A Partners Guide To Pricing For Law Firms In Australia
When Pricing for Law Firms, what do managing partners need to know about pricing legal services to generate more value for the firm and their clients?
You have worked extremely hard to build a successful practice and over a number the years. In effect, you’ve clearly demonstrated that you are the best at what you do. Many lawyers dream about joining your firm and rising through the ranks to become a distinguished partner like you.
You have lots of clients that only trust you to advise them. Your firm has re-risked major contracts and decisions for high profile clients and your reputation for winning proceeds you. But a touchy subject soon emerges when new and even some existing clients begin to question your prices. Some have told you that they are considering outsourcing a considerable amount of the work they give to you to another, cheaper firm. Some don’t even tell you and just move their business away and never call you again.
Which raises serious questions:
- Why is this happening now?
- Are clients right to look elsewhere?
- What should you be charging your clients?
- Are we offering clients what they need or want?
- How do you show clients the full value of the firm when lawyers in your firm have never had to do this before OR when clients don’t really understand their problems?
Price your fees too high, and you you’ll lose some of your most high-value clients. Price your fees too low, and you’ll be forced to work your senior associates to the bone to cut costs— and they’ll start to become resentful in the process. How can you strike a balance that enables you to build a thriving practice where you’re generating real value for your clients and maintaining your price brand positioning in the market?
Pricing too High
A big mistake many law firms make with pricing is assuming clients will pay high prices for the brand or because they paid high prices before. Clients are not happy with this arrangement anymore. They want it all and they will increasingly demand it from you. They want you to give them: price transparency, pricing certainty and value at the best price possible.
Can you give your clients what they want? Or indeed do you know how to balance your price, fees structures and terms to drive profitability for both your firm and your clients?
Looking at the amount of temporary discounting taking place in Australian right now – even among the biggest firms – it would indicate most firms need to improve their pricing capability to protect margins. Excessive discounting to attract and maintain clients is essentially a short term play leading to ongoing profit loss – not a value strategy for long term growth.
In 2019/20 price will increasingly be a major deciding factor for your clients to join or remain with your firm. There are 5 key pricing strategies you can use to help your team of lawyers and your clients make the best pricing decisions possible. We’ll explore these pricing strategies here.
When Pricing for Law Firms, you need the 4 P’s; product, price, place and promotion.
These factors determine the best price and fee arrangements for your clients. Remember: value is not purely derived from the services you provide or your time and materials costing analysis. Rather, pricing is the summation of all the moving parts of your firms and the outcomes you produced for your clients. Consequently, the 4 P’s is a useful concept for your team of lawyers to understand.
Product – refers to the tangible benefits of the services you provide your clients
Price – refers to the economic deal you strike with your clients to get a win-win situation for you and your clients
Place – refers to how your clients come to know of you.
Promotion – refers to the reputation of your firm in preventing risk, loss and/or generating value for clients over time (financial, legal, psychological, emotional).
Importance of a Pricing Team for pricing law firms
Setting a fixed price legal fees is by no means an easy task. Therefore, you need to embrace the fundamentals of pricing and marketing when you set prices and even adapt business strategy. This includes orienting all your firm to new methods, approaches and pricing models.
Law Firm Pricing Models:
The most common pricing models for pricing legal services are as follows:
Cost-based Pricing. This model calculates a price based on the costs of running a law firm plus a simplistic percentage on top to reach a set margin target.
Competition-based pricing. This model calculates a price based on what other law firms are charging and then positioning price within close proximity to a reference competitor.
Customer Value-based pricing. This model calculates a price based on a clients willing to pay. However, you may find that sometimes clients do not always understand the full value of the services they’re looking to buy from you, which in turn makes them less willing to buy from you even though they really need your advice.
To overcome this predictable price profit problem in legal services, you need to do two things:
1) undertake careful customer value and risk driver analysis – i.e., analysing individual client needs and risk drivers.
2) Ensure your lawyers are confident about the value you offer to clients, and can clearly articulate this value when they are diagnosing their clients’ problems and setting a price.
Aside from the pricing models, other factors to consider when charging fees to your clients:
Time and effort: How much time and effort did it take to litigate the case and justify the price?
Specialisation: Were there any specific skills involved in handling the case?
Cost to serve: How much did it cost you to pursue the case?
- Pricing model: What was your price setting criteria? Did you reach your profit targets and did your clients understand the value they were getting for that fee?
- Revenue model: How were you were paid? A fixed fee or hourly billing? Contingency fee, fixed fee or retainer.
On this latter point, we will explain further.
Hourly billing pricing
Hourly billing is still the standard pricing practice in Australian law firms. The most common factor determining hourly billing fee still tends to be time-related factors, such as:
- the time spent to manage a case
- hours spent litigating the case
- length of time fact-finding and investigating
However, there are other factors to consider too when you are thinking about your revenue pricing model.
Other factors to consider in charging hourly rates:
Experience – This refers to an individual’s legal expertise (i.e., the lawyer managing the case for the client). Typically, once a lawyer is proficient in handling cases, their hourly rate goes up. The most experienced gets the highest price.
Legal specialisation. Not all lawyers practice in the same field. Just like doctors, they have their own specialisation. Hence, if you have lawyers with niche and highly sought after skills, you can charge more.
Case complexity. The type of problem you are solving for your clients. Namely, if you are solving a very complex case for your clients, you can charge more.
Field of practice – Are you services commonplace, easy to replicate, and outsource? If yes, the fee you charge has to in line with the market.
