VeraSage

John

Ron,

I listened to your podcast and shook my head more than ever.  You wanted to price work upfront.  The problem is that, up front, one likely never knows what to charge.

Let’s take a simple matter--Vioxx.  Let’s assume that one has the good fortune of getting the call to defend Merck, when it first decides it has a problem. 

We all know what the call will be---this is GC at Merck, we have a frivolous claim that Vioxx kills people.  You should be able to get a couple of associates on this and get the spill cleaned up in a week.

Later, you get a call.  Just got a complaint, filed by Mark Lanier.  By now you know that Mark Lanier will get a verdict north of $200 million, per case.  What do you charge for each case filed by Lanier?

And, then, in the last six months, the truth spills out.  Merck was paying Dr. Scott Reuben for studies with fabricated data on Vioxx.  You get the call for the now criminal investigation.  What do you charge?

In sum, the practice of law is like the practice of medicine (you don’t get an upfront there, either).  That’s in part why its a profession, as opposed to other services, which are not.

To use simple analogy.  If you call up a car dealership and ask for the price of putting in new brakes, they can quote you a price because that is the only service you are buying.

On the other hand, when a client calls a lawyer about a legal problem, the “case” is often no more than a false symptom and the client will hide the truth from the lawyer as long as possible.

Hourly fees are nothing but the cost of doing the deep drilling and probing necessary to discern the truth.  Often, by then, the problem can be resolved, so the clients basically get legal services for the costs of the diagnosis.

Ron Baker

John,

Thank you for listening and writing.

Here’s the problem. It’s nearly impossible to debate with someone who claims that was is being done, can’t--or shouldn’t--be done. The fact is there are firms that would provide a fixed price (with a determined scope, of course) for the very scenario you provide. As that scope expanded, based on new information, Change Orders would be issued.

We are not advocating that you scope and price based on services you have no idea will be needed in the future. But it is very possible to scope the work you know will need to be done, and deal with scope creep with Change Orders.

Customers want certainty in pricing--in fact, they are screaming for it. Law firms ignore them at their peril, as customers will gravitate to firms that offer these pricing arrangements. There’s nothing especially risky about litigation. My earthquake company operates with far more risk and uncertainty, yet they give me a fixed price premium. There’s no reason in the world lawyers can’t do the same.

If you are interested, here are some links with additional readings that I think you’d greatly benefit from:

Burying the Billable Hour, ACCA booklet, downloadable in pdf at:

http://www.verasage.com/downloads/bury.pdf

How to scope complex jobs, by my legal colleague Chris Marston, who runs Exemplar Law, which does not charge by the hour or keep timesheets:

http://www.verasage.com/index.php/community/comments/how_should_professionals_scope_complex_jobs/

Chris Marston’s blog, Inside the Firm of the Future, where he discusses how he does all this, and much more:

http://chrismarston.blogspot.com/

The practice of law is like medicine only in that the two are both professions. The reason you cannot get an upfront price in medicine has nothing to do with being a professional, or a profession. The reason is third-party payers, such as insurance and/or government that pay the overwhelming majority of most medical expenses. Since patients aren’t spending their own money on themselves, they don’t care what the price is. It’s also the major reason why medical inflation is so high--there’s simply a disconnect between prices and customer’s willingness and ability to pay.

Look at medical procedures not covered by insurance, such as plastic surgery, or Lazik surgery. In all cases, the patient receives a price for the total procedure, upfront, before they go under the knife. The same is true in veterinary medicine, because again, the patient is spending their own money on themselves (their pet). Study the history of medicine or law and you will find that upfront pricing was quite common prior to the arrival of the billable hour in the late 1940s and 50s. It is the billable hour that is an historical anomaly.

Any profession is not exempt from the laws of economics, supply and demand, and customer psychology. To believe we are is folly and arrogant. Your firm is subject to the same laws as airlines, restaurants, hotels, and other businesses vying for the customer dollar. One big difference is these other industries are better pricers, attempting to establish a price based on value rather than costs and labor inputs.

There are superior pricing methods to the billable hour. This Web site has tons of resources, and even case studies from Trailblazer firms--across all professional sectors--that have moved away from it and embraced more strategic pricing. I hope you will keep an open mind and explore what these firms are doing.

If not, there’s nothing I can do but wish you well with the billable hour.

