Thoughts on the pricing strategies of law firms until 2022 | RightVision

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Economic context

A recent AP headline indicated that the price of cars, gasoline, restaurants, food and other goods was at a 13-year high,[1] increasing pressure on the Federal Reserve, “whose officials have repeatedly said the increases will be transient.” However, others believe inflation will remain high due to persistent supply chain bottlenecks amid high pandemic late-stage demand.

Closer to home, we are experiencing unprecedented salary wars for associates (over income partners and side talent), which have inflated law firm cost structures. In addition, companies are increasingly making larger technological investments and hiring new roles and staff. While lower real estate rates and reduced marketing and travel expenses may offset some of these increases, the business model for businesses is changing.

Fair market value of legal services

Any observer of the free market will agree that increases in supply chain costs do not automatically increase the market value of a product or service. Therefore, how should we think about inflation and the corresponding law firm pricing strategies for 2022?

It starts with the pyramid of values ​​shown below:

The value pyramid is a handy tool that helps a service provider discover the market value of their service. It presents a logical process that assesses the customer’s perception of the value of the benefits received, offset by the cost of the service and reasonable alternatives.

The value pyramid is a handy tool that helps a service provider discover the market value of their service. It presents a logical process that assesses the customer’s perception of the value of the benefits received, offset by the cost of the service and reasonable alternatives.

The value pyramid can be useful in assessing whether inflationary trends have increased the market value of legal services. If market values ​​remain constant, the result is a squeeze in margins – lower profits per unit of value based on higher unit costs.

Contrasting uniform cost structures with varying market values

It is not surprising that the market value of legal services varies depending on the type of job. For example, various types of corporate labor can achieve different levels of value (e.g. private equity, institutional business, current commercial contracts) and there are varying service values ​​across practices and industries (e.g. insurance against patent litigation vs white collar litigation).

While it seems reasonable to assume that since transactions drove the war for talent, the fair market value of these services has increased (by how much is the question and does it correlate with sub- underlying?). It also seems reasonable that many other services have not appreciated in market value despite overall salary increases and this market shift represents the economic challenge for companies, many of which have increased associate salaries in all practices.

The market will determine the value of the service over the months, but law firm executives need to decide today how to approach 2022. To help you with this thinking, I’ve put together a simple process diagram to illustrate the steps you could take to do your best to be fair and systematic.

The customer rate discussion process

The above sequence is a roadmap you can follow to engage customers on the price and value of the service. When using this process, remember that pricing is just one of many essential elements of an overall customer engagement strategy. These steps are described below.

Review

Be aware of market conditions and do your homework on pricing trends and demand levels for your services. Be comfortable with the data and where your business operates in the market. Use customer reviews, surveys and available research to inform your thinking. Be honest and ready to think about these ideas. Finally, segment your customers and develop action plans for key groups and unique customer situations (e.g. new customers in the past three years with growth potential).

Work with the pricing team or key finance staff to develop your 2022 pricing strategy, including rate, achievement, and profit goals. Set activity goals for the quarter (and next year) and use this exercise to create or improve your customer feedback / development routine.

Use or develop pricing tools such as customer feedback scripts, pricing models, service principles, and any other device you can apply to reinforce a disciplined approach to more nuanced customer conversations.

Plan

Schedule price conversations with your customers. Create a discussion roadmap, anticipate difficult issues while planning your responses. Of course, you can’t anticipate everything, but the planning process will put you in the best position to be thoughtful in the conversation. It will also help you articulate your position and guide you towards a win-win outcome. Planning also facilitates discipline, which is essential in difficult situations.

To hire

Act on time and do not delay. As the emergency focuses on planning for 2022, take this opportunity to establish a routine of talking to customers around critical topics such as pricing, service, staffing, customer needs, and more. Be proactive and work collaboratively with your clients to set different prices in the best interests of the firm and the client. Create new organizational muscle memory.

To learn

Integrate all of the above into a learning loop that will allow you to operate dynamically and in a cycle of continuous improvement. Don’t waste the critical learnings uncovered through this process. Instead, collaborate and share your observations with your peers and discover common patterns. Explore the opportunities revealed by this process and seek effective change.

Summary

Financial models of law firms are changing due to significant developments reflected in the emerging post-pandemic economy. This provides opportunities to move forward and create routines for customer conversations on important topics. Meaningful discussion of critical issues such as pricing and the value of services will naturally lead to the development of deeper relationships and fuel business innovation.

[1] See AP News, October 13, 2021. From cars to gasoline, the spike in prices matches a 13-year high. Link: https://apnews.com/article/business-consumer-prices-inflation-prices-e80c0c24a6ec5ca1c977eccd6294d01b.


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