Discounting the Way to Profit

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Law Firm Profitability, Law Firms, Thomson Reuters

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As clients continue to ramp up their pressure on law firms to provide greater predictability in their pricing and cost effectiveness in their services, many law firms have turned to pricing models that aren’t really that innovative. Instead, many law firms are opting to offer discounts off of their hourly rate as the “alternative” to the billable hour.

Some argue that this is a viable approach. In an article titled “Should Lawyers Offer Discounts to Clients?” marketing consultant Karin Conroy argues that “the best bet of a firm is to not only offer discounts, but also to raise rates to reap the psychological benefits of coupons.”

Discounts off of retail can, obviously, impact a firm’s bottom line by cutting into the profit margin. It is for this reason that Conroy argues that firm’s should effectively max out their rates to the highest possible price, enabling them to provide the deep discounts clients are looking for.

But are discounts really what clients are after? Clients tell us in survey after survey that they are looking for predictability in their outside legal spend. A discount off of an hourly rack rate makes each individual hour seem more affordable, but does nothing to offset the inherent unpredictability of the billable-hour model.

Certainly some clients are looking for discounts. I’ve heard from a General Counsel who says that he prefers to see discounts applied to his outside counsel’s rates so he can report back to his board how much he was able to get their work discounted. In Conroy’s article, she highlights a quote from the General Counsel for Verizon that they “almost always negotiate rates down from the rack rates,” typically resulting in a “not-insignificant discount.” For these two GCs, discounts are what they’re after. But unless you’ve done the work to determine what you’re clients’ pricing preferences are, it may be dangerous to assume that this approach will work for all clients.


But are discounts really what clients are after? Clients tell us in survey after survey that they are looking for predictability in their outside legal spend. A discount off of an hourly rack rate makes each individual hour seem more affordable, but does nothing to offset the inherent unpredictability of the billable-hour model.


There are also compelling arguments that simply discounting hourly rates will not actually lead to better outcomes for the firm or the client. In the instance with Verizon, the client may be getting a discount, but a discount off of what? If the firms with whom corporate counsel negotiate are following the model Conroy advocates, the client is seeing a discount off of an inflated hourly rate. It reminds me of a jewelry store at the local mall. The store often advertised “70% off STORE WIDE!” My wife once asked me, “how can they afford to always have everything on sale?” It’s quite simple. The “retail” price to which they’re applying the discount is simply inflated high enough that once the discount is applied, the store ends up with the profit margin they wanted in the first place. I’m sure we can all think of retailers that follow this same model.

The American Institute of CPAs (AICPA) argues that the impulse to discount may actually result in leaving money on the table over the long term. In their example, a tax preparer works for the same client preparing returns for several years. The preparer feels compelled to discount the client’s invoice the first several years to meet what the preparer perceives as the client’s pricing preference. With each passing year, the preparer gains efficiency, spending less time doing the same work. As the AICPA puts it:

“If you hold to your historical model of billing ‘actual time’ spent, you have backed yourself into a position where you have to charge less than prior years. And you, my friend, have left money on the table.”

This isn’t an argument against efficiency. It’s an argument against discounts and in favor of value-based billing. Had the preparer billed according to the value of the work in the first place, the efficiency gained over time would accrue to the benefit of the preparer, as he or she is investing fewer resources to make money from the client. Increases in efficiency would, therefore, lead to higher profits for the preparer, in this case.

Executive coach Brad Sugars, writing for Entrepreneur.com, argues “Never discount—no matter how much you may be tempted to—always look instead to add value.” He points out that many businesses may be tempted by the Wal-Mart discount model. But he cautions, Wal-Mart knows their margins “to the ‘nth’ degree,” and very few other companies have Wal-Mart purchasing/pricing power. Sugars offers some really interesting but simple math to support his argument that discounts can be problematic. I won’t reproduce it all here.

I will, however, offer this as a tease: “Would you really want to run a company where the pressure is on day-to-day to sell 100% more units just to stay even?”