Successful Value-Based Pricing for Lawyers
What works and what doesn’t?
For those of you who know me well, you will not be surprised when I say: There a three prime considerations as the basis of value-based pricing. (There are three reasons for everything!)
- Value-based pricing (VBP) necessitates determining the fees based upon value to the client not the value of the sale or deal.
- Establish and frame definitively the scope of the engagement or project
- Manage client expectations at the start and communicate regularly
VBP is not about establishing a one-size-fits-all fee. It is not about establishing the value of the deal. VBP is different to menu-pricing; and menu-pricing is an intelligent way to handle commodity-styled engagements and projects (conveyancing, tax returns, etc). VBP is a set/fixed price that is founded on the value to the client. This requires an understanding that determining perceived value is both art and science.
Many of my clients in the legal profession worry because they do not know how long an engagement may take. My response is, “So what?”
Are you managing your firm to have a consistent and effective hourly rate (which is easily compared with other legal firms and has partners discounting and assessing write-offs) or are you in business to make money through good profits, good work and good client results?
There is no need to measure time, for all that really matters to you at the end of each financial year is that your firm is being increasingly profitable. Your focus should be on developing your $3 million dollar profits into $4 million profits rather than researching the perfect six-minute increment and having every staff member counting every six-minute to be recorded. Focus on the results not the tasks.
Secondly, in response to the uncertainty of the engagement, establish Project Steps and VBP on those steps independently rather than the project as a whole. The elegance of VBP is that the client feels comfortable that they have certainty about the fees, but you are not discussing hourly rates that the client then compares against other legal firms.
The most significant reason lawyers become anxious over VBP is self-esteem. Lawyers are not commodities, so why set fees that way? Lawyers create value in so many different ways and yet they charge only one way, by the hour. Well that’s just dumb! Lawyers need to understand that the client gains value through the leverage of the lawyers’ unique talent and skills, through the diversity of the firm, and through the networks and resources available to that firm. Most of which is uniquely different for every single legal firm around the nation. The first question a lawyer should be asking herself while meeting with the client: “How can I create value here for this person?”
Hourly rates are not what the client buys, as they measure inputs, tasks, efforts and activities; but not what matters most for the client … results. There is a maximum as to how many hours a professional can work in a day, therefore restricting the amount of income potential that person can earn, other than by egregiously inflating the hourly rate. Fees should be based upon the value delivered, not performing tasks and so time unit billing will always be less than your true value.
Clients are not stupid, and they do not consciously decide to purchase 6 hours of your time. They want you to solve their problem as best it can be, in the shortest possible time. Value-Based Pricing makes the most sense to the client and to the legal firm!
VBP is about being able to add value to the client with non-time dependent value-adds.
- Additional skills
- Additional services
- Creative thinking
- Strategies
- Etc.
By charging by the hour you are immediately creating a ceiling on potential earnings. If you do nothing else but focus your practice and marketing around value, you will increase profitability and decrease your labour intensity dramatically.
Executive Wisdom Consulting Group has developed the “Professional Services College” for those in the professional services arena to grow and market their firms. The College is three days of intensive interaction with Ric Willmot and a very small group of colleagues. The College focuses on pricing, strategy, marketing, negotiations, interpersonal relationships, customer service, staff, etc.
Then we provide you with six months of mentoring to assist you implement!
Comprehensive details about the Professional Services College.
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