Requests for discounts have become a routine step in the legal services purchasing process. Lawyers face the uncomfortable task of defending their billing rates in both RFPs and client pitches. But too often, lawyers don’t make an effort to resist giving a discount when asked. Mostly because they haven’t been trained in how to do it.
Oddly, in client presentations, it’s not even the client typically asking for the discount. A recent study found that nearly 75% of sales people were the ones that initiated the talk about discounts. I believe it. More than a few lawyers I’ve worked with argue that they will lose the work if they don’t give a discount. Of course, I’ve yet to find a lawyer that has tested that assertion.
For a large portion of engagements, discounts are not necessary to win the work. In fact, discounts come at a price. Both parties assume a degree of risk when margins are thinned. Lawyers don’t want to be the lowest cost provider and buyers don’t want to be the one responsible for selecting the cheapest provider. Working from this common ground, this article presents several techniques that you can use to re-direct discussions away from discounts and help to minimize their financial impact.
The best advice I can give you is first …
Don’t offer a discount. As noted, most sales people offer discounts without being asked. It’s a knee jerk act of desperation born of a scarcity mindset. Discounts are given too frequently, given to clients who are undeserving and almost always create the wrong impression.
Don’t offer a discount. Wait to be asked about the discount and respond with a confident and enthusiastic statement about your fees. Say, ‘I’m proud that our work is consistently commanding rates of $XXX and sometimes higher. Our clients willingly pay for the value and efficiency they get from us.’ After that, most prospects won’t ask further questions about discounts.
But if they do …
Ask if your billing rate is an obstacle to getting the work. This question helps you figure out the buyer’s motivations. If they don’t have a clear reason for the request, it was probably just a rote request that can be addressed with the strategies in this article. If they say it is an obstacle, delve deeper into their financial situation, their expectations of the cost of the work, the options they have considered, etc. Try to figure out what is motiving them to get a reduced rate. That answer will help you determine whether to continue the discussion or not. Some prospects can’t afford your services while others or are simply not worth the effort.
If you decide to continue, try to …
Delay the discount discussion. Companies frequently ask for discounts as a matter of routine and often too early in the negotiations. Many factors contribute to how efficiently the work can be done and the costs of a matter. Because those factors influence the discount you can offer, ask to put off the discussion about discounts until you’ve had a chance to come up with something that will please them but still protect your margins. Many times, the discount request won’t rear its ugly head again.
But if it does …
Just say ‘no’. Present the offer you submitted as a fair and reasonable offer that the firm stands behind. Prepare in advance the ‘rationale’ for why the firm’s rates are set at their current levels. Use comparative studies of billing rates, publicly available records of past competitive bidding processes, projected ROI calculations based upon similar work and other objective evidence of the competitiveness of rates to justify the price. Resist the discount as your first line of defense. It’s much easier to change your mind than it is to claw back a discount once given.
And speaking about defending your billing rates before reducing them,
Use testimonials. The experience of peers is a powerful endorsement of value. Before succumbing to rate cuts, share the testimonials and case results of similar companies you have worked with to demonstrate the value of your services. You can sometimes delay a rate negotiation by asking the prospect to speak to past and current clients prior to continuing the discussion on rates. Peer companies held in high esteem by the prospect have the greatest testimonial influence. But choose your references carefully and prepare them in advance.
If an evidence-based approach doesn’t work, use some of these strategies to try to recalibrate the price-value equation in the buyer’s mind:
- Sell your competitive advantage or points of difference, not your rates. What sets you apart from your competition? Do you have a unique set of skills or experience? Unique technologies? A consistent and strong track record? Use these differentiators to reinforce the value of your services.
- Use the fact of higher rates as a reason to buy. The marketplace is a brutal equalizer. Higher prices result from higher quality and service. Long established firms with robust track records of results continue to thrive with higher rates because other clients find value in those fees. Use the power of market success to justify your fees.
- Sell the decision maker on the value of the relationship. Relationships are made or destroyed in the months after the initial engagement. Cuts in prices are often recovered through reduced service levels, something that neither party wants. So, in order to serve clients after the sale in the manner that clients expect, fees need to be maintained at the levels which ensure consistent service levels. You are a business, too. This is not a foreign concept to companies.
- Make price concessions too costly. Price concessions are negotiations. All terms of the deal are in play. Terms such as late fees, interest on outstanding balances, research fees, unbilled services or meetings, the mix of attorneys and other elements are fair game to negotiate- or even renegotiate. The objective is to make the client keenly aware of the sacrifice they will make when demanding a discount.
- Use the client’s success to your advantage. Most large, successful businesses have set price structures that are rarely altered. Study the pricing philosophy of the prospect and adopt the philosophy in your response. Often, you’ll find that the company does not discount their prices on average or low volume orders. In most cases, the estimates of work you’ll do for the company will not be large and will not warrant a discount.
