Obviously, pricing is an important part of marketing your legal services. There is no question that price sensitivity is real; and that clients, particularly in these economic times, are feeling the pressure to minimize legal costs.

Some argue that the cost of legal services should be driven solely by what the client is willing to pay. That unfortunately is only part of the pricing equation. On Attorney at Work last week, there is an article that provides excellent insight into value pricing by Toby Brown, the Director of Pricing for Vinson & Elkins. His proposition is that there are three critical bits of information that a law firm should determine prior to pricing a particular piece of legal work.

  1. Understand the clients price sensitivities. Clearly one size (or fee) does not fit all situations. As Brown points out, a given piece of legal work may have a high value for one client, and lower value for another. I would agree with him that "the only effective way to understand the client’s value priorities is to have a direct conversation with them." The client is the only one that will know what the particular legal issue(s) means to them, or about the internal pressure they are under to reduce legal costs;
  2. Know what your costs (better still, your desired profit margins) are. Some would contend that it doesn’t matter what your costs are. The only thing that matters is what a client is willing to pay. That is total baloney. If law firms price their services under that reasoning, without knowing what their costs are, they won’t be in business very long. It may be correct that a client simply will not hire you for the fee you quote, but if you don’t know what your costs and profit margins are, you won’t how much you will gain or lose by taking the work. There may be good reasons for taking some work at a loss, and there are firms that do that to get their foot in the door for future work. But, without knowledge of your costs, you cannot make an intelligent decision as to whether to take the work or walk away; and
  3. Do some risk and reward analysis utilizing project management techniques. After you understand what a client’s price point is, what your costs are, and what your margin needs to be, the firm should then do some "risk and reward" analysis using project management tools that include risk assessment, understanding the scope of the work (what’s included, what’s not), the client’s goals, and a client communication plan for starters. As Brown says, “[T]he main point here is that the decision to take the risk and make the investment should be made with knowledge and awareness…”

The bottom line is that pricing should not only match the client’s value proposition, but the firm’s value proposition as well. A firm can’t “just accept the clients’ definitions of price and value absent your own costs and risks,” according to Brown. Concur in spades!