John

Ron writes, “Customers want certainty in pricing--in fact, they are screaming for it. . . . [my] earthquake [insurance] company operates with far more risk and uncertainty, yet they give me a fixed price premium.

Ron, there are always people who will make the poor business decision of under-pricing risk, especially when customers “demand” such. 

Look at AIG and all of our former investment banks.  All of them under-priced risk, no doubt for clients who were demanding such.

Simply put, you are merely arguing that lawyers disregard recent business history and take on more risk.  Those in the insurance and investment banking business who did this at least had some data points (Long Term Capital) on which to build elaborate but ultimately useless models.  No such models can even be attempted for a law firm.

You offer nothing in support of taking on more risk expect that clients want such. If I were a client, I too would ask for such, but would be stunned (and wouldn’t hire) a lawyer who did such, for I would have little confidence in his or her judgment.

There are many risk managers who would say that it is impossible to price risk like a hurricane or an earthquake.  So called malpractice tort reform is, de facto, an admission that risk cannot be priced.

There are at least 6 or 7 good opinions by law and economics judges like Posner that point out that it is impossible to price the risk of fraud (i.e, clients being less than candid about past events), which is why fraud will always remains an exception to the economic loss rule.

I am no “fan” of houring billing.  I only understand the reasons for its existence.

And, contrary to what you would have the reader to believe, it is you, not me, that believes that law firms are exempt from the laws of supply and demand.

I have enough faith in the operation of markets to understand that hourly billing is highly prevalent because it works better than all other alternatives, which is all that any market ever tells us at a point in time.

And, you forget that, if there is any competition in the market for legal services, it would be impossible for any firm or to change the way it bills so as to increase profits. 

You say that my “firm is subject to the same laws as airlines, restaurants, hotels, and other businesses vying for the customer dollar.” While true, such a statement too general to be meaningful. The profits realized by airlines, because the value proposition to customers is different, are substantially less, even in good times, than the profits of hotels and restaurants. 

Private law firms, taken as a whole, are several orders of magnitude more profitable than the airline industry in any economic environment, so why would be look to that industry for lessons.

As for medicine, your explanation is not correct.  Present yourself to the Mayo Clinic with a complex set of symptoms and you will not be told what admission will cost.  You are just admitted and the testing and diagnosis process starts.

A specific, easy to diagnosis procedure may, like having the brakes repaired, have a fixed price, but that is not true for complex cases, for hospitals and doctors cannot take such risk.

Ron Baker

John,

You are not only constructing straw men, you are avoiding my main argument completely.

There are firms out there, right now, doing what you say can’t be done. How can that be? These are rational, economic actors whose firms are profitable and thriving. Some have been doing this for a decade. Several are among the most profitable firms in their respective sectors.

You say that there are “always people who will make the poor business decision of under-pricing risk, especially when customers ‘demand’ such.”

So what? You can’t mention the current problems with AIG and investment banking without talking about marketplace interference from Freddie/Fannie. No sane company makes mortgages to people with bad credit. There must be something else going on. The answer is incentives: government socializing the risk-taking, and increasing moral hazard.

But a bigger issue is: most businesses don’t make a profit. Again, so what? Capitalism is a profit AND loss system. We seem to forget that, as we want to socialize the losses and privatize the risks. Only 10% of national income is derived from profits, but it is critical in allocating the other 90%, as Thomas Sowell so eloquently pointed out in his Basic Economics book.

I hope you are not arguing that capitalism could exist without insurance? You say risk can’t be priced, but an entire actuarial profession exists to defy this argument. I, too, admire Judge Posner, but he’s not arguing against insurance, he’s arguing against the notion that the optimal level of fraud is zero. That’s as economically illiterate as arguing that the optimal level of traffic deaths is zero. The costs would be prohibitive––imagine having to do a 50-point inspection before you drove car anywhere. I find nothing in Posner’s writing that says insurance can’t be priced. Indeed it’s priced everyday. The story of risk is the story of capitalism, as told by Peter L. Bernstein in Against the Gods.

But back to law firms. I do offer more in support of law firms taking on more risk, other than that the client wants it. The more is this: if you assume some risk, you can charge a premium price. This is no different than a fixed-rate mortgage commanding a higher price than a variable rate mortgage, since the customer is shielded from risk. The additional risk premium has NOTHING to do with the cost to the bank of processing this mortgage.

