The Professional Services World Should Be Cheap or Smart But Can’t Be Both

Tony Wilson is a Vancouver based lawyer and professor who recently wrote an interesting article* for The Globe and Mail on the fallout (or lack thereof as he argues) of Heenan Blaikie, the Canadian law firm that recently closed its doors.

While Wilson discusses the commoditization of legal services and argues that “law firms must commoditize and repackage their services to lower costs, or their services will become an unaffordable luxury”, I believe there is another argument that deserves equal exploration.

That is the argument for increasing legal fees based on their value to a client.

Pricing Professional Services

There are three basic ways to price anything including legal and other professional services; cost, competitor, and consumer.

Cost

In a cost based pricing scheme input costs are determined and some reasonable markup is added to determine the price of the commodity. This is how price-sensitive commodities such as gravel, dirt, and some legal services are priced – just slightly above what they cost to deliver.

Competitor

In a competitor based scenario, the price of a service is told to the seller by the marketplace. It is a “me too” pricing strategy in which the standard pricing of the industry is simply adopted by the seller. Those who can make a profit at that price are welcome to play. Those that can’t ultimately go away or go broke.

Consumer

In a consumer centric pricing model the price is determined by the usefulness or the value of the service to the buyer and this means that the price one considers appropriate can vary significantly from buyer to buyer – even for the same service. To grossly oversimplify this concept it is sometimes referred to by economists as the utility of a product or service.

The Utility of Legal Services As Illustrated by A Can of Coke

Niraj Dawar a professor at the Ivey Business School illustrates the concept using a can of Coke in his December 2013 Harvard Business Review article When Marketing is Strategy.

When it is nineteen cents a can we are willing to buy warm Coke twenty-four cans at a time, wait twenty minutes in line to do so, and then lug it across a half-mile of dangerous parking lot to our cars. However, we are willing to pay two dollars for the exact same can of Coke when we can get it instantly and frosty cold from a vending machine in the park while running on a hot day.

The product is the same but the utility is wildly different to different consumers – or possibly the same consumer in different circumstances.

My personal lawyer once commented when I asked him how much a new will would cost that “Wills are the Slurpee of the legal profession. Everyone does them for a hundred and fifty bucks.”

So in the world of commodity law, the winner will be the lawyer that can do a will ten bucks cheaper, all the while competing in “the race to the bottom” as described by Thomas Friedman in The World is Flat.

In a different scenario, for example one that involves, ex-spouses, kids, grandkids, substantial family wealth, multiple corporate holdings and bitterness all around, the winner will be the lawyer that has significant relevant expertise regardless of the cost.

While the former lawyer will focus on automation, process efficiency, standardized solutions, and volume, the latter will focus on professional development, knowledge acquisition, and complex customized solutions.

Either approach is a reasonable and legitimate business model for a law or other professional services firm.

But the worst place to be in the future of private law firms will be stuck somewhere in the undefined middle. Not cheap enough to win the commodity war, not smart enough to win the expertise war.

 

*Heenan Blaikie’s demise has no impact on business community, Tony Wilson, Vancouver — Special to The Globe and Mail, Published Tuesday, Feb. 18 2014

One Response to The Professional Services World Should Be Cheap or Smart But Can’t Be Both

  1. John Lobaugh says:

    Cal,

    I’m guessing for the small consulting firm the “place” you want to be is consumer. Cost : your services are commoditized so all you can do is charge what the market will bear. Competior : your competitors determine the price you charge. If you can survive at the market rate then great otherwise it’s bust. Consumer: your clients value your service enough to pay what they think it is worth. Deliver a “better” service and you can charge more!

    John

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