The concept of ‘value-based pricing’ is hardly new. But it’s becoming increasingly topical in the legal field.
But what exactly is value-based pricing? How can firms benefit from it? And why has the legal industry been so resistant to it?
In this Q&A, leading legal pricing expert Nigel Haddon answers these and many more important questions on value-based pricing. And emphasises the urgent need for lawyers to open their eyes to a new world of pricing possibilities.
Q. What is value-based pricing?
Value-based pricing is a strategy that aims to align the fees you charge with the client’s perceived value of the service you’re offering.
It breaks free from the constraints of historical and cost-based pricing.
Q. Why do so many legal firms resist value-based pricing strategies?
From my perspective, there are two major barriers.
First, lawyers are innately conservative and resistant to change. I'm not saying this trait is unique to lawyers, but they do sit at the extreme end of the risk-aversion spectrum. So, it’s hard for them to look beyond the small and limited realm of the ‘billable hour’ model.
The second major barrier is that adopting value-based pricing is not quick or easy.
To introduce this strategy properly, you need to invest in professional development so that your people have the soft skills required. Most lawyers are well trained on the technical, black and white robust stuff. But to understand pricing, they’ll need to upskill in less concrete areas, like psychology for example.
There’s an awful lot of psychology in pricing strategy. You need to know how to get underneath your client’s skin and understand what makes them tick – so that you put the right pricing options in front of them. Then you need to know how to use psychological leavers to nudge them in a particular direction.
Q. Can you tell us a little more about the role of psychology in pricing?
The aspect of psychology that’s most relevant to pricing is the field of behavioural economics.
Behavioural economics centres on understanding how buyers make decisions with their money. It’s about realising that the traditional Keynesian, rational approach to economics – which says we always act in a self-interested way in decision-making – is a fallacy.
There are a few big hitters in this field, like Daniel Kahneman who wrote the best-selling book Thinking Fast and Slow and won a Nobel Prize for his work.
And Dan Ariely, who famously put it: when it comes to pricing, we’re not just irrational, we’re ‘predictably irrational’.
Q: How has the pandemic affected legal services pricing?
The crowded middle space of the legal sector is experiencing one heck of a squeeze at the moment.
Trying to be all things to all people and charging mid-market prices is no place to be right now. This idea aligns with the well-known phrase “go low, or go high – but for goodness sakes, avoid the middle”.
There’s never been a better time to have a niche and get to know your target customer really well.
In the UK, where I’m based, we’re seeing an awful lot of highly specialised startup legal businesses, which has been accelerated by the pandemic. We're also seeing consolidation at the top end. It’s like an iceberg melting away. Middle-sized firms are breaking into bits that are either going up and consolidating, or down and creating niche firms.
Q: What’s your background and how did you get into legal pricing?
I'm a lawyer by trade. I spent over 30 years in private practice in the UK, and was the CEO of a medium-sized law firm in the Northwest of England. This all changed for me in 2012, when I happened to meet a New Zealander by the name of Richard Bertram.
Richard told me he was a ‘pricing consultant’. I only knew what ‘consultant’ meant out of those two words. But after chatting to him for 20 minutes, I knew he could help me grow the firm. So I engaged his services, which ended up being transformative.
This experience had such an incredible impact on me, that when I decided to leave private practice a year later, I contacted Richard. And I've been working with him ever since.
Teaching pricing to lawyers aligns perfectly with my background. With a long history as a lawyer myself, I’ve been there, done that, got the t-shirt.
I’ve also got the scars. The lawyers I teach are going through the same ups and downs I did. No matter what legal field they're in, I've got similar war stories and I understand their challenges intimately.
Q: Can you tell us a bit about the course you teach at The College of Law?
The course I teach aims to open lawyers’ eyes to something other than the billable hour pricing model.
Through this course, lawyers learn that by aligning their pricing with their clients’ needs and objectives, they can make more money for their firm.
More than that, they also learn that it leads to happier clients since those clients receive the level of certainty and risk they want, and pricing that fits their interests.
Is it time to modernise your pricing?
From a healthier bottom line to happier clients – you can reap countless rewards from recalibrating your pricing model to suit the contemporary legal market.
Introducing Attracting and Retaining Clients, a 12-week course from The College of Law that explores the principls of behaviour economics in the legal work.
During this course, you’ll learn what makes your clients tick and the factors that influence their purchasing decisions. And ultimately, you’ll come away with the confidence and knowledge to rethink your pricing and attract the right client base.