- Use fairness to existing clients. Your firm negotiates dozens, if not hundreds, of engagements every year. Many of those clients do not receive a discount. Discounts to new clients put firms in compromised positions with their loyal clients. Companies today collect or have access to lots of billing rate and project pricing data. Communicate that the industry is too small and client relationships too important to run this risk.
- Use uncertainty to your advantage. Ask to delay discount discussions until a sufficient track record of work has been recorded. Clients are equal partners in controlling the costs of legal services. Some clients are efficient, make decisions quickly, produce documents on time and give consistent direction. Other clients are a drag on the efficient production of work. If you are just starting out with the client, there’s no way to know for sure how efficient they handle their outside counsel work. Variable costs are what erode profits, not fixed costs. Without the experience of how the client and you work together, price concessions are somewhat of a gamble.
Discount Negotiation Strategies When Discounts Are Inevitable
Sometimes discounts are unavoidable. Attorneys want to start a new relationship on a positive note and feel certain that they can manage the work profitably. Often attorneys fear the client relationship will be harmed if a discount is not given. In those situations, discounts may be unavoidable. But you can always minimize the impact of the discount. Read on for several strategies of what to do when discounts are unavoidable.
Negotiate a sunset on the discount. The discounts negotiated today form the basis for pricing discussions in future years. If left in place, the discount has a compounding effect on future work. When a discount is inevitable, ask to have a sunset or end date put on the discount percentage. For instance, when asked to provide a discount, respond by suggesting you will do it for six months. In other words, don’t assume you have to provide a discount for the entire term of the agreement.
Negotiate the lifetime value of the discount. Discounts are given to win the work. But once it is won, they no longer serve their original purpose (at least not for you). Rather than a percentage taken off all work, negotiate a lifetime monetary value of the discount. That way, if the client gives you more work than they projected, you won’t take the discount on the future work after the discount revenue pool has been exhausted.
Negotiate the rate increase instead of a rate discount. Law firms routinely increase their rates on an annual basis. Clients, aware of this, often ask for both a discount and a rate freeze, significantly increasing the damage of the discount. Counter rate discount requests with a choice of either a rate discount or a rate freeze, but not both.
Negotiate the contract term. Companies routinely request contract terms of two and, more frequently now, three years. The terms and conditions are locked in throughout the extended term. In response to a discount request, ask for the contract term to be reduced to a one-year term in order to allow for an appropriate learning curve and the experience in working together.
Negotiate discount escapes. Discounts are a reward for mutually beneficial working relationships. The moment the balance tips away from one party, the terms of the relationship necessarily should be reviewed. When bills are paid late, are suspended for what ends up being unwarranted review, or are only paid partially, this obstructs the firm’s cash flow, sometimes requiring firms to rely on bank loans and other costly means to meet their obligations. When this happens, the discount should be voided. The agreement should make it clear that certain reasonable billing issues will not subject the company to the discount void, but other circumstances within the company’s control may.
Negotiate for something in return. Negotiations are two-way streets. They should be mutually beneficial. When asked for a discount, ask for a concession that benefits you such as larger portion of the client’s matters, a regular meeting schedule with the client, or to shift a cost that you’ve already agreed to absorb to the client (such as a free set of hours for the onboarding meeting).
Offer value-added incentives in place of price concessions. Access to special services can tip the balance in some decisions. Instead of cutting price, offer more value in the firm of specialized research projects, customized software, an extranet war room or other value-added services. One firm addressed pricing pressure by offering a proprietary study of wage and hour decisions in district courts throughout the country. The analysis was useful in setting case strategy in each district and proved to be a significant value-added service that won the new client’s business. The firm then used the study to win other clients. The firm’s extensive investment in creating and maintaining the report was clear justification of its billing rates.
Bundle up. Discounts that are requested for multiple areas of practice make more sense than do discounts on a single practice. When faced with a discount request, explain that discounts are typically reserved for clients with multiple practice relationships with the firm. Be prepared with practice areas that are most often used by clients in that industry. Ask about the other legal needs of the client and offer to work up a discount based on the use of two or more practice areas in the firm.
In conclusion, discounts are not a cost of doing business. They are a cost of not doing business well. A discount is often a reflection of the firm’s inability to convince clients of the value that the attorney or firm brings to the company. Firms who learn effective ways to justify the fees they charge by demonstrating the value they bring to their clients will enjoy higher profit margins than those who simply succumb to discount requests.
Eric Dewey, MBA has been coaching and training professionals for more than two decades. He has advised hundreds of lawyers and other professional service providers in marketing, business development, practice management and lateral hiring. The former CMO of several large law firms, Eric created www.eLegalTraining.com, an online practice development training, coaching, and referral community for lawyers. eLegal Training’s Learning Management System (LMS) features the largest selection of practice development elearning modules for corporate lawyers in the industry, gamification, custom portals and dozens of business development forms and guides.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.
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