But there is more to the practice of law than risk. You are also providing a valuable service, which should be priced based on external value, not internal cost to produce. You write you are no fan of hourly billing, and I’m glad. Even the ABA’s Model Rule 1.5 advocates that you look at many other factors to determine a reasonable fee beyond the time it takes to perform the work.

Hourly billing does, after all, place an artificial ceiling on your net income. Bill Gates doesn’t have this ceiling, because he doesn’t believe he sells time. Neither do you. You sell intellectual capital, and there is no standard price for it––it all depends on the value and results you create. To believe your value is captured by your labor time is to fall prey to Karl Marx’s false labor theory of value, as I describe in detail in my post:

http://www.verasage.com/index.php/community/comments/the_economics_of_value/

We advocate price discrimination, a common practice that comports with supply and demand. Far from believing you are not subject to it, we teach you how to optimize that theory so you can capture more value. You should read my book, Pricing on Purpose. You will find that I am an enormous advocate of the free market, meaning consumer sovereignty. We don’t really care about businesses, since creative destruction is what the free market is all about. No business should exist that doesn’t create more value than the resources it consumes.

Hourly billing exists because it is easy and simplistic, not because it is the most optimal pricing strategy. The entire business world has been moving towards Value Pricing for the last 25 years, with organizations such as the Professional Pricing Society hosting educational events to help companies price better, and even certifying professional pricers as a separate discipline and profession. Every major consulting house now has pricing consultants.

This is the free market at work John. Obviously, these companies are investing in this function because there are profits to be had. The free market improves itself every single day, and to believe the reason hourly billing is still alive is because it is the best strategy is to deny the history of how professions improve—slowly, glacially. Look at my book review of Bad Medicine for how long it takes a profession to change:

http://www.verasage.com/index.php/community/comments/most_fascinating_book_of_2008_bad_medicine/

So it is possible for law firms to change the way they price? We see it every single day. Sometimes they make less money, because the value they provide is low. Most times, though, they make more money because these other pricing strategies are better at capturing that marginal value. Customers are happier.

And I’m not advocating you only look to airlines for pricing. Look at hotels, rental car companies, cruise lines, the retail industry, and a myriad of others, for dynamic pricing, and Yield Management, two pricing innovations that have made a dramatic difference in these industries. The professional firms are laggards in this area.

You’re also avoiding my argument with respect to health care. I’m not arguing that the Mayo Clinic will give you an up-front price. I know they won’t. But again, it’s because the patients aren’t spending their own money on themselves. If they were, you better believe every health organization would have to price up-front, like plastic surgeons, Lasik surgeons, veterinarians, etc. You did not deal with this fact at all.

Here’s my question: why do you get a price upfront from these doctors, but not the Mayo clinic? The only answer is because you are spending your own money on yourself. Milton Friedman called this Category 1 and 2 spending, versus Category 3 and 4 spending, in his masterful book, Free to Choose.

Here’s another question: name for me something you buy as a customer where you don’t know the price upfront? Again, medicine doesn’t count, as it’s not a free market. I bet you can’t come with many, if any at all.

If you really want better profits, I don’t know why you’d want to continue with a pricing method that limits your income right out of the gate, simply because that’s the way it’s always been done, or that’s what the majority do (the majority at one point thought bloodletting was a medical cure; that didn’t make it so).

Of course, if you think you’re only worth your hourly rate, maybe you’re right. But I believe you provide more value than that to your customers. The only way to capture that value is with more optimal pricing strategies.

That means burying the billable hour like thousands of firms around the world have already done.

John

Ron,

You write, “Hourly billing does, after all, place an artificial ceiling on your net income. Bill Gates doesn’t have this ceiling, because he doesn’t believe he sells time. Neither do you. You sell intellectual capital, and there is no standard price for it––it all depends on the value and results you create. To believe your value is captured by your labor time is to fall prey to Karl Marx’s false labor theory of value, as I describe in detail in my post.”

Ron, I don’t subscribe to the labor theory of value.  Unfortunately, our code of professional responsibility does, which I would change if I could.  The same is true in many other areas of the law (construction, for example), where “hours worked” time rates is the measure of damages in quantum meruit.

As for Bill Gates, the analogy is a false one.  Gates reaps the profits he does for two reasons.  First, and foremost, he has a natural monopoly on operating systems which he is able to leverage for higher prices.  Second, and increasingly, he has capital substantially in excess of his customers, so he is able to leverage that advantage also.

