Law firm profitability and the pricing myth

Law firm profitability and the pricing myth

25 October 2021 By Chantal McNaught
Law firm profitability and the pricing myth

If you are considering lowering prices to remain competitive in your legal services market, there are numerous questions you should ask of yourself and your firm, writes Chantal McNaught.

There is a persistent myth in the legal profession that to remain competitive in today’s market, a law firm must price its services lower than others. This is largely based on the assumption that in order to win work and be profitable, law firms must reduce their pricing.

Why this is a myth is that this reasoning fails to take into consideration the possibility of bad instructions and the cost of the service delivery.

While public discourse may persist that law firm profitability is on the nose and that lawyers generally charge too much, my experience is that the opposite is true. This is about law firm survival.

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Despite strong economic growth post-pandemic, many law firm principals are reporting weaker draws and concerns over market competition.

So, what is the best way to price legal work? While the process will differ between areas of specialty, pricing is nevertheless such an important management process in which I hope to present a strategy.

To price legal work well, the pricing myth, service design, and value for money ought to be considered.

Myth: “To remain profitable, my pricing model must be competitive”

This prevailing myth needs to be set straight; a law firm does not need to slash prices to compete and be profitable. In fact, continuing to slash prices to compete contributes to the commodification of the legal profession, which has consequences for both the legal profession and the law firm.

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This is not an argument against the need to review pricing. Pricing is essential. In a few rare circumstances, pricing can go down for a short instance in response to a market surge or due to a redesign in the service offering. However, this should be the exception and not the rule. A practice of reducing price to be competitive without stringent checks and balances undermines the value of legal services and the profession. Not to mention it could have severe implications for the profitability of the firm concerned.

Service design is a dependency of pricing

Service design is a business practice of designing the service around those things which the transacting party finds valuable. It follows that when looking at legal service pricing, the legal service must be of more value to the client than the cost of it.

This is why legal service design is such an important part of the legal pricing challenge. Philip J. L. King wrote in his 1995 guidebook Professional Practice Management of the importance in the form of the product. The product for lawyers is, of course, the legal services provided.

Legal services mean different things for each client. Specifying the “product” then helps with accurately pricing for it, setting out responsible firm resourcing to complete the service, and ensuring adequate profitability margins.

The first essential step is to set out clearly what the client is trying to achieve by seeking the legal service. Then, it is necessary to determine how the client will use the legal service.

Philip J. L. King uses the example of advice and ensuring the advice is in a useful and accessible form for the purpose to which the client is to put it. It would make sense, for example, for advice to a millennial or Generation Z client to be in digital form in a secure portal, which can include diagrams and multiple media to explain complex concepts. This method would not be suitable for a client who is culturally and linguistically diverse and does not have a smartphone.

Consideration of whatever else can be done to achieve the client’s stated goals can also be meaningful when determining price. This is an important consideration that cannot be understated. When dealing with the question of being competitive, differentiation among service providers, apart from price, is a good thing.

Many family lawyers are already doing this by connecting their clients with non-practitioner services, such as counselling, as complementary to the family law practice service offering.

Understanding the client’s problem, including the unique challenges they face in their industry, will also make your firm have greater appeal than competitors. Too often, I see law practices have numerous practice areas listed on their website. This can detract from the value of the area of law practice in which the practitioner is trying to attract clients.

Assessing alternatives to a technical solution that present faster, more commercially advantageous results also has merit. Presenting these as options for the client will allow them to have a choice of your legal services.

Designing the service so that each client feels that the legal professional is on their side also contributes to better pricing. Addressing client concerns in a meaningful way, discussing the costs to them not just in aggregate terms but within a budget schedule means that both parties will know the expectations and have the added benefit that payment would be likely. Identifying those who will be having contact with the client and the client’s preferred reporting procedures are also important. Finally, taking them through all possible outcomes means that there are no surprises for the client.

Service design also means that appreciation is built into the process, and therefore the value of the service to the price tag attached will be more suitably matched.

In addition to the solution the client is looking for, if additional benefits such as how legal process outsourcing can assist the specific service in being more streamlined or helpful to the client can be presented, the client will be more appreciative.

If your practice consistently applies just one of these in legal service design, then you would be at a competitive advantage over the practice that is at the race to the bottom with pricing.

Value for money pricing

Lowering prices for legal services is just one way to compete in the market. Albeit not as profitable as charging more for the same services. In many ways, lowering prices can do significant harm to the practice and can lead to such declines that the firm ceases to trade.

There are law firms out there that do charge more than others and are more profitable. How do they do it? They build value in their pricing model through their legal service design.

This is due to clients assessing value on what is apparent, not just the technical excellence. In theory, all law firms should be technically capable in more or less the same way. The real difference is how these law firms can demonstrate to clients the legal services provided are more beneficial than if they were done by their competitors, or even a non-lawyer.

Does your practice demonstrate value to your clients?

Do this yourself for your practice and answer these questions:

  1. Does the law firm tailor its legal services so that they are accessible to the client (i.e. does the service delivery help make the client feel that they and their business are important)?
  2. Is empathy strongly encouraged when working with clients to help them build trust and confidence in your services?
  3. Is your excellent skill and capacity apparent from conduct and/or reputation?

If you are considering lowering prices to remain competitive in your legal services market, consider these questions beforehand. It may mean the difference between profitability and mere survival.

Chantal McNaught is an admitted lawyer, writer, researcher, and is passionate about all things legal practice and technological innovation and cats.

Law firm profitability and the pricing myth
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