Should lower costs lead to lower prices

The Solicitors Regulation Authority (SRA) recently concluded the following consultations and the outcome will be eagerly awaited by a range of stakeholders in the legal services market:

  • Compensation Arrangements Review: the introduction of an eligibility criteria
  • Proportionate regulation: changes to minimum compulsory professional indemnity cover

The two consultations were underpinned by a number of key assumptions and the assumptions that were of particular interest to me (likely to have rippling implications if the proposals are implemented as proposed) are as follows:

  1. Individual consumers and larger/corporate organisations do not require the same regulatory protections
  2. Reduction in costs for legal services providers should lead to lower prices for consumers

Different needs, different protections, different interests

The question that arises from the first assumption is the extent, to which the interests of individual consumers and corporate organisations can be aligned on the same transaction if the regulatory protections afforded them are different.

For example on a conveyancing transaction, would it still be appropriate for a conveyancer to act for the lender and purchaser on the same transaction if the impact of mortgage fraud has differential implications for both clients with regard to recovery of losses. It could be argued that changes to the regulatory arrangements as proposed may present a stronger case for a review of separate representation in conveyancing transactions.

Reduction of costs, lowering of prices

Imagine a legal firm (regulated) with a turnover of £800,000 paying approximately £48,000 annually for the minimum required level of professional indemnity insurance (PII). Assuming that the SRA’s recent PII proposals results in a 30% reduction in its PII costs, it appears unlikely that such a firm would consider lowering its prices in order to pass the savings of about £14,400 to its customers. In the unlikely event that such savings in PII are achieved, it is more likely that such a firm would explore either retaining such savings in the business or consider making investments in improvement projects.

Nevertheless, the question of determining when it is appropriate to share any costs savings with customers through lower prices is a legitimate one to consider for legal services providers.

Some of the issues that legal services providers may consider are as follows:

  • The extent to which proposed lower prices arising from costs savings would be meaningful and discernible to customers;
  • The extent to which proposed lower prices arising from costs savings would not adversely affect profit margins;
  • The extent to which proposed lower prices arising from costs savings would not adversely affect the perceived the brand value of the firm and its services;
  • The extent to which a firm’s prices are currently misaligned in view of the strong downward/competitive pressure on prices in the relevant markets and the proposed lower prices arising from the costs savings appears to be an appropriate response to market conditions;
  • The extent to which the relevant drivers of costs are within the control of the firm and where the reduction of costs is unlikely to be recurring, lowering prices on that basis may not be prudent;
  • The extent to which the proposed lower prices arising from costs savings is underpinned by a clear strategic rationale particularly with regard to increasing market share in order to optimise the life time value of its customers;
  • The extent to which the link between costs and prices are transparent and easily understood by customers in order to make it acceptable to raise prices again if cost savings are not sustainable due to fluctuating key external costs drivers;
  • The extent to which the proposed lower prices arising from cost savings is designed to reward loyal customers particularly if the relationship with customers is based primarily on repeat purchases;
  • The extent to which a firm considers that it would be unfair in view of its corporate purpose not to share costs savings with customers through lower prices.

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