Value is in the eye of the beholder
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Firms' formulaic approaches to pricing are no longer fit for purpose in today's more competitive environment, writes Richard Burcher
Whether you think value pricing is a science, a dark art, or just more management claptrap, it is a client-driven trend few law firms will be able to avoid for much longer.
Defining value is like trying to nail jelly to the wall. I’ve have heard value pricing variously described as ‘what the client will stand’, ‘making up a figure’, ‘hourly billing plus some more’, or ‘what the client thinks it is worth’.
That’s an approach that lacks honesty and integrity. It also completely misses the central point that legal services pricing should be about the optimal alignment of the clients’ perception that they have received fair value and the lawyers’ perception that they have been paid properly.
It is important to distinguish value pricing from the two most common approaches of law firms to pricing – cost-plus pricing and market-driven pricing.
Cost-plus pricing involves nothing more than adding a margin to the firm’s fixed and variable cost base. Market-driven pricing, rather than being determined by operational costs or clients’ willingness to pay, is largely dictated by the firm’s perception of what the market will stand.
These two approaches have historically served firms reasonably well, but they’re not fit for purpose in the more competitive and sophisticated environment we are operating in now.
Although it is a gross simplification, as a profession we prefer objectivity to subjectivity. Just look at the reaction of most lawyers when asked to explain Wednesbury reasonableness or the man on the Clapham omnibus. What on earth does ‘reasonable’ mean?
Therein lies the attraction of hourly billing. It is empirical, robust, black-and-white, and not open to interpretation.
Value pricing is therefore the complete antithesis. It involves having to make qualitative judgements about what the client perceives as being valuable and therefore something they will be willing to pay and pay handsomely for, or, conversely, what they attach limited value to and will pay little if anything for. This is considerably more challenging than a formulaic approach to pricing.
For pricing specialists, the holy grail in any sale of goods or services is to ascertain with precision the client’s ‘willingness to pay’ – that is, the maximum amount that an individual client is willing to pay for the services, no more and no less. The airlines have made an art form out of this, with yield management and dynamic pricing resulting in most people on an aircraft having paid a different amount from the person they are sitting next to.
Only by putting in the time and effort to understand what value looks like on a particular matter to a particular client can we begin to contemplate instituting pricing structures that capture all of that value.
There are five critical rules to follow when implementing value pricing:
Comprehend the key value drivers for clients. Make sure you know what drives success in the customers’ business and personal life and how they measure success.
Create value for clients. Make sure that you deliver the services and support your clients want and need. Follow up on questions and issues. Avoid the urge to take shortcuts, and take the steps that ensure your clients are satisfied.
Communicate the value you create. Talk with your clients and explain the tangible features and intangible benefits of instructing you.
Convince clients that they must pay for value. If you and your firm are creating value and ensuring that your clients recognise that value, have confidence when you ask for prices that reflect it. Contrary to popular myth, most clients are looking for good value rather than lowest price.
Capture value with effective price tactics. Effective tactics include recognising when you have an advantage, rigorously qualifying competitive prices, recognising which services drive a client’s decision and which services are less valued, and getting something in exchange for any price concessions you make, for example reduced scope or payment in advance.
'‹Value, like beauty, is in the eye of the beholder. It really doesn’t matter what we think. The only opinion that matters is that of the person who is (hopefully) going to pay us. Whether they think it’s good value or not, either way they are right.
But being prepared for these conversations, and having real confidence in pricing for value, increases your chances of the client reaching the conclusion you want them to.
Richard Burcher is managing director of global pricing consultancy Validatum