By Shaun Jardine
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An excerpt from P#1 PARADIGM: THE FUNDAMENTAL CHANGE REQUIRED
The reason you bought this book is to learn more about value-based pricing. You will immediately realise that the cost plus or 1/3, 1/3, 1/3 model, or any combination of chargeable hours multiplied by days worked, fails to take into account any value that has been created for the client or the price that the customer is prepared to pay.
Value is never mentioned in the process outlined above. Why is this? In short, it’s never been something lawyers have been told about or taught to consider as part of the process of being a lawyer. As a result, when we join firms, we do what they have always done. We adopt a flawed model, and we don’t even attempt to find out what that value is. It’s not something that we ever think about… until now.
Curiously, we know from our own lives, when we consume or purchase anything, that we instinctively realise whether we have received value. It is the same with our customers. They make the same call every time we send a bill, and they question the value they received.
Value is something that is not easy to define and is very subjective, so it is no wonder that many law firms shy away from trying to get their heads around it.
Value-based pricing is an art, not a science, and that troubles lawyers, who like things to be certain. It is a mindset and attitude. In the same way, all of our clients are different, so are our lawyers. It is not a formula you can roll out and apply.
I am sorry to break it to you, but to implement VBP we need to adopt the thinking of John Maynard Keynesand take the view that when it comes to our policies regarding VBP, ‘It is better to be roughly right than precisely wrong.’
YOUR CURRENT FIXED PRICES
Now, I know that many of you reading this will maintain that your firms provide perfectly adequate fixed prices already, and that is pretty much the same as value-based pricing, so you don’t need to worry too much… well, I am afraid you are wrong.
Often, the way law firms calculate their fixed rates is by adopting what my aforementioned friend John Chisholm calls ‘billable hours in drag’. Lawyers look at the issue before them, think about how long it’s going to take to deliver the service, and give the client a fixed price to do the job based on the hours multiplied by their hourly rate. Again, in this calculation, there is no factoring in the value generated for the client, the impact on the lawyer’s workload, the degree of urgency, etc.
In most cases, the fixed fee given woefully underestimates the time actually taken because it’s human nature to underestimate the time it takes us to do something. Often, the fixed fee is wrong seconds after it’s been communicated.
If you don’t believe me, find out the work in progress (WIP) write-offs you have against closed matters at your firm, where a fixed fee was given. It will scare you.
It is curious that, sometimes, if pushed, law firms will give a fixed price to clients when asked. Is it really up to our clients to suggest that their lawyers change their business model, or should we just get on with offering them what they want, which is choice?
When you stand back and look at pricing happening around you in the real world, you will realise there are thousands of examples of non-cost plus and non-time-based pricing.
If you think about it logically, when airlines are selling tickets, the closer it gets to a departure date, the cheaper the available tickets should be, as the airlines’ flight costs are already covered. They are not though, are they? They are more expensive. Why? Because airlines embrace dynamic pricing and know they can charge more for a seat the closer it gets to take off as client choice is severely limited.
Luxury brands charge premium prices. They’re not at all related to the cost of production.
Zero-alcohol gin is charged at the same price as normal gin, even though there is no duty paid on it.
You don’t know how many hours it took to make your car. You might have never even considered that question until now.
Some printer companies practically give away printers knowing that they’re going to make their margin on the inkjet cartridges they sell, as they recognise their customers dislike chopping and changing printer setups.
Car wash machines offer different prices for different services delivered. The same is true concerning mobile phone data/call and text plans.
We are frequently exposed to add-on pricing. It’s very common. Think back to the airlines, the add-ons that we pay to either select a seat next to our partner, opt for extra legroom, or check our luggage into the hold.
Think about the fixed-price subscriptions you pay in the operation of your business.
You probably pay per user for the PMS Case Management Systems and the library facilities your lawyers look at daily. They are all subscription/user based. They are not based on usage. If you check the contracts you have signed, you will probably see that there are provisions in the contract that require you to keep the prices you pay to the supplier confidential. Why? Because you have been value-priced, my friend, and others in the sector will be paying more, and others will be paying less.