The danger of discounting

Whenever I tell a client that discounts are the biggest expense at their firm, they invariably defend the reasons why they give discounts.  “Discounts are good, because they bring us more business,” they say. Or “Every firm offers a discount, and we have to be competitive.” And “The banks force us to give their clients a discount.”  It’s hard to argue with this logic, because there is some truth in all of those statements. Unfortunately for law firms, discounts are a necessary evil. Having said that, there is necessary discounting, and then there is unnecessary discounting. It is the latter that we are concerned about.

Most lawyers have come up with a standard answer for clients as to why they cannot offer a discount.  Something like “Our hourly rate is much lower than other firms in the area, so in effect our price already factors in a discount”. In my experience lawyers give in too easily when clients ask for a discount.

You have probably heard the term ‘triple discounting’.  That’s where the client asks for a discount, and you agree to, say, 20%.  You then finalise the matter, add up the hours, and before presenting the bill to the client you reduce it by a further 10% because you think the client won’t be happy with the fee.  Then you submit the bill to the client who suffers ‘bill shock’. “This is too high.  You need to reduce it.”

What makes discounting worse is that most firms don’t record it, so they have no idea just how much they are giving away.  I always tell lawyers that giving a discount is a bit like taking cash out of your wallet.  That’s because a discount is a 100% hit on bottom-line profit.

So how do you reduce this type of discounting?  One way is to ask for a deposit before taking on a new client/matter.  Another way is to invoice the client along the way - while the ‘gratitude curve’ is still high. In this way, the final invoice will be lower, and the client will be less likely to ask for a discount.

If you must discount, you need to ensure that you bill for all time spent, as well as for all disbursements on a matter.  The only way to do that is to record time on your practice management system as it happens, rather than waiting to month/matter end. You might also consider reducing the percentage discount you offer, for example from 20% to 10%.  Or even from 10% to 7.5%.  You’ll be surprised at how it adds up in a year!

You probably know that retailers increase their prices substantially before having a ‘50% off’ sale, right? One lawyer I spoke to told me that she increased her hourly rate to allow for a discount. While that might work in some cases, clients are increasingly asking for fixed pricing for legal work.  For these matters, although there is no discount, the firm will need to be more efficient in order to maximise profit margin.  But that’s a topic for a different article!

Contributed by:
AJS Legal Practice Management Systems

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