Thinking strategically about your pricing and the fees you charge puts you in position to earn what you think you’re worth. Better yet, it gives you the option to charge what your clients think you’re worth.
Last time, I discussed the corrosive effect of letting price hijack your conversation with prospects. RJ, the Managing Partner of a mid-sized law firm, cited three reasons clients select his firm. Within hours I couldn’t remember the first two, but the third one stuck with me: “We charge less than the big firms.”
I’ll be blunt: RJ’s pricing strategy undermines the growth and profitability of his firm, destroying more opportunities than it creates. RJ thinks he’s competing on value. In reality, he’s competing on price. Competing on price makes it harder to achieve his revenue and profit goals.
Every Additional Dollar Is 100% Profit
RJ regaled me with stories of clients who loved his firm because of its smaller size, hands-on culture, and seasoned attorneys who create better outcomes for clients and their businesses. I posed the obvious (to me) question: if they’re better than the big firms, why don’t they charge more rather than less?
Over the course of a year, he’s leaving hundreds of thousands of dollars on the table. Every nickel of “found revenue” would drop straight to his bottom line as additional profit.
Ok, charging an outright premium is hard for many people. However, if RJ were confident he could make a case for charging more than big firms, pricing at parity becomes a baby step. My client interviews provide that confidence by demonstrating that a firm’s best clients pick it for outcomes, not price.
Empirical data backs me up. Sellers of professional services place twice as much importance on price compared to buyers. More interestingly for RJ’s situation, according to research at the University of Minnesota’s Carlson School of Management, buyers prefer a greater quantity for the same cost compared with the same amount at a discount
RJ’s pricing model is a twofer for undermining the growth of his firm:
- He’s leaving money on the table. His firm’s best clients are almost certainly willing to pay more than they do for his firm’s services.
- His pricing makes his offering less attractive. Research tells us RJ’s same-for-lower-price offering is less attractive than the more-for-the-same-price offering he could justify in good conscience.
Ultimately, by generating less revenue from each new client, RJ must win more new clients to achieve his growth and profit goals. The hit in his partners’ pocketbooks is just the first in a series of dominoes. Lower profits makes it harder to attract and retain the best lawyers, which in turn makes it harder to attract the best clients, etc.
Pricing Too Low Raises a Red Flag
There’s more than academic mumbo-jumbo here. We all expect a firm which creates better outcomes to charge more, so a firm which claims better outcomes while charging less raises a red flag. It goes against what we expect, so we look for a reason. The most obvious reasons are that the firm is less capable than claimed, or it’s hungry for business. A lot of prospects seize on the latter possibility to negotiate fees down even further. To reach his revenue and profit goals, RJ has to work harder and win even more new clients.
While there’s definitely an art to pricing to value–and it takes confidence–there’s plenty of science to back up that getting it right is good for your business. The challenge is that while clients are often willing to pay more to get more, they’re also smart enough to keep quiet when you offer a discount–even when they were prepared to pay more. Blissful ignorance keeps the pain at bay.
Converting Theory into Profits
While truly optimizing fees can involve a lot of qualitative work, simply understanding the broad impact your firm has on your clients and grabbing the low-hanging fruit will close 80 percent of the gap without requiring much math. The biggest obstacle to going from theory to practice is having the guts to charge what you’re really worth. If that seems too big a leap, perhaps hearing from your own best clients will convince you. That’s where I come in, showing firms how to better assess the value they generate, and then going to market with a strategic marketing plan to win more of their ideal clients.
If you know a firm facing similar challenges to RJ, drop me a note.