Make More Rain : pricing, marketing

The Science Behind Pricing

Admin — Tue, 22 Apr 2008 07:00:25 GMT

The April 2008 Scientific American contains an article titled Why Things Cost $19.95: What Are The Psychological "Rules" Of Bartering? (hat tip: Matthew Homann, in his blog the [non]billable hour). The article explains the effects that initial pricing has on a potential buyer based on a series of tests. The results found:

people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.

The authors of the tests then looked at five years of real estate sales in Florida to see the difference between the list price of real estate and the actual sales price.

They found that sellers who listed their homes more precisely—say $494,500 as opposed to $500,000—consistently got closer to their asking price. Put another way, buyers were less likely to negotiate the price down as far when they encountered a precise asking price. Furthermore, houses listed in round numbers lost more value if they sat on the market for a couple of months. So, bottom line: one way to deal with a buyer’s market may be to pick an exact list price to begin with.

Homann, in his post on the subject, took it a step further: Why not charge $297 per hour rather than $300 per hour? Then if a client wanted to negotiate, ostensibly the negotiations would be in single dollars rather than tens of dollars.

In the case of firms who are competing with other firms for business, this tactic may work well to secure a deal.

It may not work as well when clients are asking for a discount. Many times when it comes to discounting rates, clients look at percentage discounts of the whole bill rather than dollar discounts. Therefore taking a few dollars off the charge per hour may end up costing you a lot more than anticipated. Where it may work better is in flat fee or value-bill situations, where you are adjusting only the final price of the service.

So, if you have priced a certain task at $1,500, try advertising a price of $1,497.96. On top of making the client look at penny increments, it also makes it look like you have calculated the exact value of the service. Before making wholesale changes to your pricing, try on a specific area that may have a higher average of discounts (or lost potential clients due to pricing) than other areas. Track whether the change in pricing has an effect. If so, please feel free to post your results here.

Discounting At Law Firms

Admin — Wed, 09 Apr 2008 07:00:27 GMT

I received an email from Brendon Carr, foreign legal consultant and host of the Korea Law Blog, regarding a recent post of his, “I Don’t Care What You Charge; Whatever It Is, It’s 15% Too Much”. The post discusses a request from a new client for an across-the-board 15% discount for his services.

In my experience working with law firms, discounting is the most difficult thing to change. Where mark-downs to work performed can be addressed internally, discounting becomes an entitlement to a client. The only ways to recoup the loss in value is to increase rates at a higher percentage than other clients, pad your hours by billing for things you may otherwise not charge to a client, tie the discount to high volume, or tie the discount to fast payment of invoices The first two are not conducive to a positive trust relationship with the client.

In my opinion, discounting should be avoided at almost all costs - the exceptions being:

In return for high volume of business that compensates for the reduced value of your time. There is nothing shameful in requesting from a client who asks for a discount to provide estimates of business it will provide and tying the discount to their ability to provide that level of business. Then you can agree to the discount, but will provide it once the threshold business the client sends you is met.
In return for fast payment of invoices. This encourages fast payment and thus a positive effect on cash flow.

When in a situation such as that of Mr. Carr, several questions come to mind:

Is asking for a discount up front damaging to the relationship between attorney and client?
Does mandatory discounting encourage mark-up of hours?
If it becomes known that your firm discounts, does it create a perception by clients that your firm expects rate negotiation and thus overcharges for its services?

What do you think? Add a comment below to share your thoughts.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

New Service to Increase Big Business Access to Law Firms

Admin — Wed, 22 Aug 2007 17:32:19 GMT

Midrange firms have the price and service quality advantage over big law but don’t have the access to Fortune 1000 companies. If OnRamp is successful, that is about to change for participating law firms.

The idea behind OnRamp is to create a space for corporate legal consumers to go to find answers to frequently asked questions on very specific topics. The answers on the site are contributed by participating law firms with deep knowledge and expertise in the topics.

The new on-line community will level the playing field. It will not matter if you are solo, a 20-attorney firm, or a firm with 1000 attorneys. The prospect discovers your law firm. Your posted answers establish your credibility. The two of you are likely to do business.

The internet has already increased the accessibility of midrange firms for the corporate buyer. A select number of firms have used blogs to establish national and even global credibility in specialized areas. Corporate buyers increasingly turn to the Web to search for (or to validate the fit of) a law firm experienced in particular matters.

OnRamp is another avenue for the small and midrange law firm to catch the eye of corporate legal departments. It has the advantage of being a central depository of answers to which corporate counsel can go first in their search to match a law firm to a particular matter or style of matters.

My understanding is that Legal OnRamp is the brainchild of Mark Chandler, the General Counsel of Cisco Systems. It is new and not fully operational but is currently accepting content from participating law firms. To become one, you have to first contact the OnRamp team and earn an invitation to participate.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Billing Practices That Cement Relations with Law Firm Clients

Admin — Wed, 01 Aug 2007 17:07:59 GMT

I hear the same thing over and over again. It isn’t so much the cost of legal services as it is the lack of predictability. Business managers abhor legal fees because of a feeling that they are beyond the manager’s control. They are unpredictable. The delay between when legal work is performed and receipt by the client of the law firm’s bill makes things even worse. A corporate manager can’t turn off the flow of legal expenses that are already in the law firm’s unbilled pipeline for work performed.

