Why Adopt Fixed, Value-Based Pricing Now? - http://www.thecompletelawyer.com

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In all my years of practice, I have never had a client say, “I’d like to buy ten six-minute increments of your time, please” and I have never met an attorney who did. That being said, it is a wonder that since the late 1950’s the legal profession has adopted a billing model that has us selling something that nobody wants to buy: units of time. The sad consequences of operating on the billable hour model are that it pits the economic interest of legal professionals against their clients (we end up weighing whether we want to get paid more to take our time, or to be more efficient and be paid less); and it causes the perceived commoditization of the practice of law.

In today’s economic climate, lawyers who bill hourly are facing significant price competition and pressures on profit margins because their business models do not translate their work into value as it is seen through the eyes of their clients. However, there are many things you can do immediately to add significant value to clients, prevent client attrition, and keep your profits in line through these tight economic times.

Explain Value In Pre- And Post-Action Reviews

A best practice for attorneys is to have clients define, in their terms and at the beginning of the engagement, what success means to them. This allows you to make sure their expectations are reasonable and that you understand what they really think they are paying for. Remember, they are not buying your time and effort. Make sure to have clients identify what they value, how they desire to work together with you, and what communication style they prefer: this way, you will be more likely to hit the bull’s-eye.

If you do not plan to change your pricing model anytime soon, this is a great way to keep your clients happy and reinforce your unique value. Many lawyers get so caught up in creating the outcome for the client that they forget to tell the client all of the great things that they did to get there, and I don’t mean in the form of an itemized bill.

Finally, before giving clients your bill, have a detailed discussion with them reviewing the process you went through. Reveal the thought and expertise that you put into the matter and connect that with the outcome that you achieved. Sometimes, you might even tell a story about how you successfully used a negotiating tactic with opposing counsel or explain that you crafted a unique argument to the US Patent and Trademark Office and prevailed. This will reinforce your unique value and keep clients from focusing on itemized bills for emails, phone calls, and vague line items that they do not understand or value. As a general rule, if you do not first reinforce value to clients, they will look at your bill to find it. When they don’t find it there, the first thing they will do is complain about line items—or even worse, say nothing and never return.

Designate The Scope Of Outcomes

If you’re a bit more adventurous, include in your engagement letter a definition of the scope of the project defined by desirable outcomes rather than by process. When clients see their own definition of success in your engagement letter, they will see that you “get it” and that you have your eye on their prize rather than on a process that you find intellectually stimulating. With proper communication, clients will understand that an outcome is not guaranteed, but they will also be significantly less likely to blame you for not achieving their desired outcomes if they know that you were aiming for the right goal to begin with.

Give A Value Guarantee

A few innovative firms have begun to offer a value guarantee to clients, ultimately putting the “perceived” power in the hands of the client. This may seem scary, but it isn’t. First, a value guarantee is not a guarantee about outcome. It is a value promise of the firm to make sure that what clients pay is ultimately no greater than what it was worth to them. This has several benefits: it keeps you constantly thinking of how the client perceives value; it also significantly reduces client attrition and complaints, and ultimately prevents you from losing referrals.

If you think about it, clients already have a value guarantee: we call them write-downs, write offs, non-paying or slow-paying clients, etc. By offering a guarantee, you create an incentive for clients to talk to you about what they value and how much they value these qualities. This is valuable intelligence for a firm to have. The alternative is a silent killer. All of the research we have done shows that unhappy clients are unlikely to tell you how they really feel, but they will not hesitate to pay less, not pay, or tell everyone they know how horrible their experience with you was. To a great extent, they already have the power to control your profits, which is why it’s a great practice to give them an incentive to address issues with you that allow you to maintain a long-lasting relationship and avoid the silent killer. Remember, it costs five times more to acquire a new client than to maintain an existing one.

Adopt Fixed, Value-Based Pricing

Fixed, value-based pricing is the most effective way to align your economic interest with the success of the client in a manner that can earn you significantly more in the long run. It’s also the most value-aligned pricing model that, done well, almost assures client satisfaction. There are a few firms nationally that have completely abandoned hourly billing in favor of this model, and many others are exploring the possibilities in light of the earnings pressures faced by the industry today. 1

Value pricing is a form of fixed pricing that sets a price for work based on its subjective value to the client. There are significant resources online and in print to help professionals navigate the inevitable change to fixed-pricing in the market. 2

In order to price based on value, attorneys must work with the client up-front to discover the value-drivers, desired outcomes and preferences, and then carefully scope out an engagement around what the client wants to achieve. Next, ask your client to attribute a value to the engagement and get your money up-front. That way, you don’t need to manage your entire life in six-minute increments and you can work effectively and efficiently to achieve the outcome in a manner that increases, rather than decreases, your profitability.

Your client’s last memory of you will be your achievement for him or her rather than your bill. If you feel as if you need some courage to try this model, remember that the reason you are in business is to be profitable, not to make exactly the same profit margin on every job you do or to know exactly how many pennies you made on each engagement.

