Determining the pricing structure for your firm should be considered as a part of your marketing strategy. Your pricing strategy is not just an accounting activity, meant to balance the books but rather an opportunity to signal the quality of your work and support your firm’s branding. Price-quality signaling is an observable incident that affects consumer behavior. Whether or not your services are, in fact, higher quality does not matter necessarily, because the consumer believes the inputs to be of higher quality.
Rather than throwing a dart or guessing at the “going rate”, use the following simple equation to figure out an appropriate range for your pricing strategy.
- Cost & profit objectives: Start with your overhead costs and profit goals and work backwards from there.
- Demand: What is the market price? What value and benefits do customers perceive in the product and how willing are they to pay for it?
- Competition: How many competitors and similar products are in the market and in what price structure?
Once you have these three variables, you will know the minimum price you can charge to break even and the maximum price you can charge based on an estimate of customer demand. Together, costs and demand estimates provide you with the amount of price flexibility available in pricing your product.
Pricing hourly punishes efficiency
Pricing hourly seems much easier than flat rate pricing, but if punishes the lawyer who is more efficient. Here’s a picture of why this is a flawed pricing model: two lawyers are hired for the same matter, but one lawyer works much faster than the other. Both are equally talented, but one is far more efficient. At the end of the job, the lawyers turn in their invoices—he worked on it for a total of 18 hours and she a total of 7 hours. He is paid a respectable fee of $3600 and she $1400 for producing the same result.
However, there are times when hourly pricing is the right answer for an odd project or certain clients who are clearly not going to fit the normal model. In these cases it is important to have an idea of what your hourly rate will be which is also based on one of the pricing strategies below.
Four main pricing strategies
Rather than using the cop-out of hourly pricing, here are four main pricing strategies to consider that are most applicable to law firms:
- Premium pricing
Are you the expert in your niche? Does everyone know your name and you offer solutions unlike any of your competition? Then you can charge Premium Pricing. Premium pricing is used when the product has one or more unique characteristics. This uniqueness differentiates the product greatly from competition and creates a significant competitive advantage. It is best to use premium pricing when substantial barriers to enter the market exist (i.e. it would be nearly impossible for someone to compete with your experience), and your potential customers are price insensitive because they value the benefits provided by the product.
- Value pricing
Are you a new lawyer in a unique area of law, but want to build your firm so need to establish yourself? In this case, Value Pricing might be the right answer. Value pricing is a bit lower than premium and used when there are only a few competitors, when your service has a competitive advantage but demand or competition is likely to change.
- Market-oriented pricing
Is your goal to provide a fair price as compared to your competition? Market-oriented pricing is pricing based on research gathered from the target market. To determine a pricing strategy using market-oriented pricing, a firm should compile information on the rates competitors are charging, then price their goods at an above price or below, depending on what the company wants to achieve.
- Penetration pricing
Are you a new firm, wanting to offer gain market share and attract customers? Your strategy should involve Penetration Pricing where your price is set to attract new customers more quickly and easily. Once market share is gained, you should strategically increase your price. When raising prices, be careful not to alienate your current key clients and pull a Netflix or Verizon move that could create outrage. This typically involves sending advanced notice (a few times), providing clear explanations, and offering an alternative to the increase.
How do you know if you priced right?
You should not be winning every proposal, and your clients should not be overly excited about your price. After all, your firm is not Kmart, and you are not running a Blue Light Special. If your client emails back too quickly and sounds like they might be making a mad dash towards your “too good to be true” price, it probably means your prices are too low. If they write back and try to negotiate you were probably pretty spot on, and if they write back and say that this is well beyond their budget, you need to decide whether or not you want to figure out a way to work within their budget or whether you want to walk away.
When first starting out it might be necessary to be flexible, offer payment plans and negotiate your project costs. However, in my experience it is rarely worth it. It is easy to get taken advantage of and the best clients will value your time and price. The clients who question, argue and negotiate are letting you know how difficult they will be to work with (for which you should almost charge extra).