The Psychology of Pricing

ABSTRACT

We often view pricing through too narrow a lens… a purely rational approach founded more in accounting than in client behaviour. A better understanding of client emotions and preferences can increase client satisfaction and profits. 

I love pricing. It’s so multi-faceted. And there’s always that fabulous moment of truth in quoting / estimating work when based on your price you can potentially miss the boat, sink the boat, or get it just right. That sounds extremely reasonable can be just as unnerving as that’s way more than I expected. The problem is that what is extremely reasonable for one person is completely unsatisfactory for another. So a good starting point is understanding how clients experience price.

How clients experience price

This is always moderated by market power and market knowledge. Powerful organisations like banks, insurance companies and large listed businesses tend to set prices themselves (within reason). Their dual goals are to push down total operating costs through set rates for set processes, and to reduce the risks of cost escalation through a rigorous set of rules on allowable billing practices. They usually define price in fine detail – base rates, total price per class of matter, allowed extras, billing cycle, payment terms, and so on. So interestingly, it is the law firms working in these areas that do most of the experiencing of price. And often, because they have so little power, their enduring parallel questions are can we afford to keep doing this business versus can we afford not to do this business?

For less sophisticated clients, price is experienced as both a reality and a perception. Even without any actual idea of dollars, clients extract signals from other elements of our marketing mixes and form views about our pricing. Are we in Eagle Street, a suburban shopping strip, or purely online? Are our offices on the 40th floor and are they all marble and fresh flowers? Is the feeling very corporate or very personal? What trust us signals are on the website or on TV advertising? Was the lawyer we spoke to on the phone personable and helpful so that we want to believe he will be fair with price? What pricing experiences have our friends told us about and how do they influence our expectations?

Having a pricing strategy

To get on top of all this, firms need to develop a deep understanding of the things that matter to their target markets. Some legal start-ups I deal with initially say they are going to discount their price (rate) by around $150 per hour vs their current big firm employer. I tell them they are nuts. No client will reject a lower rate, but the better approach is: What do they typically like? What do they hate? What will get them over the line? What will drive them away? Remember, if you are pitching to a business client, chances are they already have lawyer/s and they already have firm views about specific aspects of pricing and billing.

So considering this, you could build a pricing strategy which may involve:

  • A relatively high base rate, but with
  • No charges for petties
  • No charges for nominal attendances, and
  • Structured payment terms.

You positively sell them a price they can live with while removing the irritations you know they hate. This kind of approach can be helpful where your goal is long term repeat business at a reasonable profit. You can say this is how we are different from other firms and an experienced buyer will see that it is true. Remember though, if giving anything away make sure the client can see that’s what you are doing (e.g., in no-charge attendances) or they won’t place any value on it. So the driver in this approach to pricing is the relationship rather than just the current transaction.

But this is just one example. There are hundreds of them. It may not suit your business.

The psychology of too expensive

Compared with what?

A rookie error dealing with reasonably unsophisticated clients is quoting fees or rates in abstract. For inexperienced clients, $350 per hour will seem like a lot. For others it will be a bargain. People will judge legal pricing harshly if they haven’t anything to compare it with. Sure they can search online sources (and you need to be on top of these). But in (say) commercial drafting / transactional work, you can reduce the perception of high price by taking the high ground and introducing a comparison yourself, e.g. saying The pricing is the good news. Because we have low overheads and the way we are structured, we can do this work every bit as well as you would find in a Street X law firm where partners charge $600 per hour, but we can do it for a partner rate of $465 per hour and an average rate of probably around $400. This is a simple way of providing positive context for your rate / price, rather than letting the client form a negative view that isn’t anchored to anything.

Can’t afford or can’t afford not to?

A price by itself means little without proper context of total costs and benefits. Nobody likes paying legal fees. (Trust me it’s true.) So your job is to ask questions so as to provide future profit / loss context for the spending decision on legal advice. In family law matters, you can appeal to the emotional side of the brain, and balance that with the rational side (financial difficulty, relocation, practicalities of residency) to assist the client with a decision that gives your potential legal fees proper value. In commercial matters, when providing front end assistance on structuring, commercial agreements, etc – you can provide practical examples of what can go wrong and in the context of those potential losses, how the drafting of the recommended agreements isn’t very expensive at all. If you have the capability to provide high quality tax advice as well, then usually it is much easier to present the total fees in a better light. Everyone loves beating the ATO.

Can’t afford or can’t afford today?

Lawyers and their clients regularly confound these two differing positions. A client may well have crossed the can’t afford not to bridge, but will still be very anxious about proceeding because of perceived capacity to pay. Good law firms – particularly those working in personal law and small business law – understand that method of payment is just as important a part of pricing as rate and estimate per se. Payment can be made easier through an understanding of the client’s weekly and monthly cash needs, their creditworthiness, and where applicable, location of other family members with an interest in the outcome who may be prepared to help. Not unlike car dealerships, some firms now have a payment/ finance process for all clients which establishes payment commitments prior to any substantive legal work being done. The challenge in this area is that clients will too quickly interpret a total job estimate as being payable immediately, and therefore unaffordable. In litigation particularly, this is rarely the case. Of course, if you are an online provider, payment can be built in to the matter setup process.

