“When times are good, pricing sins can be easily forgiven. But when the economy sours, a misguided pricing strategy can shrink profitability, warp client relationships, and destroy a brand.” Nick Wreden – Harvard Management Update.

 

 

When it comes to pricing, the immediate response from many firms to the economic downturn is that they cannot put up rates and may even need to provide larger discounts to some clients. This response helps silence not only complaints from clients but also concerns from some partners who find it difficult to respond to clients’ 'requests' for fee reductions. The strategy is justified on the basis that the firm is trying to maintain utilisation levels. Yet few firms truly know what impact a decrease in rates will have on sales.

 

What firms do know is that decreasing charge-out rates will lead to decreased profitability. You would think that in difficult economic times, firms would pursue all opportunities to protect earnings and yet the strongest lever of all – pricing – is often the first opportunity discarded. The result is that the firm’s financial performance is squeezed from both ends – the decline in volume reducing revenue coupled with the profit impact of a decline in realised rates.

 

As Nick Wrenden points out in the quote above, the impact of a misguided pricing strategy goes beyond the firm’s profitability this year. A misguided pricing strategy may also:

·       Reduce future profits - The asymmetry of pricing (it’s much easier to drop your price than put it up) means that firms who drop their rates now will find it much more difficult to return them to ‘normal levels’ when the economy improves.

·       Create price wars – Firms often say they are following the price cuts of others to remain competitive – but do your competitors think they are following you?

·       Damage client relationships – At the very least a price cut may highlight to clients that you lack confidence in the value you deliver. At worst it may send the message that you’ve been over-charging for years.

·       Damage brands – Price plays a role in signalling a firm’s market position. Firms with premium positions (i.e. high price, strong brand) are primarily chosen based on the benefits they can deliver, the experience they have and the team they can bring to the table. Why suddenly compete on price? Similarly, firms in the mid-market may be better placed to target lower valued services currently delivered by top-tier firms rather than aggressively compete with peers on price.

 

So given the pressure to reduce rates, the opportunity pricing presents and the impacts of a misguided pricing strategy, should pricing be the number one item on the CEO’s agenda for the coming year?

 

 

Below are six ideas that firms should consider pursuing to improve pricing outcomes.

 

In tough economic times, firms need to be proactive to protect their earnings. Nothing has a greater impact on a firm’s profitability than pricing. Not margin management, not leverage, not even utilisation. Helping partners and staff understand this can assist in changing attitudes towards discounts and write-offs.

 

In most firms, too few partners understand the impact of pricing on profitability. It therefore becomes easy to ‘give away’ 5% of the fee via a discount or a write-off in order to retain the remaining 95% of revenue. However for a firm operating on a 30% margin, an across the board 5% discount (either through write-offs, discounts or a failure to increase rates) equates to a decrease in profits of 17%. Partners’ attitudes can be changed when this is quantified in terms of profit per partner.

 

 

In a poor economic environment, having a strong pricing capability becomes even more important to the financial success of the firm. Elements that characterise a strong pricing capability include:

·       Clearly defined pricing strategy based on sound objectives.

·       A clearly understood pricing process including clarity of roles and accountabilities at various stages of the process.

·       Effective capture and use of information relating to competitors, client value and costs.

·       Quality execution and oversight of execution to ensure discipline throughout the process.

 

Pricing Solutions Ltd has developed a model for assessing the pricing maturity of organisations (see table 1). Assess where your firm’s capabilities sit against this model and determine what is needed to take you to the next level.

 

 

 

Focus on and sell value. Does this sound like a cliché? We all know the concept but how do we do this in practice with an offer as intangible as legal services?

 

Any knowledge of the value you deliver to your clients gives you greater control over, and confidence in, your pricing. Interview your clients to find out how they view your service offering. Your clients are choosing your firm for a reason. The more you understand these reasons the better placed you are to build, reinforce, articulate and quantify this value. If you can communicate the value you deliver then can deal with price pressures and requests for discounts.

 

The search for this understanding focuses the firm on creating and delivering greater value to clients. It helps create the right mindset amongst fee-earners. In their book, Value Merchants: Demonstrating and documenting superior value in business markets, James C Anderson, Nirmalya Kumar and James A. Narus contrast the mind-set and behaviour of a ‘Value Spendthrift’ to the mindset and behaviour of a ‘Value Merchant’ (see table 2).

 

 

Table 2 - Adapted from Value Merchants: Demonstrating and documenting superior value in business markets, by James C Anderson, Nirmalya Kumar and James A. Narus

 

 

Effective pricing should be fair to the client and fair to the firm. In the economic downturn loyal clients deserve your support, however your firm also needs to be appropriately rewarded to enable you to continue to attract, retain and develop the best people. It is more important in an economic downturn to discuss pricing with clients face-to-face, to demonstrate an empathy for their situation and to seek solutions that are acceptable to both parties.

 

One example is to explore ways to deliver your services at a lower cost. This may involve encouraging the client to do more or to change their processes for how they engage you. While the ‘Rolls Royce’ solution may be appropriate in good economic time, it is unlikely to be the preferred solution in today’s economy.

 

 

While it is likely that rates will reduce in some parts of the firm, it is equally likely that opportunities exist to improve pricing outcomes in other parts of the firm. It is now more important to identify these opportunities and vigorously pursue them.

 

In a recent discussion with a firm they indicated they would not be raising rates for the next financial year. Knowing the firm I highlighted to them that:

·       Parts of their offering were highly differentiated and very highly valued by the market, and hence were less sensitive to price pressures.

·       Many of their clients were primarily focussed on the benefits the firm delivered, rather than the price.

·       Some partners would be fully utilised even if their rates were increased.

·       Some small clients, the ones who use the firm in an ad-hoc manner, and were not part of the firm’s long-term plans would also obtain the benefit of the proposed ‘discounted’ rates.

 

Clearly this firm could develop a more sophisticated pricing strategy than the one proposed.

 

 

The worst mistake that can occur with pricing is agreeing to a fee that is far to low, then trying to deliver the project to that budget. It generally ends with a poor result, damage to the brand and the inability to win work from the same client again.

 

While delivering high levels of service is always important, it is magnified in times of recession. When clients are rationalising who they use and utilising the alternatives they have in the market, it is important to be one of the firms rationalised in, rather than rationalised out. In an economic downturn, firms should increase their investment in client satisfaction studies. The cost of loosing a client far out-weights to cost of the study.