Elsewhere I've advocated for pricing a given piece of legal work in three distinct ways, with reference to:
The cost of delivering said piece of work, to ensure that costs are covered and an appropriate profit is generated for the firm
The price competitors are charging for equivalent work, to ensure that there's a reasonable chance you can actually win the work in the first place
The value of the work to the client, to ensure that the transaction is economically viable
If you're creating this for the first time, there is indeed some work involved in collating these data points but it's relatively straightforward to update on a periodic basis to sense check your current pricing
Visually, we can plot these different values against each other, as shown below with a fairly typical worked example:
Let's walk through the different components
Perceived Value of the Work
The perceived value of the legal work to the client is not the same as the value of the underlying transaction - it is the perceived value of the legal work to the client that matters here
This is important in two ways:
Firstly, and put simply, no client is likely paying you £8,000 in legal fees to help recover an £5,000 debt. However, they may pay you £8,000 to recover a £100,000 debt. The actual price of the legal work must be less than the value of the underlying transaction
Secondly, it is the client's perceived value of the legal work that is important and this is broader than just the sticker price
They may value speed of service, clear communication, add-on services and so on. As a law firm, you can increase the perceived value of your services by emphasising these qualitative factors
And some clients will naturally value the same work more highly than other clients. As a law firm, you can seek these clients out. The simplest example here is to focus on client's with deep pockets and large budgets, but other factors may also come into play such as relative (in)experience or sophistication of the buyer
Competitor Price Range
It's rare that there is a single price for a piece of legal work. More often, there is a range of acceptable prices that competitor firms charge for similar work for similar clients.
Your firm's current price may be at the lower end of that range, it may be at the top end. Here we've illustrated the current price of £5,000 as the mid-point in the £3,000 - £7,000 range our hypothetical competitors charge
The key point here, is that there is fuzziness or breadth to this range. It may well be a narrow range but it is a range nonetheless - and you'll likely find your own price compared relative to the competitor price range, not to some absolute notion of value
This fuzziness can be even more pronounced when pricing using the billable hour and estimates
Cost to Deliver
Finally, the difference between the current cost to deliver and current price is the profit on the work, in this case £3,000 (£5,000 price, less £2,000 cost)
Note here that this is cost to deliver the work, not the value of the work at the firm's standard rates. Typically this would be calculated with reference to pro-rata'd salaries x hours worked on the matter (although different firms have different approaches here)
In this example, we can see that the firm could reduce the price of work by up to £3,000 and it would still be profitable.
What are the Practical Pricing Options Available?
Based on the example here, with a current price of £5,000 we have some options:
We could lower our price towards £2,000, perhaps to capture a greater volume of matters or steal market share from competitor firms. The key point here is to attract a greater volume of matters, this is likely a poor strategy if it's just to win the next single piece of work
There's room to increase prices up to £7,000 and still sit within the range of competitor prices. I'd look at how the competitor firms are positioning themselves and working out how we can play to our own strengths and differentiate our offering. For example, fixing prices that are typically billed hourly, guaranteeing turnaround times or expanding the scope of services
Conventional wisdom suggests that the price is limited by the lower of the competitor's price (£7,000) or the perceived value (£8,000). But if we're feeling particularly bullish, we may be able to increase beyond those limits if we can increase the client's perception of the value offered, perhaps by bundling in additional services, or perhaps by taking on additional risk related to the transaction with a contingent fee
We can go and play in a different part of the market. What would our fees look like if the Value of Transaction was £1m instead of £100k? It's likely that the perceived value would increase (although not necessarily by the same 10x)
We can see the natural boundaries to the pricing discussion at the lower end (cost to deliver) and upper end (perceived value to the client)
Ultimately, if we're looking to price outside of this range then we're likely going to need to look at delivery model (if we want to price below the lower bound) or our marketing strategy (if we want to price above the upper bound)
The key point here is, by laying out the different price points in this way, we can have a more holistic conversation around pricing beyond "we need to be cheaper to win the work" or "let's increase headline rates by 10% and see what sticks"
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