Quick Legal Service Pricing Tips
Price is one of the key elements of profitability in any business: a law firm is no different. Pricing legal services is complex no matter whether you use a time billing method or a value pricing method or something in between.
Remember that a client uses the services of a lawyer to gain a result or an outcome, either business or personal. The client is “buying” the lawyer’s knowledge and skill, legal or otherwise, to assist them obtain a successful result. What the client is not buying is time, although the lawyer may think that time is what they are selling.
What is the value to a client of a successful outcome to their problem? For each client that value is unique. It is this value to the client that is at the heart of value pricing of legal services. When value pricing legal services the lawyer, or whoever is undertaking the pricing exercise, must take time to understand what of value to the client. Linked to the concept of value is the scope of the work to be undertaken. Scope is the totality of the work to achieve the desired client outcome. It is only once value is understood, and the scope of work know, that the legal services to achieve the outcome can be priced.
Value pricing, simply put, is putting a dollar value on value to the client. It is not a multiplication of an arbitrary hourly rate. The price must reflect a profit to the client, and to the firm.
Time based billing is the estimation by the lawyer of the time it took to achieve the result multiplied by an hourly rate. The hourly rate is calculated based upon historic settings or is derived from some other internal firm formulae. An hourly rate includes both internal costs and a profit element. It bears no relevance to the value the client may receive. In time based billing the piece of work is not priced up front for the client, although the client should receive an “estimate” of the costs.
Fixed pricing is having the price of the piece of legal work fixed up front. This fixed price may or may not be based upon the value to the client. The fixed price could be calculated on an estimate of the time taken to complete the matter multiplied by the hourly rate, or it could be set by the client.
Yes, to price the value a client receives is challenging because it involves really understanding the desired client outcome and the scope of the work involved. However, it is the most client centric method as the client gets to agree the price based upon the agreed scope. Time billing never allows that to occur.
- A client wants a successful outcome
- A client does not buy time from a lawyer
- A lawyer assists a client with achieving the successful outcome
- A lawyer does not sell time to a client
- Value pricing captures the value to the client of the outcome
- Accurate scoping the work to achieve the desired outcome is required
- Fixed pricing is fixing a fee in advance of the work
- Time billing is based upon an hourly or daily rate which includes elements of profit and business costs.
- Alternative fee arrangements (AFAs) are those non “traditional” time based charging
- AFAs are frequently based upon an hourly or daily rate
- ricing is an art and a skill which can be learnt
This article was published in the Law Institute Journal