Three Stages to Pricing

There is an idea (that I'm really struggling to attribute - if anyone can help!) that whatever it is that helps you overcome the current constraint is the thing that, in time, will prevent you from overcoming the next constraint

I've been toying with this idea when it comes to pricing - and again welcome comments as to whether this is helpful/accurate/nonsense(!)

I see three key stages when it comes to pricing:

(1) - Pricing to Win (Work)

Most start here. Arguably most don't get beyond here. But it's the idea that we're primarily pricing to win volume

Success is measured with reference to top line fee income (either £ or growth)

But the focus on growth for growth's sake means we fill the team's capacity with fee income of mixed quality. Some of it may be highly profitable, but some of it is poor or low-margin 

So we pivot to...

(2) - Pricing for Profit

We move away from fee income growth and start looking at gross profit, or gross contribution at a client or matter level to directly draw the link between client/matter contribution and profitability or PEP

This starts some hard, but necessary, conversations around the poor quality work at (1), leading to increasing prices, reducing delivery costs or walking away from certain clients/work types

But it can lead to over-focusing on every single client, every single matter, every single partner's book of business, ensuring it's suitably profitable

We get too far into the trees, and miss the nuance of the woods in looking at resilience within the revenue base - be that across economic cycles or the benefits of steady cashflow even if the margin is lower

So where I think we have to get to is...

(3) Pricing the Portfolio

This is increasingly important if we've shifted from hourly rates to fixed fees (hello AI!). The criteria for success is not 'does every matter clear a profit hurdle' and if not we have some laborious lessons learned exercise

Rather, the criteria is - is the overall porfolio profitable?

We may have winners and losers within that, but so long as it's profitable in the round, then we're good

'Portfolio' I would suggest is a flexible concept, portfolio of matters, clients, partners, teams, departments etc - whatever is the most helpful use of that concept in the specific context

And while we're defining terms, 'helpful' I would intend as enabling a Pareto analysis to assess which next action will have most impact

As ChatGPT might say, the difference between (2) and (3) is a subtle shift :)

But it has quite significant implications in terms of how we measure and incentivise, and what reports/data etc we need to surface (and to who) to be able to manage the business (3), as distinct from manage the matters (2)

Welcome thoughts around these distinctions. Are they useful/meaningful/worth exploring further?

Or blindingly obvious/inconsequential?

Pricing to Win > Pricing for Profit > Pricing the Portfolio