By contrast, lawyers have neither. This is a fundamental aspect of business economics that your arguments disregard.  You view hourly billing as a result of free will exercised by sellers of legal services. I do not.  I view hourly billing as the cheapest way, over time, for large firms to buy legal services, as determined by the market.  Such a broad, open, competitive market doesn’t “lie.”

Christopher Marston

Hi John,

I run a corporate law firm and wholly disagree with you.  A simple look at history reveals that hourly billing, just like value pricing, is a product of the free will of the sellers of services in the market.  The industry, out of free will, started to bill by the hour, and because of our free to will to change, customers are hiring us and changing the way business is done. 

Further, there is nothing in our ethics rules that “adhere” to the labor theory of value.  Sure, for the purposes of client recovery in a judgment one considered factor is hours worked by a contractor, but with lawyers, time worked is only one of many factors considered by the court in determining attorneys fees.

the validity of Value theory and the fallacy of Karl Marx’s Labor theory of value has absolutely nothing to do with power and influence.  Sure, they can impact negotiating leverage no matter what theory you operate under, but when you say the market does not “lie” I’m not sure what point you are trying to make.  The “market” as you describe it does not determine the pricing model—the SELLERS do! We doubled when most firms are falling apart.  Now that the market has voted with their feet, I could easily respond with the same and say the “market does not lie” to support the opposite proposition.

John

Christopher,

I am going to just “Rosalita” this debate.  If you know Mark Lanier, you will understand what I am writing.

Just answer this simple question:  If time based billing is not the cheapest method for pricing or buying outside legal services for large businesses, what is the cheapest method of setting the price for legal services?

What evidence do you have in support of your assertion.

My position is very simple. Time based billing results in the lowest fees for the buyers. There is a very simple reason for this, well explained by Peter Drucker in his classic, Managing in a Time of Great Change 48 (1995)

In discussing Cost-Driven Pricing, Drucker wrote, “ The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on the top.

The only sound way to price is to start out with what the market is willing to pay—and thus, it must be assumed, what the competition will charge—and design to that price specification.”

In the market for legal services, what the market is willing to pay, and no more, is hourly billing.  This is what other firms will charge.  Therefore to meet competition, one must charge by the hour, at similar rates.

It is all pretty simple and has nothing to do with value pricing.  If other firms could lower their fees by “value billing,” they would do that, in order to attract business.  Obviously, given the number of laywers and law firms, many have looked.  The lack of tacker show that prices, already, are as low as they can go and/or the firms at present can resist taking on the greater risk

Ed Kless

John,

Chris can simply cite himself as proof of his assertion.

You reference Drucker, but you have hopeless confused cause and effect in your thinking. Your hourly rate is NOT a price! Time (effort) is not money!

You say you do not abide by the labor theory of value, yet you continue to proliferate it. We have demonstrated the world is round, yet you keep asking what to do if you fall of the edge? There is no edge. Rate (high or low) times hours does not equal value. Change your theory!

Customers do not just want the lowest price, they want the best margin between value and price.

Christopher Marston

Hi John,

We are the example.  We are NOT a cheap firm.  In fact, we are a premium firm that doubled in one of the toughest economies most have seen like what you describe as the “cheap” players are falling apart.  That being said, I’m not sure why you have confused what consumers BUY with the pricing model under which sellers sell a product or service.  For instance, Billable Hours is not what a consumer buys, that is simply a pricing model based on a proven-to-be-flawed economic theory.  In fact, I hope you realize that the billable hour model was an accident, rather than an intentional billing practice.  So, I suppose the intellectual musings are fun, but I’m sure Drucker did not intend to have his contribution interpreted to support an already-refuted economic theory!  I suppose I mean if you really just think everyone is cheap and sellers price to woo cheap people, just come out and say it! :-)

(Thanks for the fun back and forth John—It’s all fun)

John

Ed and Christopher,

I have left my post up long enough for a fair reply to have been made to my question. 

I did not expect an answer for the truth is that time based billing is the least expensive (i.e., cheapest) way for large businesses to buy legal services.

This is proven or corroborated by observing the market.  It is the way most large business buy legal services and most large law firms sell legal services.

This is also the “market price.” Without pricing power, neither buyers nor sellers can do anything other than buy or sell at the market price.

