Because they do not have tangible products, law firms must rely on creating relationships with propective clients that provide individual attorneys with the opportunity to showcase the firm’s value. In my latest writing — “Driving Revenue: Value, Value Propositions and Value-Based Pricing” (ALA Legal Management, March 2013) — I offer a basic outline for defining value, communicating value and pricing value. Here is Part One:
Prospective clients have four cost/benefit options when selecting counsel: choose you, choose a competitor, do the work in-house or do nothing. Why choose your firm? A singular – but not simple – reason: value. Because the essence of your client relationships – acquisition and retention – is rooted in the concept of value, it is imperative that you and your firm be proactive and deliberate in defining your firm’s value.
In essence, value is what a firm provides to a client over and above the client’s expenses. By agreeing to hire you, your client believes that your services (their benefits) will be worth more than your billings (their cost). Here is a simple formula for calculating value:
Value = Benefits – Cost (V=B-C)
This concept is the basis of competitive advantage, according to Harvard Business School Professor Michael E. Porter, and the reason value is so critical to your firm’s revenue and profit. “Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it,” wrote Porter (Competitive Advantage, 1985). To maximize your clients’ value, you must focus on four unique – but interrelated – elements of the value formula: cost, differentiation, competitive intelligence and client expectations.
Cost is half of the value equation, so it is critical to determining value. There are two equally essential parts to consider: first, how much it costs you to provide your services, and second, how much you charge clients.
Differentiation is one of the three “benefits” components, but it tops the other two in importance. Differentiation is the power to stand alone. It is developing unique attributes, or value activities, that are valuable to your clients and that cannot be matched by your competitors. In a law firm, differentiators can be tangible (e.g., client list, industry niche, experience, clever advertising) and intangible (e.g., reputation, level of service).
- Competitive Intelligence is the only sure way to know if your differentiation is truly unique and your costs are truly reasonable. Conducting research on your competitors and identifying industry benchmarks are crucial to maximizing your firm’s value.
- Client Expectations are an implicit component of the value formula. Therefore, client feedback needs to be an ongoing priority.
Once you have been able to understand your costs, your competition, your differentiation and your clients’ expectations, you are ready to build a case for your value. Part Two will discuss the way in which you communicate your value: value propositions.