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Talking about money can be difficult and make us feel uncomfortable.
Culturally we are discouraged from discussing our finances. Speaking about money can be viewed as rude or vulgar.
But money is important, especially in business. It is crucial to the success of a business, from the fashion industry to law firms. They need to be able to value and price their work correctly to prosper.
So why do we undercharge and how can this be prevented?
If you know that a case/matter will take you 5 hours to complete and a reasonable rate would be £200 per hour, you should be charging £1,000. If you decide that you are only going to charge the client £600 you are undercharging by £400. That’s 2 hours that you are actually working for free.
You have invested a lot of time and money becoming skilled at what you do. This needs to be valued.
You may feel that you are new to business the best option is to start quoting a cheap price and that you can increase this at a later date. In practice, this does not work. People do not easily accept big price increases. Undervaluing or offering a discount for your work to start with makes it harder to charge the correct price later.
Luxury goods can be sold at a premium because they are perceived to be of better quality. The opposite is also true. Something sold at a cheap price is perceived to be of poorer quality. The price you set for your work should reflect the value you place on your skill and the quality of what you produce.
It takes time to produce your work. If you are undervaluing your work you are undervaluing not only your skill but your time. Time is something we only have a limited amount of. There is a finite amount of time to work and a limit to how much income you can generate. Failing to get the balance correct can cause problems. If you undercharge for each case it is harder to reach your financial goals. It can result in taking on too many cases, rushing, poor quality of work, unhappy clients and increased stress.
Unlike other industries like music and art, people do not buy your work because they like it but because they need it. This can result in a fear that nobody will engage your services because it is too expensive. Understanding your motivation for under pricing, taking steps to appreciate your work, its value, and why this will be valued by a client, can build your confidence and reduce fear.
When setting the price you only take into account the work you now. You do not take into account the time you have taken to develop your skill or the costs and expenses you have incurred on that journey.
Lawyers offer a great service to clients but not all lawyers are exactly the same. If you fail to understand what makes you special, how you add value to your client you can undersell yourself. Try writing a list of your values and highlighting what makes you special.
Discussing fees with clients can be difficult and it is easy to offer to discount work as a way to win business. Instead, try to focus on the value you bring to your clients from using your services.
Pricing needs to be balanced, it needs to be fair to the client and the firm. A lot of lawyers, by their nature, are people pleasers. It is easy to make the client happy by delivering a cheap price but that is not fair to the lawyer of the firm.
There are two main ways of setting price hourly rate and fixed fees. Fixed fees are commonly set by an estimate of how long a lawyer feels that a task will take. The alternative way to fix a fee is on value-based pricing. There are strengths and challenges to both ways of charging.
Solicitors have traditionally charged on an hourly rate basis, a pricing structure based on the length of time they spend on this case. One of the problems with this is the final amount to be paid is uncertain and estimates provided to clients are not always very accurate.
To combat this difficulty some firms have adopted a fixed fee pricing structure, this is often based on an estimate on how long they feel it will take to complete the work. It can be difficult to work out how long work will take in advance and difficult to amend that price at a later date. If you get your estimate wrong and it takes longer than expected, you end up either doing more work for the same price or asking the client for an additional fee. This results in a firm being out of pocket or an unhappy client.
There isn’t one answer for everyone. The correct pricing structure will fit in with your firm’s objectives, the nature of the matter or claim, and the legal practice area. The information and data you have, the research you have done, your ability to monitor your costs budget, and how sophisticated your pricing structure can be will impact how you set your price.
Billable hours have come in for criticism recently for the inability to predict the amount to charge to the client and the pressure that fee earners can be put under to hit targets.
But these aren’t the only problems with hourly rates. On the surface it seems a simple charging process but how do you establish your hourly rate and what time do you charge?
The concept of charging for the time it takes you seems simple, but when looked at in detail is not such a straightforward process. One of the reasons some firms utilise Costs Lawyer to recover their cost son litigated matters is because they will identify the time that a fee earner has failed to record. But Costs Lawyers are not involved in all matters.
A number of the problems can be managed with appropriate training, support for fee earners and maximising the technology available.
Fixed fees work well on cases where the objectives of the client can be clearly identified and the work required planned out.
The challenge with fixed fees is that it can be difficult to set the price for the work to be done in advance.
It can be difficult to identify at an early stage that you are over budget.
It can also be difficult to know whether the pricing structure meets the objectives of your firm.
The other way of calculating price is based on the value of the work. Historically this has been a much more common way of pricing creative works and commodities than services. Recently there has been an increase in firms looking to offer value pricing within the legal sector.
The price is not based on a direct link to the time that was taken to do the work but on the perceived value of the customer/client. What is it worth to the client? How much will they pay?
Luxury brands are experts at value-based pricing. They understand exactly how much someone will be prepared to pay for a new bag or phone. Companies like Starbucks and Apple are masters of value-based pricing. They use research and customer analysis to work out the highest amount they can charge, without scaring customers away.
Value-based pricing at set based on the perceived value of the work by the client. Not strictly on the cost of providing the service. It focuses on outcomes and results rather than time spent and activities undertaken. Influencing factors on how to set the price include how important is this to the client. What differentiates you from competitors. What will they/can they pay for the service.
It is important to remember that the solicitor’s regulations require a firm to only enter into fee agreements that are suitable for a client and in their best interests. So care has to be taken when adopting this approach. If you give a client options and clear advice this problem could be avoided.
Benefits for including value-based pricing for law firms are:
Competitive. It allows you to reflect ways where you differ from your competitors, your expertise, what added value do you bring.
Flexibility, you can adjust pricing to different clients.
Reduce administrative burdens of time recording
Choose profitable instructions more easily, allowing you to reject those that are likely to be unprofitable at the outset.
Rewards efficiency, encourages fee earners and firms to find more efficient ways of working, improving processes and technology.
Certainty of fees, both the solicitor and the client know exactly what the work will cost.
It allows you to think about what the client wants and is important to them and charge accordingly.
It enables you to price for individual requirements of a client. You may have someone who only wants to deal with a senior fee earner at short notice and they will pay for that privilege.
But it can be difficult to value and take a lot of data and information to accurately establish a price.
In addition, staying within a fixed fee/budget, tracking the costs and resources can be difficult without active project management.
Understanding how you charge and why can take you forward to develop your pricing and reduce undercharging.
Do you have a tendency to undervalue your work or find it difficult to price your work? let me know your concerns in the comments below.