As to your posts, it is appalling that you cannot even apply Drucker’s observation.  Your replies are “not even wrong.”

In a competitive market, one cannot charge more than what other competitors are charging for the same service or product. Thus, as Drucker observes, one has to engage in the exercise of first determining what the market will pay. Drucker wrote, “The only sound way to price is to start out with what the market is willing to pay—and thus, it must be assumed, what the competition will charge—and design to that price specification.”

For the kind of legal services we are talking about, purchases by large businesses and insurers, what competitors will charge is time based billing at reasonably signaled hourly rates.

Thus, if you want to compete with the law firms in those markets you have that as a cap on what you can charge.  If you charge above market fees, the work will move elsewhere.  If you can charge fees below this, the work will move toward you.  As large corporate firms do not want to either price themselves out of the market or loose profits, they engage in a lot of direct and indirect price signals.  For example, they all publish what they pay associates, they use the same consultants, have come HR functions,and probably have the same accountants.

It seems to me that lawyers, of all people, would understand the most simple or economic rules.  It matters not what value one creates; it only matters if one has leverage in the market place to be able to capture that value. Such is, after all, why we have patent laws.  If one truly doubts this proposition, study the life of Nikola Tesla.

A lawyer can, in the right circumstances, create a lot of value for a client.  Capturing that value is what is difficult about this business.  Ron is right about only one proposition. Most billing methods used by lawyers do not capture the value created.  This is true about all competitive markets, where it is easy for competitors to copy and duplicate one’s offerings.

Consider, for a moment, the telephone.  Landlines, now, with unlimited long distance are about $20 to $30 a month, per line.  If, however, ATT could charge for the value of the service in the way that Ron talks about value, it would be charging hundreds of dollars per line, especially when a big deal is being negotiated.  Consider, if there were no telephones and someone came to you and said, What would you pay to be able to talk to anyone, anywhere in the world, at any time, for as long as you wanted, about whatever you wanted to talk about?

In sum, there is no silver bullet to pricing legal services. Our prices are not set by “accident” or by sellers or buyers.  They are set by a free market and the entire profession needs to learn such.

Ed Kless

Despite my better judgement, I will try this one more time.

Your hourly rate is NOT a price.

Your customers (I know clients) do not buy hours.

“In a competitive market, one cannot charge more than what other competitors are charging for the same service or product” implies every lawyer is EXACTLY the same. Are you not smarter than others? If so, how sad.

Christopher Marston

John,

Thanks for sparring.  To give you credit, if you commoditize anything then it will be cheap to buy, and since that is what billable hours does to the profession, you are right about leverage. 

HOWEVER: The error in your reasoning is this:

You wrote:
“It matters not what value one creates; it only matters if one has leverage in the market place to be able to capture that value.”

This is where you are way wrong and it is well proven.  Starbucks turned the most commoditized industry and created a premium market around the VALUE it created int he market.  the VALUE gave them the leverage John!!!  Think about it, how on holy earth do you think that someone got bottled water to cost more per barrel than oil!?!????  IT WAS NOT LEVEREAGE....IT WAS VALUE!

That being said, I don’t want to scream at you with capital letters.  Using Drucker’s language incorrectly to support an argument again people like Marx, Hayak, etc, it like quoting Brittany Spears to support an intellectual proposition.  While he is great, even his thoughts are inspired by economic principles that we study and follow at VeraSage.

John

Ed and Christopher,

Ed, as they say in physics, you are not even wrong, you are so far off the mark.

I have said nothing about my hourly rates--I haven’t even said that I charge by the hour. You misstate so that you can make ad hominem attacks. The propositions you put forward are meaningless.  Clients buy services for which they pay a price.  What we are talking about is how that price is determined. 

Simply put, all I have said is that the market is competitive enough that we can conclude from observation that for large businesses the least expensive way over time for them to buy legal services is by using time based methods to compute the price because this is the predominate method now used to compute price.  IOW, the facts speak for themselves.

Christopher, your reasoning, likewise is wholly flawed. Starbucks does not, contrary to your assertion, capture the entire value it created (assuming it came up with the idea of a gourmet coffee/coffee shop) because the moat around its business is imperfect (it has only its trade and service marks, and perhaps trade secrets in its blends of coffee). Thus, other competitors are copying its business model and gradually eating into its profits, which have been declining (with attendant store closings). Starbucks now, may not even be making the profit on high priced coffee that is being made by McDonalds.

