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December 28, 2016

Pricing legal matters (Part 4 of 4)

In the fifth edition of The Strategy and Tactics of Pricing, one of the most widely respected texts in this field, Thomas Nagle, John Hogan, and Joseph Zale noted that:

In many business-to-business markets, where high-volume repeat purchasers negotiate their purchases, buyers are ahead of sellers in thinking strategically…. Buyers have goals and a long-term strategy for driving down acquisition costs, while suppliers rarely have comparable long-term strategies for raising or at least preserving margins (p. 98).

The problem of salespeople discounting too deeply in order to close deals is also common in other businesses:

Customer satisfaction can usually be bought by a combination of over-delivering on value and underpricing products… The purpose of strategic pricing is to price more profitably by capturing more value, not necessarily by making more sales (p. 4).

Nagle’s text goes on to describe five basic concepts that can be used in any profession, including the law, to improve the way prices are set:

1. Differentiate. You may have heard legal marketers use this word quite a bit, and it is just as important to pricing experts. The features of a law firm that add differentiating value must 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. According to Nagle:

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).

Nagle makes special note of the value of an endorsement from a client known to be discriminating. For example, in the health field, Kaiser Permanente has an excellent reputation for being an informed buyer. As a result, “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. Discounting to win business creates client expectations of future discounts. 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 refundable fares for business travelers and nonrefundable fares for vacationers with flexible schedules.

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:

a. Value-driven clients have sophisticated analysis strategies for studying value-added, and you will need to work to establish your value-added for them.

b. Brand buyers (also known as relationship buyers)—For this group, 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 to deal with so long as you do not disappoint them.

c. 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.

d. 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.

But whatever price strategy a law firm uses, the simple fact that they are paying more attention to this area will have positive effects. In their book, Law Firm Pricing: Strategies, Roles, and Responsibilities, Toby Brown and Vince Cordo give this example:

Lawyers live in a reputation world, and [financial] monitoring exposes that reputation to risk. Once lawyers realize that others in their firm can see their financial performance on matters, their behavior often changes. In one example, a lawyer was losing money on the first phase of a fixed fee arrangement. Once a monitoring program was put in place, performance on the second phase dramatically changed, leading to a reasonably profitable result (p. 39).

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

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