Law firms face two critical intelligence factors — business intelligence (internal) and competitive intelligence (external) — and both play a significant role in pricing. This post focuses on competitive intelligence. Watch for the post on business intelligence next month.

In the second half of the nineteenth century, two towering scholars—one from England, one from the United States—found themselves in separate, but similar, predicaments: each was missing an important piece of information.

Benjamin Jowett, renowned Oxford professor and master translator of Plato, was walking across the commons at Oxford one day, when he had a moment of memory lapse. Jowett stopped and caught the attention of a student passing by. “Please, can you tell me,” Jowett asked, “am I walking toward or away from the cafeteria?” The student informed the professor, “You are walking away.” Upon hearing the answer, Jowett regained clarity: “Ah, that means I have already eaten lunch.”

Oliver Wendell Holmes, Jr., Associate Justice of the U.S. Supreme Court, once boarded a train leaving Washington, D.C. As the conductor moved through the railcar, the distinguished jurist was unable to locate his ticket. The conductor, recognizing his famous traveler was visibly concerned, tried to be reassuring: “Do not worry, Mr. Holmes. You can mail your ticket after you reach your destination.” Holmes replied, “My good man, my concern is not ‘Where is my ticket?’ Rather, my concern is ‘Where am I going?’”

Although both predicaments resulted from the scholars’ forgetfulness—one did not know if he had eaten, the other could not remember his destination—the moral of both stories is that clarity (i.e., intelligence) results from information. In each case, an absence of datum led to a moment of unintelligence. Businesses—including law firms—need to guard against the absence of data and, more importantly, should promote the collection and the analysis of data in order to improve decision making.

Competitive Intelligence

Over the last decade, a growing number of legal professional have been promoting Competitive Intelligence (C.I.), beginning with the legal industry’s first evangelist, Ann Lee Gibson (www.annleegibson.com). She does an excellent job introducing the basic concepts of C.I. and connecting their relevance to law firms. (Her 2008 ABA article, “How to Create and Use Competitive Intelligence: 45 Tips for Law Firms,” is a must-read: LINK.) My goal is not to persuade readers that C.I. is good for the legal industry (something Gibson does extremely well). Rather, my goal is to illuminate the central role C.I. plays in pricing, which hopefully drives home the point that firms need to invest in intelligence functions.

In a market-based economy, everything has competition. Yet, according to management professor Peter Drucker, companies devote few resources to understanding external forces, such as competitors and markets: “Ninety percent of the information used in companies is internally focused and only ten percent is about the outside world. This is exactly backwards.” This is remarkably true for law firms and their pricing strategies.

There are three concepts that play significant roles in clients’ purchasing behavior that require C.I.: next-best alternative, willingness-to-pay, substitutes.

Next-Best Alternative

In a mature market, like legal services, buyers have many choices when purchasing goods and services, as well as when switching NBAs are similar companies that your prospects/clients believe offer a product or service comparable to your offering. Because of their similarities, NBAs influence the market price for products and services. The next-best alternative concept is critically important for several reasons:

First, it establishes your firm’s reference value. Buyers use the experiential knowledge they gain as participants in the marketplace to have an understanding—a frame of reference—about the value of a product or service. The reference value is usually built on two factors: what buyers last paid for the service and what the current market price is.

Second, it sets the bar for your firm’s differentiation value. Once buyers establish a reference value, they seek out the attributes that your product or service delivers over and above those provided by the competition (reference value). The differential value helps a firm determine the price it can charge above its reference value.

Third, it establishes your firm’s perceived value. When buyers have perfect information about your value, they can evaluate if the offer is their best deal vis-à-vis reference value. However, buyers often have imperfect information—they are uninformed—which leads them to an incorrect perception about your value and causes an adjustment to the differentiated price (usually downward).

For example, is your top litigator worth $1,000 per hour? Is your patent prosecution fee of $10,000 appropriate? To answer in a vacuum would be challenging, if not impossible. Clients do not make judgments solely based on a money price (unless they must adhere to an absolute budget). Rather, clients’ judgments are relative to their next-best alternative. If a litigator across town with similar credentials is $1,100 per hour, your litigator looks like a bargain. Do you know what your competitors charge? Do you know what your clients currently pay for legal services? Without a C.I. program, you cannot have a successful pricing strategy.

Willingness-to-Pay

Willingness-to-Pay drives a buyer’s trade-off. Willingness-to-pay comprises the qualitative concept of a buyer’s motivation to purchase (i.e., how much do I want this purchase?) and the quantitative concept of a buyer’s maximum purchase price (i.e., how much am I willing to pay for this purchase?). If either element is missing, the sale won’t happen. According to pricing expert Reed Holden, “Everyone wants value. The reality, however, is that not everyone is willing to pay for it.”