Law firms appear to be desensitized regarding their billing practices. Yet it is a firm’s billing practices that drive clients away. Not that the client will be any happier with their new choice. Rather than being drawn to another law firm because of higher value added, it is dissatisfaction with the existing firm’s practices that sends the client in search of something better.

What is needed is deliberate sensitivity by billing attorneys to the client’s concern over legal bills. Those concerns aren’t the same for every client’s contact. Nor are they the same for every case or matter. Nevertheless, for most clients the following steps will go a long way toward cementing your relationship for the long term.

Offer a retainer relationship for all minor matters. If your are unsure about the level of work involved, shorten the period before the retainer is renegotiated or include a provision that lets you renegotiate at any time the volume of routine legal work changes materially in the judgment of the firm. The objective is not to undercharge for services; it is to remove the surprises in your relationship.

Offer an estimate for all matters or cases handled outside of the retainer. If necessary, break the matter into phases and provide your estimate for each phase. Revise your estimate as circumstances change. One client said, “We don’t hate bad news; we hate to be surprised with bad news!”

Do not let unbilled charges accumulate. Clients prefer to be billed promptly for work performed. The typical law firm takes almost 70 days before it bills for work performed. Clients find that delay to be a disservice and they find this un-businesslike practice a negative reflection on the law firm. At the end of each month, or more frequently, bill promptly for all services performed.

Discuss your billing procedures with the client. Can you send your bill directly to the client’s accounting department with an information copy to the firm’s client contact? Do your plans regarding the presentation of information on the bill meet the needs of the client contact? Get rid of charges for soft costs, which produce more aggravation than revenue. Instead, increase your prices for services to offset any reduction in revenue due to the elimination of routine soft costs like faxes, telephone, copying and so forth.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Law Firms and Corporate Clients Continue Their Dance

Admin — Mon, 09 Jul 2007 18:27:33 GMT

The June 2007 Corporate Counsel reported that Circuit City is requiring law firms to discount legal fees by three percent for prompt payment. What is interesting about this is that the interviewed Circuit City representative reportedly explained that they were already paying promptly and decided they should get something for it. By "prompt", they apparently meant in 20 to 30 days. Outside of the legal sphere, that would be “normal trade terms”!

Asking for a three percent discount for making payment on time takes gall. At the end of the year that three percent discount adds up to a 36% annual interest rate on the average amount involved. Giving in to the discount signals that law firms are simply willing to take whatever punch their big corporate client throws at them. Those big accounts look great until you realize that they have you around the throat. Or do law firms give in to those demands because a lot of legal billing may be like a balloon? Squeeze it here and it bulges there.

In the long run, what the client pays and what the law firm receives have to be a fair deal for everyone. Without that fairness the relationship will not last. Law firms should be proactive in reporting the value delivered. Corporate clients should be investing in systems that track the comparative value (benefit vs. cost) of its various attorneys rather than squeezing here to just experience a bulge there.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center: 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Law Firm Survival Is Tied to Its Blended Rate

Admin — Thu, 03 May 2007 18:03:00 GMT

Paul Calthrop, writing in the May issue of the Harvard Business Review, gives all of us something new to think about regarding pricing. Calthrop is a partner in Bain & Company. His article is titled “Higher Net Price—Or Bust.”

He makes the point that lower pricing may be a viable strategy for entering a new market or launching something new, but otherwise it signals a path toward commoditization, which he says “…inevitably undermines the firm’s prospects of achieving sustainable revenue and profit growth."

For a law firm, Calthrop’s warning reinforces the importance of tracking the firm’s effective blended rate metrics. It also explains why it is so important for the firm to have strategies and tactics in place to increase its blended rate. You don’t achieve a continuing increase in the firm’s effective blended rate through price increases. It comes from increased value:

Increasing efficiency coupled with pricing alternatives
Moving into more valuable practice areas
Increased specialization
Adding new value to established services—convenience, response times, certainty, etc.
Moving to new clients for whom your services have higher value
Etc. Etc. Etc.

Price increases are still important, but the typical pricing increase strategy for a law firm is the annual increase to cover increased operating cost. Adjusted for inflation, it has a zero impact on the firm’s effective blended rate. Moving the blended rate can, however, be achieved through better pricing strategies:

Multiple standard price sheets pricing higher value services at appropriately higher prices
Targeted price increases to move underpriced services, clients and matters to higher competitive price
Having more prices based on the deliverable versus the hours worked, i.e., Alternative Pricing

And the effective rate can be increased through improved collection and faster billing of services. Both improve realization and decrease lost revenue arising from adjustments and uncollectibles.

Managing partners need to take Calthrop’s warning to heart. If your effective blended rate is not moving up, then the firm is increasingly engaging in areas undergoing communization. Short of reinventing how legal services are provided, that will lead to an unsustainable trend of declining partner income.

For more on measuring and tracking blended rate, go to the prior post Blended Rate and Utilization Model for Law Firms.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com ,or go to www.Juris.com.