Recent developments are pushing the legal sector towards the two Cs – Consolidation and Commoditisation.
Many law firms are understandably worried that pressure is being applied to their top line income as commoditisation drives down the prices being charged in the marketplace.
However, it is not the commoditisation itself that is driving the price down, commoditisation is a result of the market pressures of supply and demand, and it is those factors that impact on the price which suppliers are able to charge.
There is a move in the general economy towards demand from the public for remote service, online service and non-business hours’ service. As suppliers are able to meet this demand, particularly if they do so in bulk, they find that their unit costs fall since the delivery methods are more cost effective. They can, therefore, pass these savings to their customers with the aim of competing for a larger share of the developing market.
As customers become more used to these lower prices, they use those prices as a benchmark for the amount that they expect to pay to all suppliers delivering what they see as the same service, something that the online price comparison sites have encouraged.
Looking towards the legal sector in particular, there are some firms that have changed their delivery methods to match the changing demand from clients. These firms have found that they have been able to reduce their charges and move towards fixed fees. That has, in turn, put pressure on other firms to do the same.
Price is always going to be an important factor to clients, particularly if they see competing firms offering the same service, or product. However, it is not the most important issue to all clients. At the end of the day, all clients will be looking for the lowest price – but the lowest price for the service that they require. It may well be that they are prepared to pay a higher price when they know that they will receive that required service. An example of this would be with repeat clients, where it is often the case that even if they could receive the same level of service elsewhere, they aren’t sure that that is the case. On the other hand, for other clients, if in their minds they only require a standard service that they could obtain from any supplier, then they would expect to pay a lower price.
Most firms are now looking at ways to protect their income whether that is via:
Differentiation
Targeting different sections of the market
Creating demand for new sections of the market
Niche focus on services where higher fees can be justified
However, it could be argued that firms shouldn’t be asking whether price is important to clients, perhaps they should be asking whether they are operating with the appropriate profit margins for the market-driven prices, although I accept that certain scale is required to cover fixed costs.
If demand in the marketplace is changing, then suppliers should evolve to meet that demand or they will ultimately perish, unless they can educate the market of the benefits of their service.
This is why the market is being pushed towards the second C – Consolidation – with the aim of generating synergies and economies of scale in order to deliver services more cost effectively.
Protecting profit margins would also mean re-assessing the way in which services are delivered to clients and focusing on what the clients really want and value. In many cases, that could be delivered at a lower cost to the practice and therefore protect profit margins despite falling income levels.
After all, it has often been said that turnover is vanity, but profit is sanity.
