A big problem in the pricing of legal services is “sticker shock.”  This occurs when a client, particularly when the client is a non-lawyer, is confronted with the reality of what legal services cost.  Lawyers often equate sticker shock to price sensitivity.  In fact, they are entirely different issues.

The difficulty is that most clients don’t have the vaguest idea what legal services ought to cost.  This is not a problem limited to professional services.  Researchers at the University of Florida  stood in supermarkets posing as workers taking inventory and asked shoppers the price of an item that they had just put into their shopping cart.  Less than half could give an accurate answer and most significantly underestimated the cost.  Fully 20 percent would not even venture a guess as to what an item cost.  This probably comes as no surprise to anyone who watches The Price is Right on television, but these were items that shoppers routinely purchased and the price was clearly labeled on the shelf from which they had just taken the item.

One could argue that the supermarket study involves relatively low cost items and shoppers, therefore, don’t care what these items cost.  But the term “sticker shock” comes from the purchase of automobiles, the largest possible consumer purchase.  Most of us see sticker shock everyday.  We recently remodeled our kitchen and I’m embarrassed to tell you the amount I thought a Sub Zero refrigerator ought to cost.  In fact, anyone who has looked over a hospital bill, paid for a funeral or received a proposal from a public relations firm will tell you that a lack of pricing knowledge is not limited to just supermarket products.

While it may be a stretch to equate professional services to consumer goods, I think there may be more commonality than we care to admit, and we might be able to use what we know about consumer pricing to deal with clients’ sticker shock with legal services.  Legal services are, after all, purchased for businesses by individuals on behalf of the businesses.  As consumers, these buyers bring with them their consumer habits, expectations and experiences.  That is to say that, while as buyers of legal services people may make more rational decisions than as consumers, the experience on which they base their attitudes about pricing are probably very similar.

If this is true (and, based on my personal experiences and my observations of others in managerial roles, I believe it is), we have a vast consumer marketplace from which to gain some clues about pricing.  And, if we are careful about which pricing techniques we borrow from the consumer marketplace, law firms may be able to counteract the problem of sticker shock.

The Power of 9
For example, the traditional assumption as to why retailers set prices to end in the number nine ($39.99 rather than $40.00) is that they are tricking consumers with a price that sounds much lower.  Whether or not this is true, studies are now indicating that consumers have become so accustomed to this phenomenon that they prefer prices ending in the number nine.  For example, in a research study , three versions of a dress catalog were printed and sent to demographically similar groups of consumers.  In one catalog a dress was priced at $34.  In another it was priced at $39 and in the third catalog the price was $44.  An identical number of dresses were sold from both the $34 catalog and the $44 catalogs, but the $39 dollar catalog had dress sales 33% higher than the other two.

It would follow, therefore, that a buyer of legal services would equally accept a $390 rate to a $350 rate and, indeed, might find it more palatable.  By the same token, a fixed fee proposal of $59,000 might be more acceptable than one at $44,000.  To test this, I did a very impromptu and pretty unscientific study of six law firm clients.  Two were general counsels and four were businessmen.  I asked each how much their lawyer charged.  None knew the correct amount and all rounded it up to an even fifty dollars or gave me a range that ended in an even fifty.  With one exception, all rounded the fee upward (e.g., a $375 fee became $400).  In each case I followed up by asking if an amount ten dollars below what they had said (e.g., $390) sounded right.  In each case, the client said yes, even though the actual fee was less – including one client who was paying $425, estimated the rate at $500 and accepted that $490 was accurate.  Could it be that law firm management committees spend hours arguing over $10 rate difference when the clients are rounding off to the nearest hundred dollars?

Benchmark Pricing
Another retail pricing technique to which buyers of legal services may become accustomed as consumers is benchmark pricing.  A retailer will often under price an item for which a consumer has a good concept of cost, sometimes selling it at a loss so the consumer thinks, “If the price is that good on something I know the price of, it will probably be equally good on things I don’t know.”  For example, a discount golf equipment store may have a very low price on a particularly popular golf ball (an item on which the buyer has a good idea of price) so that the buyer infers that the prices of their golf clubs (items the buyer may have less price knowledge about) are equally inexpensive.

The moral here for a law firm may be, for a price sensitive client, to set a low first year associate rate but increase rapidly the midlevel and senior associate rates.  For example, in most law firms there is a linear relationship among associate rates — rates go up by a fairly consistent amount from year to year and, if plotted in a graph would produce a relatively straight line from lowest to highest.  But associates don’t become more valuable linearly.  In fact, the greatest growth occurs during the first three years for a new associate.  So, if a firm were to set its rate using the same low and high rates for associates but used a parabolic curve which increased rates more dramatically in earlier years with less of an increase in later years, the firm would increase its revenue by somewhere between eight to 15 percent with very little negative client acceptance.  For fixed rate proposals that are broken into several parts or stages, under pricing the basic and routine stages may cause the buyer to assume equal value in the more complex stages.

Price Familiarization
Sticker shock is, of course, the result of being surprised by the price — the client has a mental picture of the fee being about $25,000 and the bill arrives for $50,000.  For years auto manufacturers would advertise prices for the most stripped down model.  When the customer saw the price of a reasonably equipped model they were shocked.  Today we see auto makers advertising the price for a car that is “nicely equipped.”  The purpose is to get the customer accustomed to the price.  The first time a buyer sees an ad for a Toyota that costs $35,000, it may be shocking.  But after seeing the ad several times, the buyer becomes accustomed to it and accepts that a Toyota costs $35,000.  The buyer who is completely unwilling or unable to spend that amount of money is lost and will never come to the show room.  But the legitimate buyer comes with a price expectation.

Lawyers often low ball price quotes in hopes of not scaring the client off.  If a typical fee for performing a service ranges from $25,000 to $50,000 based on circumstances, quoting $25,000 is almost a guarantee of sticker shock at some time in the future.  I recently worked with a lawyer who charges $1,000 per hour.  In the very first conversation with a new client, he tells the client that he charges $1,000 an hour but they will talk about fees after an initial consultation about the clients matter, for which there will be no charge.  During the conversation he drops the $1,000 per hour number several times.  Finally he offers the client the opportunity to have him do the work or use one of his firm’s other partners who charge substantially less.  The lawyer finds that, even for relatively unsophisticated work, clients accept his fee.

What about Quality?
We have to be careful not to carry the comparisons between professional services pricing and consumer pricing too far.   We know that things like sale prices and loss leaders don’t work for professional services.  People don’t expect to see high-quality products and services go on sale.  In fact, there is lots of evidence to indicate that, when consumers do not understand pricing, they will opt for the most expensive product or service because it is assumed to be of the best quality.

So, there may be three pricing conclusions that can be taken from the consumer pricing experience:

  • People make legal services purchasing decisions for businesses and decide on the acceptability of pricing based, to some extent, on their experiences as a consumer.
  • Sticker shock has more to do with a lack of client education than actual price sensitivity.  Avoid shock by creating fee awareness with the client.
  • Law firms could generate higher fees without creating sticker shock but following pricing cues used in consumer pricing.

But this all comes down to what smart attorneys have known for years.  Clients don’t like surprises, and attempting to hide or underestimate the cost of a service will invariably lead to sticker shock.  Open conversations with clients about pricing may lose a few marginal clients here and there, but it will help avoid sticker shock with the most valuable clients.

Of course, you might also want to set your rate to end with 9.