A lot of law firms talk about using pricing to attract clients who don’t want to pay New York prices for top quality legal work.  But, for most firms, the Low Cost Provider strategy has not been particularly successful.  The answer may be for firms to learn from the pricing experience of businesses in the consumer sector about selling on the basis of price.

This month’s The American Lawyer magazine apparently discovered what most everyone outside the New York centric legal media has known for years — there are good lawyers in second tier cities and they charge substantially lower billing rates than firms in capital market cities.  AmLaw’s case in point was Husch Blackwell Sanders, the 600+ lawyer Missouri based firm created through last year’s merger of St. Louis’ Husch Eppenberg and Kansas City’s Blackwell Sanders.  Husch has for years successfully competed for Missouri based Monsanto’s work with major New York and Chicago firms — in large measure because Husch charges much lower hourly rates.

In fact, the concept of providing high quality legal services at hourly rates well below firms in major markets like New York, Chicago, Boston, Washington and Los Angeles has been the stated strategic direction of a large number of Midwestern and Southeastern law firms.  Some of these firms backed into being a low cost provider by adjusting their strategic direction to match the facts of their practices.  Unable to convince their partners to competitively increase rates, these firms have attempted to use a financial disadvantage as a competitive advantage by declaring their situation to be by design.

The difficulty is that as increasing amounts of work moved from local firms to large firms in major market cities, over the years clients became further enamoured with the security and prestige involved in being represented by branded tier one national law firms.  Although the clients were vocal in expressing their complaints about the prices they were paying for legal work that didn’t require marquee level talent, few seemed willing to move work to lower cost options. The old line that, “No one ever got fired for buying IBM,” was apparently true for corporate general counsel in handing out their legal work.

At the same time, some firms located in Midwestern and Southeastern cities attempted to pursue merger or affiliation conversations with major New York built on the concept of serving as their back office.  The New York firms would divert client work to partners and associates earning competitive compensation in less expensive markets while charging clients New York rates for the work.  The New York firms would pocket most of the rate difference while the out-of-town firms would have a steady flow of sophisticated work.  But the recession nipped any such plans in the bud and New York firms have little work to farm out as they struggle to fill their own lawyers’ plates.

So, despite the number of law firms whose stated strategy involves attracting legal work by providing high quality lawyers and below market prices, not many have successfully pursued the role of low cost provider.  But, their failure to implement this complex strategy does not necessarily mean the strategy is flawed.  In fact, one could argue that the confluence of economic adversity, the maturation of the legal industry and the balance of lawyers and work available in the private practice of law, means that the importance of price competition is destined to become a driving factor in clients’ legal services purchasing decisions.  Point of fact, there just may well never have been a better time for firms to position themselves as the low cost providers.

Successful Price-Based Marketing
As we have seen for many years, it is one thing for a firm to pronounce itself as selling on the basis of value, but it is quite another for clients to recognize what the firms are doing, accept that it makes sense and make a buying decision.  Indeed, it may well be that the failure of legal buyers to flock to the lowest cost seller may not be a lack of desire to reduce legal fees or even a fear of the value of what they are buying at a lower cost.  It could be as fundamental as understanding market pricing.  In order to sell on the basis of a lower price, clients must understand and accept three things.

1. The client must recognize that the price is lower.  Unless a client routinely purchases a service they may not recognize that your price is lower than what they would normally pay a higher priced competitor.  And, if they do recognize a pricing difference, they have to accept that the difference is great enough to cause them to give your firm work.  Just because they are paying $800 per hour for a level of partner for whom you charge $550 doesn’t mean that the client will grasp the difference.  Law firms as an industry have been so successful in hiding the basis for the difference among lawyer’s hourly rates within a single firm that it becomes problematic to ask a client to do it between firms.

The answer is that if law firms are going to be selling on the basis of price they must actively tell clients that they are less expensive.

2. The client must be able to recognize value.  Value is the product of quality and price.  If quality can be maintained at a lower price, value has been created.  The tough part is that, in providing legal services, it is hard for clients to differentiate quality.  We have all been trained as consumers to assume a tie between price and quality.  Therefore, absent additional information we will default to a higher price unless we can be convinced that there is an equal level of quality.  For law firms that are quick to say that their lawyers are the equal of those at top branded firms, this is the time they have to create an effective argument that this is true.  But, we can’t get lawyers in our own firms to agree on the most basic of quality standards so it is unlikely that we will ever get clients, even if they are themselves lawyers, to share a definition.  For most law firms the answer is statistics.  Experience is equated to quality and capability so the number of transactions completed and specific kinds of law suits handled need to be a routine part of business development.

To sell on the basis of price, law firms must convince clients that they have sufficient experience to be the capability equals of their more expensive competitors.

3. The client must be able to understand why your firm is able to offer a lower price.  General counsels, business owners and all manner of purchasers of legal services bring with them the aggregation of their experience and prejudices as consumers.  One of the things that consumers learn early in their buying history is that anything that sounds too good to be true, probably is.  Accordingly, to accept the veracity of a claim to be offering comparable quality at a lower price, legal service buyers need to understand how the lower priced firm does it.  There are basically four answers to this question.

• One is that you do a large volume of work and are more efficient as a result but if you are charging hourly rates that really doesn’t make much sense.
• Another is your partners are willing to accept a lower profitability level but that would seem to be inconsistent with claims of their equal quality and experience.
• You could say that it is the law of supply and demand and you are able to charge less because you need to fill lawyers’ empty plates – but, while true, that probably doesn’t position your firm well in the eyes of potential clients.
• It seems that the only answer is that because of your lower cost location, use of automation, lean staffing and other factors that reduce costs, you are able to use the savings to charge lower rates.  But if you say that, you had better be able to demonstrate it because the client will expect you to.

So, to convince clients that you are a viable provider of legal services, law firms must demonstrate a methodology that allows them to charge lower rates.

The take away from all this is that, even though your law firm may have ended up with lower rates because you failed to increase rates when you had the chance, you need to make those rates an active part of your business model if you expect to pursue a lower cost strategy.