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Can We Use Price Increases to Manage Supply and Demand?

“Should we be nervous about turning away work? I think the concern here is that people will consider we are too small, or that we cannot be relied upon to help when needed, or just that we will drop off people’s lists. Personally, I feel we should be less sensitive about this: we are not unlimited in size, and nor do we want to be. If therefore we are turning away work, it is because we have too much already, which is a good sign, and because we have a sensible and prudent approach to taking on more work, which is a good sign too. Obviously, we need to message it right, but do you agree with this as a matter of principle?”

This was the fascinating request that hit my desk last week and it got us thinking about the role that pricing plays in managing supply and demand.

We think it is always advisable to do a rudimentary stock take before recruiting additional fee earners. Although it is a little simplistic, a checklist might look something like this;

  1. a) is everyone at full capacity?
  2. b) is all of the work we are doing meeting our self-imposed gross margin thresholds?
  3. c) are all fee earners diligent and conscientious about time recording and are they capturing all of their time as best we can ascertain?
  4. d) do we have all our fee earners on realisation rates approaching if not exceeding 100%?
  5. e) are we doing any work that is not core competence for us or which we don’t enjoy doing and should therefore get rid of or decline future instructions?
  6. f) what proportion of our work and what work types/work streams do we undertake off the street as opposed to internal referrals from other partners/practice areas?
  7. g) have we engaged in a reasonably scientific approach to experimenting with price elasticity in order to move towards a supply and demand equilibrium?

The purpose of asking these questions is to provide focus on some of the key levers that may need to be pulled. It makes little sense to go through the hassle, risk and cost of recruiting additional people if any one or more of the foregoing questions can’t be answered strongly in the affirmative.

But it still begs the question, ‘is it ever advisable to increase prices for the principal purpose of suppressing demand?’

The answer must surely be a qualified ‘yes’. Firms or teams that are a bit quiet have no hesitation in ‘taking a view’ and doing work at less than they normally would to keep people busy and contribute to overheads. Should it not work in reverse? We have too much work for our resources and we think we can be more profitable by being more selective, charging more and not taking on work we don’t want to do rather than employing more people to do so.

That would seem to be a perfectly reasonable position to take – not for everyone but that doesn’t make it fundamentally wrong.

Although it has merit, it would be unwise to deploy it without asking and answering the other questions that we have suggested. The conclusion may be that it is still the right thing to do but those questions should be asked nonetheless.

On the issue of whether it is prudent to decline work at all, our view is, ‘absolutely!’ No firm can be all things to all people and firms that focus on what they are superb at, are the ones that will to continue to not only survive but prosper.

There is however, always the worry that if things quieten off, we might have unhelpfully burnt some bridges that would see us through the quiet times. We have never subscribed to that view. Clients have their own businesses to run and their own priorities. We are not convinced that doing work cheaply now will be incentive for clients to bail us out during quiet times

And the issue of price elasticity we referred to earlier? We can describe it with a rhetorical question – which would you rather do, five jobs at £10,000 or put your price up to £12,500, lose 20% of the work through unwillingness to pay, and generate the same revenue from only four jobs? Just asking.