Perhaps you’ve evaded the common pitfalls most legal firms make. And perhaps your pricing practices are flawless. If this is the case, you’re in a very, very small minority.
For those who know there’s room for improvement, read on.
In this article, international legal-pricing expert Nigel Haddon shares his insights into the 5 common pitfalls your firm is probably making with its pricing strategy.
1. Forgetting that humans are predictably irrational
The logical approach to economics is to think human act in a self-interested, rational way when making money-related decisions.
But Managing Director of Haddon Consulting & Teaching Fellow at The College of Law Nigel Haddon says this is “poppycock’'.
“We’re not just irrational, we're ‘predictably irrational’, a term coined by Dan Ariely in his bestseller Thinking Fast and Slow.
“A well-known experiment illustrates this idea nicely. In the study, researchers asked university students to choose between a free $10 voucher – and a $20 voucher which would cost them $7 to purchase.
“Of course, you would expect most people to go for the latter option since it results in a net profit of $13 rather than $10. However, over 80% of students chose the former option.
“But here’s the most interesting thing – when the researchers repeated the experiment with one small tweak, the results were completely different. In this second version of the experiment, students would have to pay $1 for the $10 voucher – or to pay $8 for the $20 voucher.
“And surprisingly, over 80% did the rational thing and chose the $20 voucher. In light of the first experiment, we see just how irrational people can act when something is ‘free’,” he says.
KEY TAKEAWAY: Psychology influences how we perceive price. The strongest pricing strategies come down to presenting clients with the right options – and using levers to nudge them in a particular direction.
2. You think your clients are too unique to optimise pricing
Nigel says that almost every lawyer he’s worked with tells him that the clients they work with are uniquely challenging, and therefore, uniquely sensitive to price.
However, he disagrees.
“It doesn't matter whether your clients are outback farmers in Australia or fishermen in England. Every lawyer I work with thinks that their market is unique and that I couldn't possibly understand it. And they believe the things I suggest couldn’t possibly work in their market.
“This is a common misconception. But many people don’t realise that when it comes to pricing, the same principles of pricing psychology and behavioural economics apply, and have been repeatedly proven to apply – no matter who your clients are.”
KEY TAKEAWAY: Don’t be deterred from adapting your prices just because you think your sector is uniquely challenging.
3. You think most of your clients are price sensitive
“There’s lots and lots of research done on this subject. And it consistently shows that very few people buy on price and price alone.”
“The first priority for clients when selecting a service provider is recommendation or reputation. They look for ‘social proof’ that others have used this service and had a positive experience,” he says.
Nigel says personal chemistry is also extremely important in the decision-making process, with people more likely to select providers they like and trust.
This means that pricing is usually the third or fourth consideration in the decision-making process.
KEY TAKEAWAY: Don’t keep your prices unsustainably low just because you believe clients won’t pay more. Instead, learn how to triage your prospective market and work out what percentage of clients are actually price sensitive. From there, you can design strategies for this target market.
4. You don’t know your market segment
Are you low volume, high margin? Or high volume, low margin?
“You should not be trying to compete in every marketplace – only in the categories where you are confident of succeeding. Your value proposition needs to be consistent enough to appeal to a specific group of customers that you can serve, profitably,” says Nigel.
KEY TAKEAWAY: Your pricing strategy should reflect your entire business model. Avoid trying to be all things to all people. And know the clients you are targeting – at a granular level.
5. You’re afraid to say you’re ‘worth it’ with your pricing
“Price is a proxy for quality, we all inherently know this,” says Nigel.
“We know that a $100 pair of jeans is going to be better than a $50 pair of jeans. A $60,000 car is going to be better than a $30,000 car. By extension a $350 per hour lawyer is going to be better than one that’s $250 an hour.
“If you’re saying you’re better than your competitors, but charging less than them, potential clients will struggle to make sense of this,” he says.
“So charge what you’re worth – by being reassuringly expensive,” he says.
KEY TAKEAWAY: If you’re technically good at what you do and deliver quality services, you're in a position to charge premium prices.
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