Managing cash leaks across the entire rates lifecycle (discounts, write­downs, write­offs, collections)my comment: neither a rates issue  nor a pricing issue, but a behavioural issue
  2. Educating the lawyers in the firm on pricing principlesmy comment: neither a rates issue  nor a pricing issue, but a training issue
  3. Managing rate discounts requested by clientsmy comment: neither a rates issue  nor a pricing issue, but a behavioural issue (and are we seriously still having this conversation!)
  4. Negotiating with clients about the firm’s value and rate/pricing alignment
  5. Putting in place a disciplined pricing processmy comment: neither a rates issue  nor a pricing issue, but a training issue
  6. Managing profitability – my comment: neither a rates issue  nor a pricing issue, but an accounting issue
  7. Developing alternative fees
  8. Pitching for work generally or through the RFP process – my comment: can someone please let me know what this has to do with either rates or pricing!

Which leaves us with:

  • Negotiating with clients about the firm’s value and rate/pricing alignment, and
  • Developing alternative fees

Both of which, depending where in the buying cycle these conversations are taking place with your customer, could actually have something to do with a rates and pricing discussion.

But seriously, Challenges 4 & 7 of 8, and we wonder why law firms struggle with the concept of pricing and the disconnect between firm and customer.

And if we are really being honest and true to our clients, then even inward looking the #1 issue should not be ‘Managing cash leaks across the entire rates lifecycle (discounts, write¬downs, write-offs, collections)‘ but should rather be: ‘How are we rewarding and incentivising in our staff?‘ – because if the answer to that is ‘utilisation‘, then everything above is relatively meaningless.

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

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Game: ‘Questions to ask your deal team about why your customer is happy to pay your fee?’

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Came across the bones of a really interesting game you can play with your deal team at your next after action deal debrief/lessons learnt meeting.
Handout a piece of paper to each of your deal team members and ask them to rank, in order of priority, the top 5 reasons – from the following list – why the customer is happy to pay your fees in full (no discounts/write-offs, etc allowed):
  1. Demonstrated an understanding of the customer’s business/industry throughout the deal
  2. Demonstrated an understanding of relevant law
  3. Responsiveness to customer’s requests – phone/email/meetings
  4. Built good rapport and a trusting relationship during the deal (was in the trenches with the customer)
  5. Used expertise to help save the customer money (either on the deal or fees)
  6. Used Legal Project Management techniques to stay within the deal scope and didn’t allow scope creep without first taking to the customers
  7. Used technology, AI, Legal Process Outsourcing and value adds to make the customer’s life easier during the deal
  8. Offered the customer a great discount
  9. Hourly rate was attractive to the customer
  10. Any other reason(s)

Remember, they can only pick 5. And they need to be in order of priority.

I would love to hear feedback on which five were the most popular chosen.

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