Law firms would like to charge prices that maximise profitability, client engagement, loyalty and perceptions of the firm’s value. Some industry sectors are getting close to this ideal.

In 2016 the Economist published a Schumpeter article highlighting the growing number of companies using dynamic pricing. At the leading edge, modern online businesses are using analytics and digital technology to make changes to the prices of thousands of products many times per day and to make automated, personalised offers to individual customers.

Innovative pricing was identified as one of the fundamental solutions to law firms’ problems by the 2016 Thomson Reuters Peer Monitor. The monitor reported that current pricing is not delivering its objectives. Pricing is not improving client engagement and loyalty. Large corporates are retaining work in-house and disaggregating matters. They and many other clients are using alternatives to traditional law firms – service companies and staffing networks. Current pricing is not maximizing revenue, there is a steady decline in both worked rates and realisation rates.

Though the legal sector is very different from online retailing, the same analytic approaches and logic can be applied to set optimal prices. This requires a good understanding of how pricing dynamics differ by customer and product profiles. In retailing, certain product groups have a significant impact on customers’ perceptions of value and are priced keenly. Similarly, in law, there are service areas which most influence a client’s perception of value and need to be priced accordingly. To follow a methodical pricing approach, law firms need to analyse which services:

•      have the most impact on clients’ perceptions of value

•      contribute most to defining the firm’s reputation, expertise and authority

•      help to build longer term relationships

•      are important in generating follow-on work

•      have strategic importance

Service complexity can be handled by clustering practice areas, matters, services and geographies into groups that share similar characteristics. Then analytics is used to assess how pricing freedom for each service cluster is affected by:

•      customer value perception and demand

•      competition

•      costs

•      market conditions

Analysis of transaction data shows how service areas have been performing. It helps firms understand which are the most important matter and service elements and how price sensitive or price elastic they have proven to be. Firms assess how much a client values price versus “investment” in other customer service, development and partnership activities. Cost analysis reveals cost drivers, capacity and the margin potential. Information and intelligence from marketing, social media and the CRM indicates the strength of demand and how clients and client segments perceive the affordability and value of service areas. Competitor intelligence will reveal the intensity of competition. Strategic analytics will assess any market headwinds that are affecting the service cluster. Analytics brings all these factors to be weighed together.

This makes it possible to set optimal pricing rules and target prices for the services within each cluster. Ultimately, we would like to determine what the target price versus competitors should be by customer, practice area, matter, office and geography and for every opportunity.

Adopting a more methodical and analytical approach will help the firm’s pricing to become more innovative and competitive. Over time more sophisticated analytics will help to make continuous improvements to the pricing capabilities of the firm.