Can’t afford or can’t afford all at once?

This is a particular case of the principle of providing choice (see below). It particularly applies in commercial matters. In the setting up of a new enterprise (sometimes in conjunction with the purchase of an existing business), the client typically faces several choices on the amount of legal work – depending on their perception of risk and their appetite for that versus their appetite for legal fees. In these circumstances, the best approach is to divide the services up into must do / strongly recommended / and possibly optional classes so that the client doesn’t feel unduly boxed in by a very large total price – which may lead to a total rejection of the work. All clients crave choice. By doing this, you provide an element of choice from within your fees proposal, as a partial foil to the client’s seeking external alternatives. It can also be helpful to particularise in the proposal where there are substantial government fees and charges, so as to lessen the perceived weight of legal fees in the total cost.

Choice / What I want to believe

I have written at length on the subject of fixed fee quotes versus variable estimates. There is no question about a progressive shift to fixed pricing and fixed stages – pretty much built around the capacity of clients to freely research their options on the web. Not only that, but there is now a generation of buyers (of all services) who not only want both choice and certainty, but also would prefer not to have to deal with (as in, talk / meet) an actual person. So as all lawyers would have already discovered, some of the challenge is in actually getting the opportunity to personally engage… full stop

However, where some form of engagement is still an option, it can be a folly to presume that clients will always go for a fixed fee versus an estimated range. If you quote a fixed fee for an initial stage in a family matter of $5,000, but your client gets an alternative estimate of $3,000 – $5,000 from a lawyer they like and regard as reputable, most of the time they will want to believe the low figure and will do business with the second provider. This is the psychology of wanting to believe in the most favourable outcome. I call it the BBQ effect. At the Sunday BBQ, your brother says – how much is the divorce costing you? You answer – about $3 grand for the first part – not sure after that….because that’s what you want to believe. I encourage my clients to give their clients choice between fixed prices and estimates. Again, this provides internal choice and makes a buying decision easier.

Reassurance

Where big dollars are potentially involved, fear and distrust are big factors. In PI and family provision matters (respectively), the fear is dealt with by no win no fee and the costs come out of the estate. Even with that reassurance though, clients still may be reluctant to proceed because of fees stories they have heard from friends, or through simple distrust. In these circumstances (as I have written previously on these pages) the building of solicitor and own client costs assessing into the agreement as the method of pricing is a proven strategy to reduce disputes and increase trust. You can’t promise what the fees will be, but you can promise that an independent professional will certify that the fees are appropriate based on the costs agreement and the law. This is an example of the long standing principle that people are more inclined to believe what others say about you rather than what you say yourself. And it really works.

Mode of communication and positiveness generally

As a professional service provider, your pricing is only one of seven elements of the marketing mix which determines whether clients will be attracted to your firm. As we have said before, there is now a generation that prefers to principally deal with systems rather than people. There are some terrific online and quasi-online legal businesses that have carved out a presence. These variously wear the Newlaw hat. As technology advances exponentially, these will create further fragmentation of the market and an awesome array of choices for legal clients.

There remains though, and will continue to remain to some extent, a case for high quality face to face communication for matters where the outcome doesn’t follow a codifiable formula,  where there are nuance, variability, and layers of risk, and where the client actually needs help in knowing the right questions to ask. These tend to be the higher risk, higher complexity matters.  (Acknowledging the existence of online / help line assistance) online and email pricing tend to be one way communications. No matter how elegant and comfortable the site, the service provider’s armoury is limited to only some of the experiential levers that can be engaged, including positive personality, hospitality and courtesy, closely interactive clarifications, and reassuring visual experiences (although online providers will argue that all of these are provided to a degree – but just in a different environment). On an almost identical matter, I have seen a fees proposal of $100,000 totally rejected when communicating online, only to be fully accepted in the intimacy and intensity of a face to face meeting run by a knowledgeable and positive Principal. But watch this space. It’s all developing very quickly.

The total experience

I have tried to argue that pricing is about much more than abstract hourly rates and fixed prices. For many people, it isn’t about the price per se but about the payment conditions. For others, it is about the simple reassurance that they are being treated fairly. And for others still, it is about a state of mind that may want to see either the best or the worst in any situation. In summary, price as a concept has a huge range of psychological constructs. If you can analyse your target market and understand the things that persistently draw them to your business as well as the things that you typically have arguments about, then you can generate a how we do business pricing strategy that will win you more business, retain better relationships, and almost certainly make more profit as well.

See what you can do to improve your pricing strategy in 2017.

Published: Queensland Law Society – Proctor – March, 2017

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