Client Type – Do your clients understand the value of your offer? Do you treat all clients in the same way during the selling process? Not all clients will want what you have to offer. You need to segment your clients and know your target market.
Incentives: Do you use discounting to get clients over the line? It is important to use temporary discounting strategically not tactically. Excessive and prolonged discounting indicates you don’t know what your clients value about you. Thus, you’ll be forever offering clients discounts to compensate for the fact you didn’t educate prospective clients enough on their problem and your value (i.e., how you can fix their problem) during the buying/selling process.
Under this pricing scheme, the fee you get depends on the amount of damages awarded to your client (i.e., the aggrieved person). Which basically means that you get a percentage fee off the award amount rather than an upfront fee. Unlike the hourly billings, you are taking a risk managing cases like these because the client does not generally pay up-front and it may not be a clear cut case and drag on – increasing the cost to serve.
Personal injury, divorce cases, collections, civil rights, securities and antitrust class actions, real estate tax appeals, patent litigation, loan transactions, mergers and acquisitions are some of the cases that use contingency pricing.
Usually, one-third of the amount awarded is the rule of thumb amount charged as a fee. However, the fee can be higher or lower depending on:
- willingness of the client to pay more for more expertise
- projected amount of work put into it
- Case complexity
- Discounts offered or fee structure.
But before agreeing to a contingency fee, there must be:
- A written agreement
- An agreement signed by the client
- A clear explanation of the fees and how they can increase over the course of the litigation
- A clear citation of the expenses deducted or added to the contingency fee whether they win or not.
- A written account of the calculations and explanation of the price.
There are two types of legal retainer fees: One is the general retainer fee whereby the client pays a fee to the lawyer to be available for his services. The other retainer fee is a special retainer. A special retainer is like a security or an advanced fee for any future litigation work performed by the lawyer. These value add fees are generally deducted from the special retainer fee.
The concept here is that prior to suggesting a retainer fee or an additional fee percentage, you have a detailed conversation with your clients to understand and agree upon the value the engagement, if successful, would have on their business and then work out a retainer fee from here.
Fixed Price Legal Fees vs. Hourly Fees
A fixed fee is opposite to hourly billing. It is a fee calculated by the firm based on the value the firm is providing a client. It is a fee derived from rigorous analyses of client’s needs and risk drivers. Otherwise, any unknown variable could drag the case longer, incurring more expenses and financial loss to both parties.
Generally speaking with fixed fees, all the expenses, including work done and litigation outcomes are paid in advance. Furthermore, it can be easily applied to more complex legal services, such as criminal cases, personal bankruptcy, uncontested divorce, will drafting, and routine immigration matters.
A fixed or flat fee is usually applied to procedural cases like inheritance hearings, copyrights, trademarks, contract drafting and reviews. Moreover, it also applies to criminal, bankruptcy or divorce settlements as long there is no opposition.
It brings value to the client based on the amount paid, no matter how long the case took. Preferred by them, it carries the risk for the lawyer if the case is complex and requires additional resources. It could mean losses incurred by the lawyer.
Whereas in hourly fees, the client pays the lawyer based on his experience and expertise. If the case has an opposing party and unknown variables, the lawyer has the option to charge the client an hourly rate. This covers the time and resources spent litigating the case and lowers the risks. Especially a sizeable retainer paid in advance.
It aligns the revenue and pricing models to the clients – the clients trust that time factors are not going to push up the fees.
The downside is chasing the client if he doesn’t pay, and the uncertainty of the length of the case. When agreeing on the fixed fee it’s up to the lawyer to explain to the client in simple terms all the logistics involved to bring the case to court. This includes a clear explanation of the terms whereby the client has to pay the fee no matter the outcome of the case.
- Most law firms use the hourly billable pricing as their standard, but they really should consider other models. Generally speaking, clients have become weary of hourly billable pricing because they have been stung in the past.
- Prospective clients are making their buying decisions based on your revenue pricing model. Which means it’s important to have pricing options that decrease client churn and revenue models that make it easy for clients to buy from you.
- Law firm pricing for commonplace services must be market competitive. Therefore, it is no longer possible or right to charge clients a premium for services that can be easily outsourced for less money.
- Law firms must include pricing teams in business planning processes to show the firm the full economic value of the services they are offering to their clients. Indeed it is difficult to expect your lawyers to do this when pricing is not their area for expertise.
- Law firms pricing schemes can simplify a buying/selling process. To clarify, get it right you can have the clients you want paying the fees you should be getting. Get it wrong and you will be attracting all the wrong clients and facing a series of awkward pricing discussions – or worse still client churn.
- Law firms are increasingly losing clients because of old pricing schemes. Hence, it’s time to adopt new pricing strategies and embrace new methods and approaches to identifying, communicating and capturing value for your clients.
- Simply giving discounts to clients is not enough to hold onto their business. Therefore, the law firm must find other price options and mechanisms to stay competitive and relevant.
- Clients want law firms to be more transparent with their pricing and management of complex cases.
- Fixed fee arrangements based on value-based pricing models are only risky if you 1) don’t have a solid business planning process 2) don’t have a pricing team to help you, and 3) don’t pick your clients well.
Successful law firms are not just good at providing legal services to their clients, they are also experts at finding the right price and right fee structures for their clients as well. Reputation is based on many factors, and increasingly important factors are price and value. By familiarising yourself with the pricing strategies above, you’re giving the lawyers in your firm the tools necessary to build a successful, moneymaking practice.