Low price vs low cost – the strategic trap

As part of the emerging Newlaw dialogue, there is a groundswell of opinion that low prices and in particular, fixed low prices are the new must haves in law firm competition. But that’s only half the story…

Some 30 years ago, Michael Porter’s generic competitive strategies were all the rage. Broadly speaking, you had to be effectively differentiated, or have a competitively low operating cost, or be focused (which means focused on a particular industry or industry segment). Whether those boundaries remain distinct or are now blurred in an advanced digital environment is a topic for another conversation.

But, an enduring trap which has always flowed from the generic strategies approach is the misguided substitution of low price for low cost. Low cost is achieved by reviewing all the firm’s input costs at all stages of the value chain, and working out how to do things for less – thus creating better (and more competitive) value for customers. In the legal profession we see all manner of online delivery options, process workflows, substitution of paralegals for lawyers, and the massive shift to the microfirm structure where fixed clerical support and fixed rentals no longer apply.

These things ENABLE competitively lower (and/ or fixed) prices. It is the dog wagging the tail. But low prices in the absence of these cost reductions just mean low profit. It is the tail wagging the dog – and the losses can rack up pretty quickly.

How can people fall into this trap? It’s actually quite easy. Instinctively good marketers and communicators easily fall in love with the idea of creating a fighting brand that will shake up the profession. Unfortunately, great intuitive marketers also tend to be impatient. They can visualise where they see their new baby and just want to get their idea to market. Their marketing brain totally dominates their strategic brain. And so they launch their new product, service, brand or business before building in the cost improvements.

This is exacerbated by the golden rule of back office development – that is, if you think a particular reengineering will take 2 months, allow 8. Which means – substituting slick systems for labour is initially very expensive – costs which our budding marketer may not want to commit to.

So if you’ve been seduced by the popular literature on the imperative of low or fixed prices, ask yourself a few key questions before you get started, like:

  • Is low pricing a prime reason why my target market want to deal with me anyway?
  • If I’m going to reduce prices, what are the essential costs in the value chain that I can cut to support proposed price cuts? and
  • Do I have the patience and the budget to fund the back office improvements I need to make anyway?

Answer those key questions honestly and you’ll at least be on the right track regarding competitive pricing.

Published: Queensland Law Society – Proctor – September, 2016

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