The Importance of pricing to profit in law firms

The importance of Pricing…in context…

Pricing is extremely important to profit…most professionals understand this, but not to anything like the extent they need to understand it…

Proper pricing has been demonstrated to have a massive impact on profitability…changing the game by big percentages…100% improvement in profit is by no means unknown…

An example from the hospitality field is easy to relate to…

If two hard-working restaurateurs put in very long hours and manage to earn $150,000 each in a year, that’s actually not more than they would have earned doing the same job for someone else, so they have run a business all year for no profit whatsoever!

If they look at pricing and realise that if they can re-position themselves in the value perception with customers, on their existing “covers” even a $2.50 increase in average cover revenue will give them extra revenue of $150,000 per annum. That’s a 50% increase in what each of them earn…and a whopping lift in profit.

For small-medium law firms there is actually a lot more room to move on pricing in my experience, and firms should look hard at every area of potential.

Importantly this examination must include stopping people on your team who lack proper appreciation, or confidence (or both), from giving estimates and quotes, and from preparing bills.

However there’s an even more important issue staring law firms in the face that they have not dealt with properly.

It doesn’t matter much what you charge on matters if you’re not breaking even…the real impact on profit doesn’t occur there!

Until you reach break even point every single dollar of your fees goes to Expenses, and in Expenses must be included at least the salary principals would get doing the same job for an employer.

After break even almost every part of every dollar in fees goes to the principals, so it stands to reason that it’s critical that people are gainfully employed doing genuinely productive things in that part of each day, month or year.

Up until that point the whole exercise has just been about keeping the doors open.

Sadly, this is where most firms go wrong, and manage to produce nothing at all in the profit zone, either because they don’t realise that their break even point is so much higher than they thought, or because they don’t know how to go about fixing the problem.

Far too many firms still naively think that the old one third/one third principle is still appropriate.

One third was for wages, one third for other expenses, and one third for principals. Ridiculously, the one third for principals was referred to as “profit”, when in fact it very often was not even a decent wage.

The reality for most small-medium law firms today is that after allowing a genuinely appropriate salary for principals, there is less than 15% true profit, and very often none at all.

However, if we assume there is 15%, and that represents for example, $50,000 per principal, it is quite easy to lift it by 100% or 150%, taking true profit up to $100,000 or $125,000 a head on top of salary.

I would start by looking carefully at employee utilisation, making sure good things are happening in the profit zone, and at the same time I would address the highest priority pricing issues...ironically, often the easiest ones!

The most important issue to address is lifting ClientTime budgets up to where they need to be.

Become one of the well-organised firms that has people meeting or exceeding these sensible budgets. Budgets that are too low, and still not achieved, are not going to do much to build your practice profit, and that's the situation in most law firms.

I would improve the quality and volume of marketing activity, so there is increased demand for services and pricing changes are easier to make, and there is a healthy backlog of work for all at all times.

Improved pricing, and some operations incurring in the profit zone on that better pricing, will have a huge impact on profit.

Unsurprisingly, in the restaurant business, if you can increase pricing a little, and have fewer tables empty on average across the year, profit will also be impacted hugely. Empty tables produce nothing in the profit zone, and increases in pricing have little impact when they're at empty tables!

I trust these thoughts have been of interest and value to you…