Value-based pricing

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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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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What are my pricing options?

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You hear a lot these days about ‘pricing‘. This might be as it relates to Alternative Fee Arrangements (AFAs) or Value-based pricing (VBP).

Indeed, all the noise around this issue can get daunting at times.

So for today’s post I thought I would share a graphic that I have created from the many RFTs (tenders), RFQs (quotes), RFPs (proposals) that I have been involved in over the years and which I have named: “What are my pricing options?“.

Also, I’ll let you in on a little secret:- there’s isn’t such as thing as an “Alternative Fee Arrangement” – only pricing options or fee arrangement. Likewise, if properly explained and clearly transparent, all pricing options are value-based.

There’s one caveat I have though: any pricing option that includes a ‘discount’ or ‘volume discount’ component isn’t a pricing option – as you’re not getting your asking price!

I hope your find the graphic useful and if this is a subject you are interested in learning more about I would suggest you start with the Association of Corporate Counsel’s (ACC) Value-based fee primer.