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February 27, 2013

Five ways to improve pricing

There is so much talk these days about value pricing and alternative fees that many people think of pricing simply as setting a fixed or alternative fee. However, you are pricing whenever you decide what to ask someone to pay for your services. When you set an hourly billing rate you are pricing, and when you discount that hourly rate, you are making a pricing decision.

Proven techniques from other businesses can help any law firm to improve the way it sets prices.  Here are five basic ideas that may be particularly helpful, based on Nagle Hogan & Zale’s classic text The Strategy and Tactics of Pricing, now in its fifth edition:

  1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. According to The Strategy and Tactics of Pricing, “A product’s total economic value is calculated as the price of the customer’s best alternative (the reference value) plus the worth of whatever differentiates the offering from the alternative” (p. 19).  This differentiation value can be either monetary or psychological. Whatever features of a law firm add differentiating value, it is crucial that these features be communicated to the client. Are you different because your legal project management expertise makes you more efficient than others, or because you communicate progress better? Let the client know.
  2. Communicate value. Value is perceived differently in different businesses. Legal services are difficult for clients to evaluate when compared to products like light bulbs or computers for which buyers can more easily get price and performance information. “In our research, we have found that business managers rated ‘communicating value and price’ as the most important capability necessary to enable their pricing strategies” (p. 72).  They make special note of the value of an endorsement from a client known to be especially discriminating. For example, Kaiser Permanente has an excellent reputation for being an informed buyer in the health field. Thus “when other hospitals and health maintenance organizations (HMOs) learn that Kaiser Permanente has adopted a more expensive product or service, they assume that its price premium is cost-justified” (p. 75).
  3. Have a clear and consistent pricing policy. It is important to have a clear and consistent pricing policy and to avoid commonly granting price exceptions. In Chapter 6 of my new book, I advised being cautious about discounting to win business because that creates client expectations of future discounts. The Strategy and Tactics of Pricing says that “Good policies lead customers to think about the purchase of your product as a price-value trade-off rather than as a game to win at your expense” (p. 117).  In setting up your policies it is important to keep in mind that people are more affected by perceived losses than perceived gains and you should frame your pricing with this in mind. If the client is offered a service package, it is better to have a policy that allows a reduction in cost if a service is dropped (a perceived gain) than a policy that requires an extra fee to get that service (a perceived loss).
  4. Know your market segments. Clients are not all the same; they fall into different market segments. The Strategy and Tactics of Pricing gives an example of a company selling a scientific device to be used in DNA analysis. The device is a great improvement over existing competitor products, and the company estimated the differentiation value in order to set a price. However the company sold to two different market segments—the industrial market and the academic/government market. The differentiation value was not the same in industry and universities, so the ultimate pricing strategy involved different pricing policies in the two segments. As long as this policy is clearly stated it does not violate consistency requirements. Airlines do this all the time when they distinguish between business travelers and nonrefundable touring seniors. What are your market segments?
  5. Know your client types. Within a given market segment there may be different classes of clients, and knowing their classification may help you to deal more intelligently with each group. The Strategy and Tactics of Pricing divides clients into four categories:
    1. Value-driven clients have sophisticated analysis strategies for studying value added, and you will need to work to establish your value added for them.
    2. Brand buyers are also known as relationship buyers. For them, the cost of analyzing value added is perceived as too high. This “buyer will buy a brand that is well-known for delivering a good product with good service without considering cheaper but riskier alternatives” (p. 105).  This is an easier client so long as you do not disappoint her.
    3. Price buyers are looking for a specified service at the lowest possible price. Here you will need to “strip out any and every cost that is not required to meet the minimum specification” (p. 107).  It is also important to fence off this job, so that more lucrative clients who receive a higher level of service understand that this lower priced work is at a different level.
    4. Convenience buyers “don’t compare prices; they just buy from the easiest source of supply”(p. 108).  They know that they are paying a premium for immediate convenience and will not complain. 

Whether your pricing is based on value or cost-plus, and whether your typical agreements are hourly or AFAs, these general principles can help you set prices


This post was adapted from my new book Legal project management, pricing and alternative fee arrangements.


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