With careful scoping, great communication about value-drivers and good project management, you should be able to successfully implement a value-pricing system that will differentiate your firm and make you a provider of choice. As many innovative professionals have discovered, clients highly value what we do and are willing to pay a premium for certainty, allowing us to focus on value creation and quality lawyering instead of timesheets, billing, and collections.

In this economy, the uncertainty of hourly billing makes value pricing more compelling than ever before. After all, who can afford to write a blank check?

Article found at: http://www.thecompletelawyer.com/why-adopt-fixed-value-based-pricing-now.html

Pricing In Uncertain Times: Weigh the Options

Article by Michael Hurwich, President of SPMG

Buffeted by turbulent economic times, businesses need to re-examine their business and pricing strategies to deal with the uncertainties that lie ahead. But remember, all recessions come to an end. Make your pricing decisions with an eye to the future. While some will find opportunities in short-term tactical pricing; others will develop an entirely new business strategy to take advantage of competitive weaknesses; others still, will choose to simply "weather the storm." Regardless of which tactical approach is selected, every company in turbulent times must re-evaluate the issue of price and value as it relates to their customers.

Time For a Value Driven Approach

Turbulent markets bring with them a new level of competitive intensity. Companies face not only a shrinking market as customers cut back operations and put projects on-hold, but also new competition as nontraditional competitors look for ways to offset losses in their traditional businesses. More competition, a shrinking market -if ever there was a time to take a "value-driven" approach, this is it. If a company is to remain competitive in this new dynamic environment, it must examine how it adds value for its customers and how it can help mitigate the potential losses and slowdowns that loom ahead. Suppliers should also note that in tough economic times, the tangibility of benefits becomes a real issue. Customers need to know and appreciate that they are indeed receiving a benefit. Typically value is highest when the customer realizes some hard savings (whether in time or money), where the numbers are easily measured, and to a lesser extent when the product or service contributes to the customer's market share. Conversely, intangible benefits equate to less value.

Check Your Options

How can companies respond to turbulent markets?

Some introduce tactical short-term measures while others revise their entire value proposition and pricing strategy to position themselves to take full advantage up the inevitable upturn. Others may decide simply to "weather the storm". "Turbulent economic times can offer significant opportunities for companies with the resources to position themselves for the upturn that is bound to follow. Well positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth." Each response needs to be evaluated in terms of the market, the customers, the competitive dynamics and whether or not the anticipated duration of the downturn warrants short-term or long-term strategic moves.

Tactical Discounting: In the short term, most companies reduce prices to reflect economic conditions and maintain volumes in the face of declining demand and increased competition. They should not, however, neglect to get something in return. Customers may be more than willing to make a commitment that they will accept a return to normal pricing after tough times are over. Many companies opt to be even more promotional, introducing larger discounts and better payment terms (including in some cases financing packages). This will allow sellers to reduce their "final" prices to their customers while maintaining the integrity of their list prices. 

Once the economy recovers, discounts can be gradually reduced until normal pricing is reestablished. Companies may also want to consider "locking-in" prices. If suppliers expect prices to continue to drop in the future, it may well be worth "locking-in" customers at current levels. While current price levels may generate some immediate losses, they will offset potentially greater losses over the longer term. Get Strategic: Business slowdowns and shaky economic conditions should set off alarms that the business and pricing strategy needs to be re-visited. Companies need to make a full internal and external analysis of their products and product mix in order to revise the value proposition through "value-added" means and/or price changes. They also need to consider what other strategic alternatives may be available. Turbulent economic times may offer significant opportunities for companies with the resources to strategically position themselves for the upturn that is bound to follow. Well-positioned companies can engage in acquisition strategies, seek new customers and markets, and use their strategic advantages to contain competitor growth. 

Weathering the Storm: Doing nothing can be as valid a strategic decision as any other. However, the decision to weather the storm must take into account two key factors: the switching behavior of customers and the potential impact of losses on the company. A shrinking market and new non-traditional competitors will inevitably result in losses in market share. At the heart of "weathering the storm", therefore, is a risk assessment of switching behavior. The question that companies need to ask is "to what extent can we expect to re-gain the customers that we lose today?" It is not an easy question to answer and depends very much upon the loyalty of one's customers and the value that they perceive in the products and services that a supplier offers. In doing the risk assessment, one factor that often gets overlooked is the life cycle of the product. Products early in their life cycle have a significantly higher probability of regaining lost customers than those in the latter stages of their life cycle.

Make Your Assessment

Which strategic approach a company adopts depends on numerous factors and often a sensible argument can be made for any of the three alternatives. One factor companies should consider is the anticipated duration and depth of the downturn, which will determine the balance between short and long-term initiatives. Companies should also remember that downturns, as painful as they may be, always come to an end. Any pricing initiatives taken in turbulent times should always be done with an eye to the inevitable upturn. Pricing in a shaky economy requires more not less strategic thinking than in good times. Success depends upon both attitude and approach. The experience of the last recession shows that companies that viewed turbulent times as a pricing opportunity succeeded far better than those who regarded it as a threat.