At the recent 26th Annual Marketing Partner Forum event held in late-January, I had a chance encounter with an executive from a major golf equipment brand. It was a fascinating conversation. She and I discussed the competition within the golf industry, how her company stakes out their position, and how pricing plays a vital role in their brand image.
Now you may find yourself asking, why a discussion of the golf industry on a legal blog? Well as I mentioned in an earlier post, I don’t believe that lawyers need to look only within the legal industry to find business practices they can cite as precedent for how they run their practices. And the conversation I had with this exec provided some really interesting food for thought for law firm leaders.
There are relatively few truly premium golf brands. In introducing the Dynamic Market Model in this year’s State of the Legal Market report, Jim Jones, a senior fellow at the Center on Ethics and the Legal Profession at Georgetown University Law and the report’s lead author, made the argument that, within the legal industry, there is a relatively small pool of truly premium legal work. Whether positioning as a premium brand or pricing premium work, price sensitivity tends to be less of a concern at the top end.
But even at the top of the spectrum, providers must be conscious of the message their price conveys. As this exec shared with me, her company is very protective of their pricing, going so far as to tell retailers that they will not work with them if they won’t abide by pricing guidelines.
Discounts are pretty much the cost of doing business. Nearly all legal clients expect some sort of discount from their outside counsel before they will engage the work, but that doesn’t mean that law firms do not need to be conscious of what their discounts communicate to the client.
As they see it, the ability to command a premium price is a key component to their market position. If their prices suddenly dropped below their competitors, customers may wonder why the brand no longer feels their product is worth as much as the competition. Moreover, consumers have consistently demonstrated that they will pay the asking price. So, why depart?
The legal market is slightly different — discounts are pretty much the cost of doing business. Nearly all legal clients expect some sort of discount from their outside counsel before they will engage the work. But that doesn’t mean that law firms do not need to be conscious of what their discounts communicate to the client.
It is to be expected that price negotiations will be part of the business development and engagement process for lawyers. Yet data shows that law firms often give discounts even on their agreed-upon rates, before the client even has a chance to push back. For the past several years, our research has shown that the biggest hit to law firm realization rates comes not from client pushback, but from internal behavior within the law firm.
The difference between billed realization — the percentage of the standard rate billed to the client — and collected realization consistently sits at about three percentage points. This is the point in the billing process where the client has a chance to push back on the amount billed.
But the difference between agreed rates and billed rates has continued to widen. This means that even after clients have agreed to pay a certain rate and before they have a chance to see the final bill, law firms are billing them at a lower rate, offering a discount the client didn’t ask for.
Just as the golf company is careful to ensure that discounts not hurt their potential market position, law firms need to be conscious of the message their discounts send to their clients. If the firm isn’t going to bill the client at the rate the client agreed to pay, why agree upon that rate in the first place? What was it about the work performed that the firm felt didn’t merit the agreed-upon price? Yes, law firms want their client to feel they are getting good value and that clients are paying a price they are comfortable with. However, firms don’t want to give the client the impression that they’re receiving something less than they originally anticipated.
There may well be cases where additional discounts are warranted, of course. They may even be somewhat frequent. But discounts beyond agreed-upon pricing should not be something undertaken without a reason.
As discussed in the last Lessons from the Outside post, 75% of partners report simply looking for a price they think will work for the client when arriving at a final cost for an invoice. This kind of behavior does nothing to protect or improve the law firm’s brand, and maybe ultimately hurt future pricing power.