As usual the Citi-Hildebrandt Client Advisory makes interesting reading. The 2019 edition has a fascinating piece on Price Elasticity of Demand. In short, it found that those firms that increased their equity partner billing rates by the most, also enjoyed greater demand growth. Now there’s a finding I can’t ‘let go through to the keeper’[1].
What is the Price Elasticity of Demand?
A constant challenge for law firm leaders come budget time is the need to increase rates in order to cover increasing costs, but not to push the rates too hard that they lose clients. But now the research proves the opposite. Those firms that push rates hardest win more work! If you were ever unsure, now we have proof that the legal market is peculiar.
Without wanting to get too much into the theory, price elasticity of demand is a measure used to show the impact price increases have on demand. In pricing theory, we are taught that price elasticity is always negative because demand always decreases as price increases. Economics 101 right! But the Citi data – from 8 years of analysis – highlights the opposite is true in the legal market.
To increase or not to increase, that is the question
Specifically, the Citi analysis shows that firms whose equity partner rate increases were in the top quartile, enjoyed average annual demand growth of 1.6% compared with just 1.0% for the rest of the AmLaw 200. And the difference in rates were not insignificant. Those “Top Rate Growth” firms increased their rates by an average of 5.3% each year from 2010 to 2017 compared to average annual increases of just 3.2% for the remainder of firms. That means that at the end of the period studied, the “Top Rate Growth” firms had increased their rate by 19% relative to those outside the group. Now for a firm with a 40% margin, that equates to increased profit per partner of 87%. Now have I got your attention?
So, if we increase rates, demand will come? That’s what the data shows! Well, unfortunately it’s not quite that simple. Statistics 101 tells us that correlation (and there clearly is correlation) does not prove causation. It’s more likely the actions taken by these “Top Rate Growth” firms, is not only enabling them to justify higher prices but is also enabling them to increase market share.
Which pricing strategies justify a higher price?
If a firm wants to charge more in a market, they need to focus on a series of strategies that in combination justify the higher price.
These strategies include:
- Targeting the work and the clients where they can add the most value
- Focusing on creating value for clients
- Focusing on efficient service deliver (enabling low total cost, rather than low rates)
- Choosing to compete on value, rather than competing on price, and
- Focusing on justifying why they should be chosen, even if they are more expensive.
While these strategies enable firms to justify a higher price, in combination they also lead to increased demand. So rather than take the Citi data at face value and increase rates hoping for an increase in demand, perhaps a better approach is to do all the right things that enable you to justify higher prices, as these same strategies are likely to also attract more work.
To those firms who are actively competing on lower rates to help drive growth, perhaps you should look at the Citi data in more detail. And to those firms who are creating greater value for your clients, don’t be afraid to push price where it’s justified.
Sound good but not sure where to start? Talk to us today about a pricing review for your firm. A pricing review is a simple yet effective way to identify and prioritize opportunities to improve your firm’s pricing that delivers quick wins.
[1] An Australian saying derived from the sport of cricket, meaning something not worth pursuing.