This is the second installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.
Value Pricing – Part II
In Ron Baker’s book “Implementing Value Pricing”, he puts forward an eight-step plan on how to price a job up front on a fixed fee basis.
The concept of value pricing that he talks about is different than the value billing concept that lawyers have talked about for years. Lawyers usually work on an hourly basis, and then try to charge a premium at the end of the file based on the extra “value” as perceived by the lawyer. So on a $30,000 file, if a significantly higher recovery is obtained than expected, the lawyer may try to charge a premium of $6,000, or 20%. The client’s response might be, “Why are you charging me a premium at the end of the file. We had a contract for an hourly rate, right?” Ah yes, the lawyer says, but in the fine print of the engagement letter there is a clause that allows the lawyer to charge a premium of whatever the lawyer wishes on top of the hourly rate based on the lawyer’s perception of value provided. The client either says no, or thinks twice about using that lawyer the next time.
Instead, the value pricing system calculates the value up front, not at the end of the file as value billing does. A very important distinction.
Another benefit of pricing for value up front is that it also allows you to obtain a larger retainer up front as well. If you have scoped out the work properly and provided a fixed fee quote, with some measure of certainty for the client on the total amount of legal fees to come, they will be much more willing to give you a third or a half of the fixed fee up front. If there is uncertainty as there is under hourly billing, the client is much more hesitant to pay a retainer, or will only provide a very small retainer up front.
So you need to negotiate the value and the price of the legal work in a conversation with the client up front. Ask the client what he or she values. That value will determine what price you can charge for your legal services.
How is value determined?
Does the client or the lawyer determine value? The answer of course is the client. Notwithstanding that the lawyer may have many years of experience in the practice area, every client has a different perception of the value that your firm provides.
Ron Baker says, “Price the customer, not the service.” So each client needs a different value/price proposition. What that means is that you may charge a different amount for the same service to different clients. However, keep in mind that each client wants service provided in a different way. So each client has a different value “package” that it requires. One client may want a service guarantee, one may want a fixed fee, and another may want the service provided tomorrow, not next week. Each service feature carries a different price tag. So it’s like a new car, which is provided with several different option packages, and each client gets to choose the options she wants.
The most important point here is that it’s all about choice. The client wants choice. They may decide to go with either a fixed fee or an hourly fee, or a hybrid fixed and hourly fee, but they want to have the choice to select from. You need to provide them that choice.
4 Main Ways To Add Value For Clients
– Increase revenue – such as increasing the recovery for a plaintiff in a lawsuit
– Reduce the payment required as a defendant
– Reduce risk for client with a fixed fee
– Enhance reputation, such as using a blue chip law firm’s reputation to secure public financing that you may not have received otherwise.
Costing Out The Work
Once you’ve determined the price for your fixed fee service, you can then determine what it will cost to do the job. You will need to to budget costs to arrive at the desired profit. If you can’t make the cost work in order to get the desired profit margin, you simply decide right now not to take the job. Why get involved in a loser if you know the answer up front?
Another key to Ron Baker’s pricing on purpose is that timesheets are actually done up front, instead of as the work is done. By doing your timesheets ahead of time, you are able to determine what your costs are for pricing purposes to obtain the profit margin you require.
Do you still need to track time?
Yes! You still need to track time in order to understand what your costs are on each file and whether you were profitable. This is one area where I disagree with Ron Baker, who says he wants to trash the timesheet. Timesheets are still important for costing your files, and ensuring that you price your future jobs to optimize profitability.
Keep in mind that as you get into alternative billing and fixed fees, there’s always a danger that you will get involved in price wars. Don’t. This is a race to the bottom, as there’s always someone who will do the job cheaper than you. Instead, do whatever you can to distinguish your legal services from the competition, and “uncommoditize” them. Any service can be “uncommoditized”. If not, and it truly is just about price, get out of that business and replace it with something else where you can make money.
Another rule to consider is the 80/20 rule of profits. Under this rule, you make 80% of your profits from just 20% of your clients. Read Ron Baker’s “Implementing Value Pricing” and you’ll see the study backing up this guideline mentioned in one of the appendices.
So what that means is that you have to be ruthless in evaluating the profitability of your clients, and cut the bottom 20% on a regular basis and replace them with more profitable clients. The first step is to determine profitability of each client, however. We’ll talk more about that in a future post.