I have recently come across a debate running on LinkedIn about the relationship of cost to price to profit.
In a heavily commoditised market (competing products seen by consumers as completely interchangeable) where there are lots of suppliers and lots of purchasers market economics in the long run will force profit margins to be set at a rate where the average supplier makes a modest profit. In that environment, control of the cost base is everything as you cannot move the price you charge. It is a market price. Charge more and sell nothing, charge less and increase volume.
Is the law market really such a market? Well there are lots of suppliers (around 10,000 firms in the UK). There are also lots of purchasers with millions of instructions each year. However is the legal advice offered by one firm really a perfect substitute in the mind of the client for legal advice offered by another firm? I doubt that very much.
If your firm is good at understanding what is important to the client and delivers that precisely, the conversation on rate will not be based around your cost base. It will be based around value to the customer.
Going back to that LinkedIn discussion some fellow debaters seem to have assumed that BMW charge more for their cars because they are more expensive to produce. The reality is that consumers care little for your cost of production. They care a whole lot about the perceived quality and how a BMW makes them “look”.
By all means ensure your cost base is carefully managed and is flexible but do not think it informs your charge rate.
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