Pricing has the greatest effect on your firms profit. Nothing else comes close-except perhaps having the right client selection. Reducing your fixed or variable expenses, increasing your turnover-all which might be good- will still not effect your profit as much as your pricing does. Yet in all my years of legal practice I cannot remember the word "price" being used at all.
There does seem to be quite a bit of confusion in professional firm land as to the interchangeable use of terminology when it comes to any discussion about pricing (leaving aside the use of 19th century terms like “costs” and 20th century terms like “rates”). Perhaps this might clear up some of the confusion.
My overtalented colleagues at Verasage, Michelle Golden & Jay Shepherd, have come up with this very ingenious but simple flowchart that I think any professional remotely interested in pricing (and shouldn’t that be any professional in private practice?) should download and either use as a screensaver or pin to your sticky board for ready reference.
(Click here to enlarge)
So there you have it. If you do not give your customer a price up front it is billing-period, and most of that billing as we know is still time based billing.
And, even if you do give your customer a price upfront but base it on time spent or to be spent it is time based billing in drag.
If your fixed price is always the same for different customers it is menu pricing.
Only if you agree on price with your client upfront, based on your clients perception of worth, is it value based pricing.
It is not value based pricing if you record your time and then adjust the fee at the end of the month/matter dependent upon how much value you think the client received or how much the client will pay. That is value billing.
It is not value based pricing if you argue with your client at any time after the work is done, about the price and the value you provided, and if you do not back yourself and provide your client a service guarantee.
Other misinformation around pricing sometimes stems from use of the words “Alternative Fee Arrangements” (“AFA’s”). Many firms, consultants, commentators and even customers use these words to describe anything that slightly appears to deviate -even a 6 minute deviation- from the standard time based costing model.
Yet sometimes nothing scares professionals -and sometimes our customers- more than the use of a word like “alternative” which can conjure up all sorts of perceptions of something that might be experimental, untried and untested, or new age mumbo jumbo. It also seems to suggest that non time based pricing will always be "alternative". One day it will be the norm and time based costing will be the alternative.
In the meantime if you really have to use the acronym “AFA” OK, but instead of "Alternative Fee Arrangements" have it stand for “Agreed Fee Arrangements”.
Click here to download a PDF version. Feel free to share it.