If you want to become a wealthy attorney, your primary business goal is to MAKE MONEY. Reel in more clients. Bill more hours. Collect more cash.
In this session, I’d like to discuss the concept of Price Elasticity. It’s been my experience when dealing with non-contingency situations, attorneys simply aren’t charging enough. Either they’ve reduced their price to ‘compete’ with their competition, or their opinion of their value simply does not equal the price the market will bear. But when we take a closer look at their Cash Flow, we determine the fees they’re charging are inadequate and don’t allow them the necessary profit to grow their businesses. In order to grow your business, you must have profit.
To be blunt, I believe you should be taking two steps in pricing your services:
1. You should be measuring your conversions so you can establish a baseline at your current price level.
2. You should increase the price until the conversion difference becomes greater than the increased profit amount generated. In most cases, members of my private client group are shocked to learn how much they can increase their prices and not experience a decrease in conversions, often times experiencing increases of over 100%.
Many of you will say, “Rich, I can’t just raise prices without cause.” PHOOEY! I’ve seen it done too many times in too many different practices to be convinced otherwise.
But, to be fair, let’s look at the opinions of others on this subject.
Have you considered how price elasticity of demand should influence your pricing decisions?
I’m talking about optimal profit margins for your law firm. Simply put, if you are considering a fee change, you need to know how that change will affect the firm’s total revenue. To increase revenue, you must decide whether to increase rates (bring in fewer clients who pay more) or decrease rates (bring in more clients who pay less). Or best yet, raise rates and increase client demand!
Harken back to your college econ class and the work of the great economist Alfred Marshall (1842-1924). Known as the “price elasticity of demand,” Marshall’s formula measures how consumers adjust their rates of consumption of a particular thing (like the cost of hiring an attorney) until the marginal utility equals the price. The term “elasticity” simply refers to a unit of measure. For law firm cash flow purposes, this measure allows us to anticipate accurately how clients and potential clients will respond to a change in your firm’s fee structure.
Yes, Even Law Firms Measure Price Elasticity
According to Marshall, price elasticity of demand reflects the rate of change in demand as a response to a price increase or price decrease. If you raise your rates, then you might anticipate a corresponding drop in the demand for your services. But that’s not necessarily what will happen. Everything depends upon the price elasticity of demand for your services.
Your law firm’s price elasticity of demand is calculated as a percentage change in the attorney hours/services demanded by clients as divided by the percentage change in price.
The higher the price elasticity of demand, the more willing people are to AVOID buying the product or service when the price increases. The lower the price elasticity of demand, the less willing people are to give up the product or service when the price goes up. For example, the price elasticity of demand for an egg is 0.1 (that’s low, or inelastic). By contrast, the price elasticity of a Mountain Dew soda is 4.4 (that’s high, or elastic). The result? More people will give up Mountain Dew when the price goes up. But when hens cut back production? We resist giving up our eggs – we’ll pay more and keep consuming.
Low Price Elasticity (Inelastic)
When your services have a low elasticity rate, you can raise your rates while demand falls very little in response to the increased cost of legal services. That means an optimal profit margin for your law firm. On the one hand, you charge more, experience minimal drop in demand with a low elasticity rate, have more available hours to provide services for additional clients, and increase your profit margin.
Inelastic demand is typically associated with necessities or, for our purposes, essential legal services. Something clients really need – bankruptcy, criminal representation, or child custody, to name only a few. Also, when demand for legal services represents a small portion of the client’s overall budget, those services are more inelastic.
High Price Elasticity (Elastic)
On the other hand, with a high price elasticity of demand, you need to stay very close to what I’ll call “equilibrium.” With a high rate, charging too much will cause a significant change in demand. That change will negatively affect your profit margin. With the high elasticity of demand rate, you need to keep your firm at equilibrium. Prices set too high will through you out of balance and you’ll lose potential and existing clients.
As you may have guessed, elastic services typically have many substitutes readily available. Depending upon your firm’s location and area of practice, are there other law firms nearby offering the same legal service? If yes, then this can make the demand for even necessary legal services highly elastic. However, we’ve seen solid evidence that a firm properly positioned with a strong UCA (unique competitive advantage) can indeed charge more than the lowest cost provider in the same demographic area. In many cases, we’ve been able to charge three times as much for the same area of practice as compared to the lowest cost provider simply by showing up differently. That’s a subject for another time, but it’s important for this discussion to know it’s possible.
I think Marshall had some excellent points on the subject, but I do tend to look at price elasticity rather than demand elasticity. Hence, when I talk on the subject, more often than not you’ll hear me say “we’re looking to achieve high price elasticity.” Which means we have more flexibility to charge what the market will bear.
When leads and clients have more choices, more available substitutes, they’re more likely to shop elsewhere for less costly alternatives. This brings me to my last questions. What is your law firm’s unique competitive advantage (UCA)? How are you using your UCA to increase the value of your firm so you can show up differently and command higher fees?
Building a better business, one Increased Fee at a time…