Pricing Strategies for Legal Practices
This is a synopsis of the e-Masterclass on Pricing Strategies for Legal Practice organised by the Law Society of Singapore and College of Law Australia/New Zealand on 12 May 2021. The author also wishes to acknowledge the use of the diagram on alternative fee arrangements by Stephen Kitts, the Managing Partner Asia of Eversheds Sutherlands who also gave a talk entitled “Alternative Pricing Model” at the same event.
We are living in a world that is constantly changing. From technology to urban planning, there is hardly anything that is not changing, and the legal profession is no different as it continues to adapt to these changes. The ways in which law firms operate today have evolved from how it was 10 or 20 years ago, and law firms’ billings are no exception as lawyers make a living by giving legal advice to their clients. Over the years, the pricing structures adopted by law firms globally have changed to adapt to the increasing demands and needs of their clients. With different pricing models and approaches in sight, gone are the days when lawyers could rely solely on charging ‘hourly rates’.
Why Is Pricing Important for Law Firms?
Based on the diagram above, there is no doubt that pricing is an important aspect of how lawyers operate their legal practice. It is also one of the key factors that clients look for or take into consideration in deciding whether to hire a law firm in representing or assisting them in legal matters.
A strategic and effective pricing model builds the law firm’s reputation in terms of offering good value. If a lawyer overestimates his legal fees, he may end up losing some of his most valued and long-standing clients. On the other hand, if a lawyer underestimates its legal fees, he could be forced to overwork himself and/or his associates as a way to reduce costs. Inevitably, the business may be running at a loss due to the law firm’s failure to not only take into account the value or salaries of the lawyers, but the overhead expenses in running a law firm as well. With all this in mind, when it comes to pricing, the key is to strike a balance.
So, how does a law firm strike a balance? Is it all about the price? Validatum1Validatum’s Vital Role of Pricing in Law Firm, https://validatum.com/articles/the-vital-role-of-pricing-in-law-firm-marketing-bd-efforts suggest that a fundamental mistake many lawyers make is to assume that pricing is the primary consideration in clients’ decision-making process. This may not be the case in today’s legal world. Clients are now more cost conscious, and their focus is on price transparency, price certainty and value-for-money. In other words, today’s clients want it all.
Without an effective pricing model, law firms may continue to fail to meet their clients’ expectations in respect of pricing transparency, pricing certainty and price-value correlation, and continue to throw the ‘discount card’ thinking it will resolve or fix everything. Even though the discount approach is still a common practice in law firms generally, law firms cannot afford to constantly give discounts to their clients.
Law Firm Pricing and Marketing Strategy
Taylor Wells2Taylor Wells’ A Beginner’s Guide to Pricing for Law Firms and Consultancies, https://taylorwells.com.au/pricing-for-law-firms/ suggests that when it comes to pricing, there are four factors that law firms should consider in determining what is the best price and fee arrangement to offer their clients. It is the summation of these factors that will ensure that law firms are on the right path of providing an effective pricing model:
- Product: refers to the tangible benefits of the services rendered by a law firm to its clients.
- Place: refers to the manner in which the clients come to know or are acquainted with the law firm.
- Price: refers to the striking of economic deals between a law firm and its client, thereby creating a win-win situation for both parties.
- Promotion: refers to the law firm’s reputation in preventing or reducing risk, loss and gradually generating value for the clients, financially, legally, and emotionally.
Most Common Law Firm Pricing Models
Setting legal fees that are catered to the clients’ expectations, while bearing in mind the complexity of the legal issues that may arise in accepting such briefs, is by no means an easy task. In recent years, law firms have been guided by the following three broad-based pricing models in setting their legal fees:
- Cost-First Model: focuses on the costs required by the law firm in providing the legal services to its clients plus a percentage to reach a margin of profitability.
- Competition-First Model: focuses on what competitor law firms are charging their clients for similar services and providing better prices than their competitors. This would include giving lower rates and better value for the clients.
- Value-First Model: focuses on the value of the legal services that is being provided by the law firms to its clients.
The table below provides an overview of the types of alternative fee arrangements that have been adopted by law firms:
With all these different pricing approaches and fee arrangements, it is up to the law firm to choose the best type of pricing and fee arrangement that works for them, their clients, and the tasks at hand. After all, not all clients have the same needs.
Factors to Consider When Charging Clients
In choosing the best type of fee arrangement that will ensure a more sustainable and profitable future in the long-term, law firms must weigh the time and effort that is needed in providing the services to its clients. From litigation to corporate mergers and acquisitions, the question is whether the time and effort needed to be put into such work by the lawyers justify their fees. One of the ways that law firms can measure the time and effort needed for a legal matter which justifies the legal fees is through time keeping or time entry. A proper time keeping or time entry mechanism gives law firms sufficient data on how much of time and effort is needed for a particular legal matter. This allows the law firms to have a general idea of how much to quote their clients for similar matters, instead of merely looking at their competitors’ fees.