Without trade mark and service mark protection, Starbucks would not capture any of the profits that can be earned from its idea.  You or I could just open a “Starbucks,” go to its suppliers and get the same blends of coffee, copy the store appearance, paper products, etc. and sell Starbucks coffee, taking the profits from the idea for ourselves.

Simply put, Starbucks makes the profits its makes not because of the value it creates but because of its legal leverage---it can use the name Starbucks and others cannot.

The best case in point--Coca Cola---which goes to extraordinary lengths to protect its formula by trade secrets.  Coca Cola doesn’t earn profits because of the value it creates.  It earns profits because it can exclude competitors from offering the same product. 

Do not reply with the red herring mistatement that I am saying that customers do not value Coca Cola, for that is not what I am saying.  I am saying that it takes both a value proposition that customers want and leverage, the ability to force the customer to deal with you, to make real profits (what economists like to call “rents").

Profits take both a good idea and a business model that will capture that value.

This is why Microsoft and Oracle are so profitable.  They are in markets where a natural monopoly has arisen, driven by the need for file compatibility.

Beyond that I did not misuse Drucker.  Drucker says that in setting your price you cannot charge more than what others are charging for the same service.  You have to take the market price and design your business so that it delivers the service at a cost lower than that market price, so that you can make a profit.

You claim to compute the fees you charge clients on other than a time based method.  Assuming that is true, if your fees for services are higher than the price at which your clients can buy the same services from others, they will leave you, when they learn they have been overcharged.

The only why that “value” pricing can last over any period of time is that the service is differentiated because it comes with a cap on price---your firm takes the risk that the work will not take more than and effort to complete than estimated when the matter was accepted.

To assert that you can manage a large risk is to argue that you are smarter than the others in the room and we just proved that people, far smarter than you, cannot value and manage risk.  Therefore, my bet is that you really are not taking on large risk. 

I expect that you are taking routine matters and pricing them based on your experience as to how much time it will take to provide the service and trading on the efficiency of not having to spend hours and considerable effort on timesheets and billing.  In the right market, I would expect that this business model would work for one or two firms small firms, so I am not surprised that you are able to find a niche market.

However, this model will not work for bet the farm litigation or deals of the Fortune 100

Ed Kless

I refuse to engage in a battle of wits with an unarmed man. -Winston Churchill

Matthew Tol

This whole discussion seems to have been a dance around the issue.

Value is perceived by the customer - as a professional, we need to take them through a process where we uncover that value and assist our customer in determining what it is they actually need to have us achieve.

By taking them through the process, we will uncover exactly what needs to be done (to a large extent) and then have the proviso that if any further/additional/different/coonflicting or other information becomes available, we will need to discuss this information with them at the time and possibly adjust the scope of our engagement.  Hence the change order which is discussed above.

By taking the customer on the exploration, we then develop our relationship with them, further our understanding of their needs as they pertain to the particular issue/matter and we can then all move forward “on the same page”. 

To argue that your competitor down the street sets his fees at a level therefore he establishes a cap on your fee capacity is simply ludicrous.  Why is there a difference in price between a Ferrari and a Hyundai?  They both do largely the same things (and, ultimately get you to the same point), but they do it differently and they have established their brands to support their value proposition.  If you let your competitors establish your pricing, then, my friend, you have a big problem.

I suppose it all comes down to self belief.  I think it was Henry Ford who said, “If you think you can or think you can’t, you’re right”.

Challenge your thinking - if you keeping throwing up obstacles, you’ll bever be able to see over them to a new way of doing things.

David Winch

Well done Matthew!

You’ve brought the “argument” back to where it should be.  Value is in the eye of the client and one of the skills of any professional - medics included - is helping them understand it.

I’m not a lawyer but I am a hugely enthusiastic advocate of Value Pricing.

As a Business Coach I want to help my clients’ businesses to thrive, and I do so.  I quote a fixed fee per project and I collect at least half of the fee before I start work.  Since I changed to Pricing by Value my clients’ reactions have changed from “We’ll have to think about it” to “That’s a bargain; how soon can you start!” AND my fees have increased between 150% and 400%!

