Data analytics can be a great tool for the forward-thinking law firm looking to increase profits. There are two problems standing in the way, though. The biggest single problem that businesses face in effectively using data is that they don’t have they data they need. The second biggest problem, in my experience as a consultant, is that firms do not understand what data analytics can do or how to use data.
In fact, data analytics has the power to answer many important questions for businesses, including one that is at the heart of the law business – how much should I charge a client?
Pricing analytics is a huge untapped opportunity that firms across the economy are only just starting to take advantage of. (Try this book to learn more about pricing segmentation.) Pricing differentiation is taking hold in travel, for instance – look at a price for a plane ticket on your smartphone versus a computer and you will probably get two different prices. Look for a plane ticket price on a weekday versus a weekend, and you will also get two different prices. These prices are driven by data analytics. Law firms can take advantage of the same concept.
The basic idea here is simple – if you charge all clients $20 an hour, you will have clients calling all day, but you won’t make any money. If you charge $5,000 an hour, you would be enormously profitable if you could keep your existing clients, but they will all leave.
The key then is charging clients their maximum willingness to pay. Some clients are willing to pay a lot because the attorney adds tremendous value to the client’s business, and other clients are much more willing to shop around.
Pricing analytics can also be extremely helpful in winning new deals and clients. (Just be sure you understand what you are doing with data analytics before jumping in with both feet though!) Law firms dealing with big corporate clients know that they are often not the only firm being considered for the work. And of course, price is not the only factor by which clients make a decision. But it is a factor. Data analytics can help attorneys put together a client proposal that maximizes the chance of getting a new client, and making that client a profitable one.
Calculating ROI for data analytics can be tricky, but several studies on pricing differentiation in the broader business world have found that returns on investment for data analytics average 56% annually.