Tag Archives: value pricing

More on Value Pricing

In a previous article, we talked about flat fees, and how they have become the favourite alternative to billable hours for both lawyers and their clients. There are many benefits to flat fees: they are something clients want and like. They eliminate surprises: clients knows in advance how much they will have to pay, and you know how much you will make. And because flat fees usually are (at least partially) paid up-front, lawyers don’t have to worry about getting paid. Knowing in advance how much something will cost also lowers the threshold for clients to hire a lawyer, which means lawyers get access to more clients.

We also pointed out that fixed fees are not always the ideal solution for the services you offer. A prerequisite is that you can determine in advance what services you’ll offer and estimate how much time those will take. Typically, cases that involve opposing parties (litigation, arbitration, mediation, …) may be less suited for value pricing.

We also discussed how there two ways to calculate flat fees. In both cases, your profits consist of your revenue minus your expenses. So, you always have to calculate your expenses in advance. Where they differ, is in how to calculate your revenue. You either use a cost plus model, or value pricing. In the cost plus model, the price is set by calculating the costs and adding a fair profit margin, which can be based on the average time you anticipate you will spend on the case. With value pricing on the other hand, you determine your price based on what the service you offer is worth to the client.

So, how do you set your price? Mark Wickersham is an accountant who wrote a booklet on “Using value pricing to grow your business” that is available for free online. (It can be downloaded here: quickbooks.intuit.com/uk/accountants/value-pricing/). And while it is written for accountants, much of what he writes is relevant for lawyers, too. Here is his take on it.

Before you can actually set a price, you have to determine what it is that you’ll be putting a price on. In other words you have to determine the scope of services that will be covered by your price. This also means you first have to determine what your clients expectations are. In his book, Wickersham dedicated a chapter to five types of questions you must ask to understand a) the scope of the work and b) what your client values. These questions deal with:

  1. Scope
  2. Tangible Preferences
  3. Intangible Preferences
  4. Outcome Preferences
  5. Enhancement Questions

Scope questions have to do with what your client needs or wants from you, and with what the client values. Scope questions help us understand the client’s circumstances, which in turn helps us to estimate the amount of work we will need to do. Scope questions also help to establish what the client values. As you get more proficient with value pricing you’ll get better at asking great questions that help to uncover what a client really values.

Tangible Preferences have to do with the list of services you could offer your client that he might want or value. Basically, you offer a menu of services that you go over with the client, and that are relevant to his or her situation. When clients say “Yes” to these things, they indicate they would value them. So you add them into your price, even if the time to deliver these extra things is zero.

Intangible Preferences have to do with the user experience of the client. These are questions that help establish the modalities of cooperation, and look at how to best work together. These include questions, e.g., like “who is contact point?”, “what are the preferred modes and preferred frequency of communication (when does the client want a phone call, a mail, a letter or a meeting)?” Does the client want any evaluation meetings during or after, etc?

Outcome preferences focus on what outcome the client wants. This is where we look at the end result. We discuss desired as well as possible alternative outcomes and how to respond.

Enhancement Questions deal with how we can further enhance the client’s experience. This is an advanced and optional step that focuses on additional services that are not necessary but which the client may value.

Once we have the answers to these questions, we can start determining our optimal price. To do this, Wickersham says that we must forget the timesheet. Instead, we must focus on four factors or benefits that help determine what our services are worth to the client. These factors are:

  1. The direct financial gains for the client, which typically means increased wealth or income.
  2. Reduced risks
  3. Decreased liabilities
  4. Enhanced reputation

Wickersham: “By effectively communicating these forms of value to your clients, you can maximize your prices, while still creating a win-win scenario where your clients are able to profit from the relationship as well. And that is the key to both satisfied clients, and a healthy business. (…) Once you understand what they value (the pain they are trying to avoid and the gain they are trying to achieve) you present a high price, not because you expect them to say ‘Yes’ (if they do, you’re too cheap!), but to create a reference price. This is called anchoring.”

Wickersham also offers additional suggestions. He advises to present the client with options to choose from. “When your first price is too high, this is where all those preference questions come in. When you give clients choices they often say ‘Yes’ because they haven’t yet seen the price. If the price is too high, you can now ask the client the following: ‘The reason this is the price is because you’ve said you want all of these things. Looking at this list of things you’ve said you’d like, are there any here that on reflection you don’t really need (value)?’ ”

In short, value pricing optimizes profits, but it is not easy. Some call it an art, and with practice, one becomes more proficient at finding the correct win/win price to charge.

