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Value-based pricing strategies to help clients and maximize your profitability
Home > Publications > YourABA > 2015 > May 2015 > Value­based pricing strategies to help clients and
maximize your profitability
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Value­based pricing options and why discounts don’t
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May 2015 | Around the ABA
Looking to improve client satisfaction, increase firm revenue and
maximize profitability? Then utilize as many pricing methodologies
as you can. That’s the advice of “Value­based Pricing Strategies,”
an article by Ken Callander, managing principal at Value Strategies
LLC, in the January/February issue of Law Practice magazine.
Callander reviews how firms using standard hourly rates have both
an asking price and a transactional price. He also writes about two
types of value – economic, which is economic benefit minus the
price paid; and perceived, which is in the eye of the beholder.
He explains the five basic fee categories:
Hourly fees: Familiar and transparent, these are the
workhorse of the legal marketplace. “Hourly fees …
reduce subjectivity, create an itemized matter history
and function regardless of volume or service type
rendered,” Callander writes. The disadvantages are
that they render all matters of equal importance and
value, don’t take into account the client’s concern for
predictability and efficiency, and place the client at risk
for both cost and a bad outcome. On the firm side,
hourly fees penalize the lawyer who is productive and
efficient and “often don’t compensate him or her for
high­value services rendered.”
Fixed fees: These fees, which are a price charged for
a discrete set of services, allow for easy and
predictable budgeting, which is increasingly important
to corporate clients. They also allow a firm to utilize its
efficiency and expertise and give them an incentive to
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Value-based pricing strategies to help clients and maximize your profitability
keep an eye on costs and staffing as well as optimize
their use of technology. For this strategy to work
effectively, both sides need to be clear about the
scope of work to be done. The firm assumes the risk of
cost overruns.
Variable fees: Contingency or percentage fees are
examples of variable fees. Based on the result
achieved, the client pays more for a favorable
outcome and less (or even nothing) for an unfavorable
one. A firm needs to be stable enough to potentially
forego payment to utilize this strategy, but for those
firms that excel at case evaluation, these cases can be
quite lucrative.
Success fees: Motivation is built into these fees, since
the client pays only when the agreed­upon results
have been achieved.
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Value fees: Rather than the actual cost, market price
or historical price, these fees are based on the
perceived value of the service to the client as defined
by the client. They shift the focus from the time spent
to the value of the results.
Callander refers to discounts, which can be applied to any of these
categories, but are usually applied just to hourly fees, as a
“slippery slope and … one of the main reasons that overall
realization rates are dropping across BigLaw.” Among their
downsides are that the negotiations for them can be adversarial
rather than collaborative, and that once given they can almost
never be taken back. He recommends knowing upfront the total,
long­term financial impact of any discount decision, having a
discount approval system in place, and setting a maximum
discount level for the firm’s largest clients and making decisions for
others based on that. He warns against offering large discounts as
a short­term strategy to boost business, since firms have a high
fixed­cost structure and this will hurt the firm’s finances in the long
term. Callander is also against offering a discount if a client hasn’t
asked for one, and recommends applying them in increments of 1
percent and 2 percent, which may satisfy a client as much as 5
percent would.
According to Callander, the four qualities that drive most clients to
hire and retain a law firm are efficiency, predictability, value and
results. “Pricing strategy development requires an understanding
of the roles and incentives of the people who will be the final
decision makers,” he writes. If a firm opts for value­based pricing,
it is imperative that the client understands the value they are
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Value-based pricing strategies to help clients and maximize your profitability
getting for the price. Therefore, it is important to communicate to
them the strategies pursued, the rocks turned over, the dead ends
discovered and the research completed, not simply the hours that
were billed.
Callander concludes that value­based pricing models, client­
focused negotiations and steady communication about value will
helps firms stand apart from the others.
Law Practice magazine is a publication of the Law Practice
Division. http://www.americanbar.org/publications/youraba/2015/may-2015/value-based-pricing-strategies-to-help-clients-and-maximize-your.html
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