There are so many good reasons not to charge for your time, but the two key reasons for me are:
1/. Clients are not scared of letting skeletons out of cupboards, because they know they won’t have to pay extra - And I get to do a better job for them with fuller information.
2/. I have an incentive to get better at my job!  If I was charging by the hour, I’d bizarrely have an incentive to stay poor at my job and get paid more!

If I am adding £500,000 to a business’s bottom line over a 6 month project, firstly why should it matter to the client if I spend a day or a week or a month of my time on this? And secondly why should I not get paid more by them than if I added £5,000?

As Matthew says, it’s a new way of thinking!  Get your head round it!

John

Matt and David

I would submit the following is true:

Assets – Liabilities = Owner’s Equity

An identity statement is true due to its definition. A demand curve is an example of an identity statement—the summation of how much product customers would purchase at various prices. The supply curve is the same—a summation of how much product businesses would be willing to provide at various prices. It was not until economists combined these two identities into the scissors of the well-known supply and demand graph—inserting some assumptions along the way—that they posited the theory of supply and demand.

I have posited that this theory of supply and demand works for legal services and that, as price rises, demand (surprise) goes down.  I would appreciate each of you explaining, on a supply/demand graph, how raising your price by value pricing will either maintain or increase demand?

Ed Kless

John,

1. “An identity statement is true due to its definition.” Not true. Reconcile, “This statement is false.” Just because you say A is B does not make it so. Please review --> http://www.verasage.com/index.php/community/the_laws_of_thought/

2. Once again, you have hopelessly confused cause and effect. First, supply and demand are also theories, not truths. Second, the supply and demand is not for HOURS but for RESULTS. There is NO demand for hours. Period!

David Winch

John

I can’t speak for Matt, but I feel you have missed the point.

Supply and demand relates to commodities, where the customer has a theoretically large number of potential suppliers of similar if not identical goods, and the seller has a theoretically large number of potential purchasers.  I do not believe this is the case for any Professional Service organisation, for example Lawyers.

As I have said previously, I am not a lawyer but I would be prepared to bet that lawyers are not all equally good. I would be surprised if those who are “shopping around” went to more than two or three firms to check prices, and I would be surprised if any of those firms offered them precisely identical services because, for a start, they don’t all employ the same lawyer.

The point of Value Pricing as I see it is to allow the client to understand their true dilemma and to appreciate what it would mean for them to no longer suffer the pains and anxieties it produces.

Then one can explore their ‘budget’ for getting the problem fixed, relating it the whole time to the value of having it fixed, before finally quoting a fee for the project which will, for the client, pale into insignificance when compared to the value of the result.

In this way, the client’s attention is focusing on the return they will get for their investment, and not looking at the fee merely as a cost.  If there was no return, why would they pay a fee of any size?

If the value is small, the fee will be smaller and, if you are not happy doing the work at that level of fee, you are at liberty to politely turn down the project.

My answer to the question in your last sentence is that I would not attempt to explain/justify it in this way using supply and demand!

The fee goes up because the client now sees the true value of the solution, and you can charge accordingly.  The demand goes up because your reputation increases as the client and other parties tell the whole world what a brilliant job you did, right from the very first meeting!

One truism I have learned since I started setting my own Pricing by Value is that “Too expensive” actually means “I don’t understand the true value”.

John

Matt, David, and Ed Kless

Gentlemen,

Everyone of you need to take several years of economics classes.

My quotation was straight off this web site, authored by Ron, himself. The only way that “value pricing” can work, given the laws of supply and demand, would be for it to changes the assumptions.

David argues that value pricing might change the assumptions---a better educated customer will realize the value of the service and pay more for it, then having less to pay for other products or services.  The flaw in this argument is that it does not change what others will charge the now educated buyer for the service.  A truly informed buyer will thank you for the education and then go with the lower cost service (outsourcing litigation work to India, would be an example).

This happens all the time in the construction business, where owners and generals take the ideas of one sub contractor, then hire another.

Beyond that, supply and demand is not limited to commodities.  The laws of supply and demand apply to all goods and services, from air craft carriers and fighter jets and bombers (big ticket items) to nails and screws in a hardware store, from health to dental care (why else do we have 50 million uninsured workers---the price is too high) or hair cuts. 

If hair cuts and shoe shines and car washes were less expensive, wouldn’t people use these services more often?  The same is true for legal services.

