What does your client need and perceive as good value?

Law firms have tended to calculate the cost of providing a service by measuring lawyer time and adding an allocation for overheads and a profit margin. But this cost plus approach bears no relationship to what the client is prepared to pay. It is also rather open-ended for the client: they do not know how much the service will cost.

Lawyers sometimes mistakenly think that the appetite for fixed prices means this can only result in price cuts. Yet often clients just want certainty and it is wrong to assume that this equals low price. Some firms are now employing project management techniques to ensure that quotes are not exceeded.

Paralegals, outsourcing and technological solutions can reduce the cost of producing some legal work but this doesn’t mean that the price for all legal services – no matter how complex – must also be depressed. One of the most profitable US commercial litigation practices in London does fixed prices – but they are not the cheapest. The client pays a premium to remove the risk.

Marketers know that clients seek the lowest price when they see no other difference among providers. So the issue is about differentiation. And while it is hard to differentiate the actual legal product many firms successfully do so
on more emotional matters, such as culture and values and relationship or service issues.

And marketing strategies can create a perceived difference through brands, where clients pay more for something they perceive as important – whether
this is reassurance or prestige or something else.

As cheap commodity deals hit the market, the price of those services becomes anchored at the low end. If you have no idea how much it will cost to get a will and a trust, you will be more open-minded.

However, if you have seen numerous adverts indicating that you can do this for £49 plus VAT then your views will be anchored here.

Tangibility and transparency

Most clients are not lawyers. They do not know what happens behind the scenes and need help seeing tangible benefits. They do not know how to determine if their lawyer is good or not and infer this from observable aspects of the relationship, such as how quickly the phone is answered and how written communications appear. Clients take a risk when appointing a solicitor and have to trust them to be honest about the costs.

Part of the pricing process is to be more transparent, to explain what is actually involved so that clients can see where the value is being delivered. Or to give them options to pay just for those elements that they value.

We see this clearly in insurance price comparison sites, where consumers compare aspects of the different policies. They make a choice based on their specific mix of needs. In the family market, there are services now where clients can pay just for the face time they spend with their lawyer and nothing else.

The key to pricing is client value. So solicitors should develop a deeper understanding of what the client needs and perceives as value. It’s easier said than done. But think how much you would be prepared to pay for a glass of water. Not much. Now consider if you had been in a hot desert and were desperate for a drink. Your value perception has increased significantly.

Think also of someone who has been worried about putting their affairs in order for a long time with a tricky – to them, not legally – family issue. They may be so relieved at talking to someone who has encountered similar situations and can reassure them about the best course of action that a low bill may incur dissonance and anxiety as they expected to pay more.

What do you do?

Pricing is a complex activity requiring financial, marketing, psychological and economic knowledge and skills. But you can make a start on adopting a more strategic approach to pricing rather
than racing to the bottom.

Although you shouldn’t base your price on cost, you do need data about costs. This may involve manual work to extract from your case management and accounts system information about a variety of clients on different types of matters. You’ll need to choose the most likely influencing factors. Some will be objective, e.g. value of assets, number of beneficiaries; others will be subjective, e.g. level of hand-holding needed.

Once you have a handle on the costs, you can do a number of things. You may decide to invest in technology to drive the costs down. One leading law firm recently applied business process re-engineering principles to all its main legal processes to increase automation and drive out inefficiencies.

But more importantly, you now have a proper foundation of costs information for one side of the equation.

Segmentation is the way

Another advantage to this information is that you will be able to segment your market. Not all clients want bargain-basement fixed fees. Some segments may want options so that they can mix and match. Some may be prepared to pay more for some aspects of the service, e.g. 24-hour telephone support, weekly updates or a secure online document vault.

Once you have identified the segments that you want to serve, you can undertake research to understand the value propositions that are most likely to appeal then craft an appropriate service and pricing strategy. Yet the legal sector seems resistant to offering differential pricing.

You could produce a demand curve showing how much of a particular service is likely to be needed at each price point so you can see where maximum profit (not the maximum revenue) is likely to be.

I conducted some research in conjunction with a single-parent charity into the price perception of divorce and child services early last year. Contrary to what you may expect, some people accepted that they might need to pay a significant amount.

New service development

The idea of offering a choice of different service elements can be taken further with the creation of packages that offer different feature combinations. Not all these are of value to every client.

Think about how you select your mobile package. Some people focus on the number of texts, some on the call time, some on the data roaming limits and largely ignore the other benefits as long as the features they value are right.

In private client services, this may mean looking beyond legal solutions. For example, one firm worked with a property management company to offer a complete estate management service. Another created a monthly retainer service comprising weekly home visits and the management of other official paperwork. As trusted advisers, lawyers are in a good position to manage other services for clients. Many do so, but often do so free when it is this aspect that the clients most value.

Quotations and estimating

When providing written estimates for clients with more complicated matters, there is evidence to suggest that you should offer a number of options, e.g. a low price with a minimal service, a medium price and a higher price for an all-bells-and-whistles service.

This does a number of things as well as giving clients the power to choose. Psychologists indicate that most people adopt the middle road as they avoid extremes. And there is evidence in mainstream markets of ‘decoy’ prices helping clients put
other prices in context.

How lawyers manage price communication is important too. There are some helpful tips in the legal ombudsman’s good costs service guide.

Records should be kept of what estimates are offered, and to whom, and which are accepted or selected as this will inform and improve future pricing decisions.

Kim Tasso is an author and independent management consultant to the profession