Impact AI on cost, perceived value and price of legal services

Conversations around Value Based Pricing are often framed in a comic book casting of good (VBP) vs evil (Cost Based Pricing / CBP)

But it's not an either/or, and it's an incomplete picture

Cost and perceived value set the parameters of what a price can be, but they don't define what the price ultimately is

Unless you're a VC backed SaaS company burning other people's money, the price a client pays does generally need to be higher than your cost to deliver the service

In professional services, this is as true of Big Law firms that have infrastructure to pay for, as it is for the solo-consultants with minimal overheads. I.e. if you can't pay your mortgage with the prices clients are willing to pay, you might consider doing something else

Where cost to deliver sets the pricing floor, then at the other end it is the client's perceived value of the service that sets the ceiling

If your price is too high - for whatever reason - clients won't buy it

Where the ceiling is higher than the floor, what typically determines the price within that range is the competitive pressure between firms and the relative bargaining power between the firm and client

Consider two scenarios:

(A) If you're the only firm that your client perceives can do the job - you can likely charge a higher fee, closer to the ceiling

(B) If your client is putting the work out to tender among five firms they deem comparable, your price is likely going to be lower than in scenario (A)

When it comes to the impact of AI on pricing -

(1) Whilst relevant, I'd argue that too much time is being spent looking at time savings and what that means for cost to deliver and the pricing floor

(2) More time needs to spent talking to clients - their perception of value can go up as well as down, but I suspect it's going to be very uneven as to how that washes through different services

(3) What are your competitors doing? - be that traditional law firms, or tech enabled new entrants. If suddenly your client has three credible firms to choose from, or if a comparable firm is now offering the service at a dramatically reduced price - you're going to need to sharpen your pencil on your own price whether you're using AI or not

Currently, I see (1) being wrestled within innovation and legal ops teams, (2) within pricing and marketing teams, but comparatively little of (3)

(3) needs more focus and, more fundamentally, 1 - 3 all need joining up across the boardroom table

If it helps to visualise these relationships, the illustration below may be useful. How will AI impact your own cost to deliver, your clients' perception of value and what your competitors charge?

Armed with answers to those three questions - what are you going to do next?

Cost vs price vs value