Warren Buffett, the quintessential capitalist, was recently quoted:
“[t]he single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
These statements exposes Buffett’s core strategy in picking winning companies. His point is that most any other deficiency in a business can be overcome by the simple ability to raise prices without losing business. Law firms, to their great misfortune, currently lack the ability to raise prices and in many circumstances the market is actually lowering them.
I’ve previously contemplated the Perfect Economic Storm law firms are in, citing 1) the transition to a competitive market, 2) the Great Recession, and 3) the accelerating impact of technology. I think Mr. Buffett is spot-on with his statement and as such will now add this fourth factor to the Perfect Storm. Given Mr. Buffett’s deep understanding of markets, the pricing factor may well be the most influential.
Not wanting to leave our readers on a completely negative note, Mr. Buffett did add the following statement to his assessment, which may give law firms some level of optimism:
"The extraordinary business does not require good management.”