 

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On flat fees and value pricing

The market of legal services is changing, and so is the legal business model. Largely upon the request of their clients, law firms are shifting from billable hours to alternative fee arrangements (AFAs). The most commonly used alternative fee arrangement is charging flat fees. In this article we’ll have a closer look at what they are, what types there are, what the benefits and risks are, when and when not to use flat fees, and lastly how to set the price for the flat fees you’ll be charging. That last item will be continued in a follow-up article.

Peggy Gruenke, from www.attorneyatwork.com, defines a flat fee as follows: “A flat fee is simply a prearranged, agreed-on total fee that is paid up-front, or at least a portion of it is, to complete all work required for a particular matter.”

There typically are two kinds of flat fees, which has to do with how the fee is calculated. The first type is referred to as “cost plus” pricing, where the price is set by calculating the costs and adding a fair profit margin. For law firms, if they have certain types of cases that they do on a regular basis, they could, e.g., calculate the average time and cost of previous cases, and use that. The alternative is referred to as value pricing where you set the price based on what the service you offer is worth for the client. We’ll come back to how to set the price for flat fees later on.

There are both benefits and risks to using flat fees. The benefits include:

  • Flat fees are something clients want and like.
  • Flat fees eliminate surprises: clients knows in advance how much they will have to pay, and you know how much you will make.
  • Knowing in advance how much something will cost lowers the threshold for clients to hire a lawyer, which means you get access to more clients.
  • Since flat fees usually are (at least partially) paid up-front, you have no problems getting paid: you just don’t start work until you get paid.
  • Using value pricing to set your fee, where the fees is calculated on the value your services bring to the client, typically results in a higher profit margin for the lawyer.

There also are risks:

  • It can be hard to calculate the total fee beforehand, especially when opposing parties are involved. (See below).
  • If additional hours are incurred, those may be passed on to the lawyer.
  • There’s a potential for reduced profit margins or even losses, if the matter takes substantially more time than expected.

What these risks show is that flat fees have limited uses. They aren’t suited for all cases or all law firms. You’ll have to determine when and when not to charge flat fees. Flat fees are not advised when it’s hard to estimate in advance how much time and effort will be needed. Ruth Carter, e.g., avoids using flat feels in cases where there is an opposing party, like settlements or litigation, because you usually cannot anticipate what all they will come up with. There are exceptions of course in scenarios that are common and/or simple like, e.g., handling traffic fines. Typically, flat fees are well suited when the time that is needed is predictable. It works well, e.g., for transactions like copyrights, trademarks, and contract drafting and reviews.

Sometimes, lawyers charge a hybrid fee (or a “flat fee plus”, as Ruth Carter calls them) where flat fees and hourly billing are combined. This usually involves charging a flat fee for a project with a limited scope and then charging the client your hourly rate for any work performed beyond that. Billie Tarascio, e.g., a divorce lawyer, uses a hybrid model of hourly fees for certain work and combines those with flat fee charges for predictable items like drafting pleadings, attending hearings, etc.

So, before you start charging flat fees, there are some questions you have to ask yourself. The first questions is whether your clients are asking for flat-fee options. If they’re not, do you have a good reason to switch? When introducing your flat fees to your clients, have you clearly defined expectations, fees and scope? Have you thought about your overhead? How many flat-fee cases do you need per month to cover expenses and pay yourself?

Once those questions are answered, you can determine how to set your flat fees. As mentioned above, you can use either value pricing or “cost plus” pricing. If you want to charge flat fees for a service you have already been offering for a while, the “cost plus” model is fairly easy to implement as you already have all the necessary information with regard to scope, time needed, costs involved, etc. (If you are using law firm management software, it is easy retrieve all of this information).

Most authors, however, suggest using value pricing instead because it is better suited for optimizing your profit margins. Now, and especially when you are new to it, value pricing is not easy, since you have to know how to measure value and identify the factors that determine what brings value to your clients. Mark Wickersham, who wrote a book on “Using value pricing to grow your business” (that is available for free online), rightfully points out that value pricing is hard because of three reasons: 1) Value is subjective; it can’t be touched, felt or measured. 2) Everybody values things differently. And 3) because every client has unique requirements.

In a follow-up article we’ll go into how to set your price when using value pricing.

 

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