Additionally, it is also important for law firms to consider if there are any specific skills required in handling certain legal matters and suits. This could all add up to form the basis of the law firms’ pricing and fee arrangement.
Is There a Recommended Pricing Model?
Law firms do not all share the same priorities and to state outright that there is one pricing approach or pricing model that is “above it all” would be inaccurate. The idea is to have an approach or arrangement that works best for the respective law firm, and the key is to set legal fees that make sense to both the law firm and the client. Nevertheless, if implemented correctly with proper and strategic planning, a value-first pricing model or fixed fee arrangement would be the recommended method in helping law firms to achieve and generate higher profits. Why is this the case?
Instead of focusing on hourly billing, law firms would be more inclined to know their worth and the value they bring to the table. In turn, clients will appreciate this and pay for the law firm’s competence and expertise. The truth is that clients hate unexpected expenses, and this is one of the disadvantages of hourly billing. With a value-first pricing model, the clients are not bombarded with surprisingly high legal fees as they would have been informed of the fees upfront before they even accepted the engagement. A satisfied client builds better lawyer-client relationships.
The adoption of a value-first pricing model also minimizes inefficiencies and ‘slack’ time, as law firms are well aware of the time costs incurred to complete the matter while preserving the quality of the work done.
Law Firm Pricing Approaches in Times of COVID-19
The Covid-19 pandemic was unprecedented. In a survey conducted by Altman Weil In,32020 Law Firms in Transition, an Altman Weil Flash Survey it seems that many law firms depended on higher billing rates, increased billable hours, improved leverage, and costs control measures to contribute to higher profit margins and improved firm performance during the pandemic. The Altman Weil survey also suggests that law firms were forced to change its annual projections based on their best guesses of how public policy decisions and economic regeneration might play out.
In an attempt to “survive” the pandemic, the Altman Weil survey indicated that law firms had to re-strategize through employee pay cuts, furloughs, layoffs, recruitment freezes and the proper management of expenses to avoid any unexpected expenses.
With no end in sight to the pandemic any time soon, law firms need to be responsive and quick in navigating and circumventing the impediments that the pandemic has caused in the running and operations of law firms the traditional way. As pointed out in the Altman Weil survey, law firms were able to bounce back from the pandemic by adapting to an era of remote working. From lawyers to judges and courts, remote working is now considered the “new normal”.
Nonetheless, in such challenging times, the focus should always be on client relationships rather than the profit or revenue generated by the law firms. As suggested by McKinsey & Company in “Covid-19: Implications for Law Firms”,4McKinsey & Company: Financial Services Practice on “COVID-19: Implications for Law Firms” law firms should always be vigilant on pricing as it easy to be swayed during these tough times.
As can be seen above, there are many pricing approaches or fee arrangements that law firms can adopt when it comes to charging their clients. Smaller size law firms may adopt a different pricing model and strategy than their larger counterparts as they may not share the same priorities and market position. Law firms should also not rely heavily on the optics of discounts. Nearly all legal clients expect some sort of discount from their lawyers if they could. But discounts should be done strategically, and law firms should be able to take a stand and be firm on their legal fees. They need to be aware of the message that their discounts might be sending to their clients at the expense of the value they provide.
Nevertheless, when it comes to achieving good pricing and in choosing the best pricing approach or fee arrangement, law firms need to remember that time keeping or time entry is everything. It is without a doubt that many lawyers and law firms struggle with the idea of time keeping or time entry. Not only it is time consuming, but it is also challenging for lawyers to account for every single minute and hour that they have worked on and then to manually insert these details into the system at the end of a long day.
Regardless of the challenges that time keeping or time entry may bring or give to lawyers and law firms, the outcome or end result is worth it. By having proper time keeping or time entry policies internally, law firms are able to use this as a guide, a measurement, and the basis of their legal fees in charging clients on legal matters that are similar in nature. A well-documented time keeping or time entry mechanism avoids law firms from under billing or overcharging their clients, irrespective of the pricing approaches or fee arrangements adopted by the law firms.
|↑1||Validatum’s Vital Role of Pricing in Law Firm, https://validatum.com/articles/the-vital-role-of-pricing-in-law-firm-marketing-bd-efforts|
|↑2||Taylor Wells’ A Beginner’s Guide to Pricing for Law Firms and Consultancies, https://taylorwells.com.au/pricing-for-law-firms/|
|↑3||2020 Law Firms in Transition, an Altman Weil Flash Survey|
|↑4||McKinsey & Company: Financial Services Practice on “COVID-19: Implications for Law Firms”|