As to Ed Kless, the laws or supply and demand are laws and are fundamental truths of economics, not theories. Start with this website’s discussion and then turn to Wikipedia. Your comments continually show that you are hopelessly uninformed about all of these matters.

For example, you keep writing that the client’s demand is for results.  True but meaningless as regards what we are talking about.  My consistent point has been that time based billing is the cheapest way for clients to buy results.  The evidence of this is the shape and form of the present market, one in which there is substantial competition amount sellers of legal services.

I have repeatedly asked you for any evidence that “value billing” will lower the cost to clients.  You have had many days to provide evidence to the contrary but have not. If method of doing business does not lower costs, it has no competitive advantage and will not be agreed to by informed clients.

The reason I am correct is simple enough.  The cost of major legal work is too uncertain for law firms to quote fixed prices---there is too much risk to the provider (David, above, demand 1/2 his fee, up front, showing this kind of intolerance to risk).

Given that risk, there are two possible approaches. Ron argues for a “change order approach,” a constant re-negotiation of the cfee contract based on new developments.  The problem with this approach is Coase’s theory of the firm.  Constantly renegotiating the fee contract has costs and is expensive and inconvenient.

Hiring a law firm based on time is a suitable alternative to this conflicting positions for two reasons.  First, the time based billing reduces the law firms risk.  Second, the contract can be easily changed by the client just asking for more or less work, moment to moment, now, with email and text messaging. IOW time based billing is not different in kind from Ron’s stream of change orders, just more efficient and less expensive.

Last, David Winch writes that he trys to get, “the client’s attention is focusing on the return they will get for their investment, and not looking at the fee merely as a cost.  If there was no return, why would they pay a fee of any size?”

David, the only short simple answer I can give you is that clients do not tell lawyers the truth.  There are a myriad of forces at play, all of which strongly incentive clients to activitely hide and conceal the scope and extent of their legal problems from their lawyers.  To the lawyer quoting a few this is “risk.”

Consider, for example, the case of William Jefferson Clinton.  Do you believe that Clinton told his lawyers about Monica’s blue dress?  David Kendall produced an extraordinary result for Clinton, keeping him from being impeached or indicted. When hired, Kendall had no idea where the case would go.  This is the way of most big bet your life cases.  One does not know their worth until the end game is within site.  Until that moment, there is no “value,” to price.

Matthew Tol

John,

With respect, I think the argument around economics of the issue is a little off the point (as my Dad - an economist himself - says - you could line all the economists in the world up and you still wouldn’t reach a conclusion).  The issue is not one of economics, it’s one of value. 

Value is an assessment by the client.  How can we, as professionals, fully determine the value to the client of the work we do for them?  It’s for us to discover as we take them through the scoping and engagement process.

To put it in terms of the bell curve with the standard deviations, an astute pricer will actually take their customer through the process to move them to the right of the curve (higher value for both) rather than merely commoditise the process.

I also take issue with your argument about haircuts, carwashes and shoe shines.  You assert that if the prices of these items dropped, people would use them more.  I point out the following - if you keep cutting your hair, you’ll end up bald, there’s no point cleaning an already clean pair of shoes and why wash a clean car?  To argue that price discounting will increase turnover reminds me of the statement made by a very wise old fellow I know “You go broke buying bargains”.

Customers want certainty, they want comfort and they want to know that the issue they are coming to you for is going to be dealt with.  The only time that time is relevant is where the issue is time critical for the customer - the value to them goes up if this is the case.

I’ll bet Bill Cinton was fairly high on the bell curve when he went to Kendall.  Clinton’s perception of value would have had nothing to do with price.  To argue otherwise misses the point completely.  Sure there was a process of discovery through the case - always is.  It is the discussion during this process that helps to further uncover the value and this enables both parties in the transaction to agree on the way forward with a price attached to each successive stage as it develops.

I don’t believe I have ever argued that value billing would lower the costs to customers.  By having the discussion up front and attending to their concerns, they understand the value you offer them and the price is established accordingly. 

For the life of me, I do not understand the “value” in $400 per hour.

Ed Kless

John,

While I think you are very nice guy, for the third time, I submit you have “hopelessly confused cause and effect.”

I shall not reply further, you have the last word.

Ed

Ed Kless

PS - Ron did not say that identify statements are true, he said, they are NOT theories. In fact, one of our categories is called “Debits do not equal credits.”