Consider the popular PBS series, Antiques Roadshow. Guests are invited to bring old and/or unique items for a free appraisal by one of the show’s professionals. The professionals often surprise the owners with their appraisals. For example, a 2008 episode featured a 1963 Beatles program, signed three times by each member of the Beatles. The appraisal? “A very conservative estimate at auction would be $15,000.” A second example, aired in 2012, is a 1983 comic strip autographed by Charles Schulz, which was valued at $12,000-15,000. A third example, from 1999, is Walt Disney’s autograph on an early Disneyland ticket, which today is valued at $2,000-3,000. Is Snoopy as popular as the Beatles? Are the pair five times as popular as Walt Disney? Would you want one of these autographs, and, if so, how much would you be willing to spend? Each reader has his/her own answers, and each answer reflects the individual’s willingness-to-pay.

The subjective nature of antiques – some see treasures, others see trivialities – mirrors buyers’ willingness-to-pay. Some will find great value in a product or service, and some will not. The greater the value, the higher a buyer’s WTP (qualitative); the higher the WTP, the higher price a firm can charge (quantitative), thus increasing profit.

Although the nature of the GC-outside counsel relationship is at economic odds — buyers want to buy at the lowest price possible, sellers want to sell at the highest price possible — a strong C.I. program can facilitate a strong relationship.

Principle of Substitutes

Because few goods or services are irreplaceable, firms must be on guard: customers can—and will, when necessary—identify a substitute to satisfy demand. Perhaps the best consumer example is The Pepsi Challenge. By 1975, the rivalry between Coca-Cola and Pepsi-Cola had become what the media labeled a “cola war.” This was good news for Pepsi, which had never been able to challenge market-leader Coca-Cola. To capitalize on the attention, PepsiCo launched an unprecedented public relations campaign: the Pepsi Taste Challenge. Pepsi asked cola consumers, who voted Coca-Cola number one by their volume of purchases, to a blind taste test. Would they declare Coke the ‘better’ product? In perhaps the great campaign to capitalize on the principle of substitution, Pepsi won the taste test and won the cola wars (at least for a generation). (After the disastrous launch of New Coke, Coca-Cola watched Pepsi gain larger leads. By 2010, Coke was the top-selling soft drink, and Diet Coke is second. LINK)

Law firms face a similar challenge. If cola consumers can (and do) switch suppliers so easily (i.e., no product loyalty), could law firm clients switch as easily? In theory, yes; in practice, it does happen, but switching is based on the substitutes available and whether they are perfect or imperfect. (Law firms have little reason to appreciate the distinction between a perfect substitute, which is a complete replacement in the eyes of the client, and imperfect substitute, which is a less-than-perfect-but-acceptable substitute. Most clients are satisfied with imperfect substitutes.) What is the connection to C.I.? Unless you know who your clients perceive your competition to be, you cannot be certain of their loyalty or of your competitiveness.

Competition-Based Pricing

It’s been three years since Bruce MacEwen highlighted the growing trend of law firms submitting “breathtakingly low” RFP bids, what he labeled “suicide pricing” (BLOG POST). Such “attack” practices are common in competitive markets, where companies have strong C.I. (and business intelligence) capabilities and know when and how to challenge the market. The strategy is risky, as it often can lead to a price war (when firms compete to increase market share by decreasing price), which has no winners. Because the tactic is new to the legal industry, and because no law firm has advanced pricing skills, you must be cautious: if your competition does not know if its strategies are profitable, your firm should not follow the stupid competitor into a losing pricing strategy.

Conclusion

There are many aspects of pricing that rely on information to create intelligence. Law firms need to learn that C.I. can and should play a role in their pricing function. With a strong foundation in competitive intelligence, law firms can feel confident in their pricing strategies.

Quick Quotes

“Pricing requires preparation; a detailed knowledge of your offering, your competitors’ offering, and the competitive landscape.” Pricing with Confidence

“Companies market their products or services fervently believing that what they offer is of great value. When customers don’t respond quite as enthusiastically, it’s time to look at the competitors to determine whether they are offering something more or better.” Competitive Intelligence Advantage

“No value proposition should be developed in isolation; it has to include an analysis and appreciation of competitor capabilities.” Value-Based Pricing

“Competitive values are important for you to know. You may have to sell against them to establish your own values.” Competing on Value

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