All professionals are under-charging!

That may be a bold assertion, but I believe it to be true. None of the work you are currently doing for clients is over-priced. If the price was too high, you would not have been awarded the work. Some of the work you are currently doing is under-charged. That is, if you had asked for 5%, 10% or 20% more, you still would have been awarded the work.

The more sophisticated you are at pricing, the more you can minimize the money left on the table, and the more you are able to justify why the price is fair to the client.

The Importance to the Business

No lever has a greater impact on the profitability of a firm than pricing. A 5% price increase generally increases firm profitability by around 15%. By comparison, a 5% decline in overhead costs (i.e. non staff costs) generally increases profitability by around 3.5%. And yet most firms put significantly more energy into cost containment that price optimisation.

The only lever that has the same impact on profitability as price is utilization. You either work 5% harder, or you get 5% better at pricing. When you look at that over the next decade, you can only push utilization so far.

While this might sound self-serving, ensuring the financial health of the firm is important to enable you to:

  • Invest in training staff
  • Invest more time in pro bono efforts
  • Balance billable hours with non-billable hours, and
  • Ensure an appropriate work-life balance.

When firms are unprofitable, they look at where they can cut costs. When firms are profitable, they look at where they can invest.

What Clients Want

Much of the under-charging that takes place in firms is driven by fear, which in turn is driven by a lack of knowledge of what’s most important to clients.

Clients voice their concern about the price which is interpreted by professionals as an indication their price is too high. In reality – on most occasions – it’s simply a desire to obtain a lower price if possible. There is nothing wrong with the price. The price would be accepted. The client would simply prefer to pay less.

What’s more notable is that a focus on the amount (the price-point) distracts from focusing on other elements of pricing that are generally more important to clients. Specifically:

  • Clients want to know that the price is appropriate given the value of the project. Poor practitioners leave this to the client to assess. String professionals help the client understand the investment in the context of the benefits.
  • Clients don’t like surprises. This is why many clients prefer fixed fees to hourly rates, or at the very least the provision of accurate estimates.
  • Clients want to know that you are aware of their need to contain costs and that you have consciously considered how the project can be delivered as efficiently as possible.

If you can give clients clarity around what it’s going to cost, help them see that the price is appropriate given what’s at stake and show them you have thought of ways to contain the costs, they will generally be less concerned by the actual amount. If you don’t do these things, don’t be surprised if the client challenges your price.

Sophisticated Pricing

The contemporary definition of pricing is that it is the process of determining how much we receive in exchange for the services provided. In this regard, pricing should not be viewed as a one-off event but rather a longer-term process whereby we are aiming to get closer to the right price more often.

The best firms at pricing still make mistakes, but they learn from their mistakes, and they develop their professionals to get closer to the right price more often.

More importantly, the best firms at pricing have a strong focus on both value-creation (using their technical knowledge and their knowledge of their clients to develop cost-effective solutions) and value-capture (pricing to capture a fair share of value created). They help clients see their services as an investment to be optimized, rather than an expense to be minimized.

How sophisticated is your pricing and where are the opportunities to improve? Download our 10 Step Pricing Assessment checklist to find it out!

A version of this article was originally published in the Australasian Law Management Journal.

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