The Billable Hour Stifles Pricing Innovation

Figuring out how much to charge isn’t just a conundrum for lawyers,  it’s common to most small businesses. For example, how many times have you as a lawyer, asked yourself or a colleague the same questions posed in this New York Times story, Businesses Go Creative on Pricing, Applying Technology.

Many business owners struggle with pricing. Should their first concern be covering costs or figuring out what the market will bear? How do they determine what the market will pay without raising prices high enough that some customers flee? And can they offer discounts without damaging their price brand?

Yet, even though lawyers and small business owners may have the same questions about pricing, small business owners are discovering new solutions through a concept known as dynamic pricing that allows rates to vary according to demand. Whereas once, dynamic pricing options were available only to the largest companies, now, thanks to technology, small business owners can avail themselves of these solutions as well.

Perhaps the most well-known example of dynamic pricing comes from Uber, a private taxi service that employs “surge pricing,” raising rates on high-demand nights in an effort to draw more drivers out on the road.  Although higher prices bring complaints, Uber discovered that when “you set expectations ahead of time, the more you get to a place where there’s no issue with it.”

Other small business dynamic or alternative pricing models described in the article include (1) a company called FeedVisor that makes re-pricing software for Amazon sellers which algorithmically decides the best price within parameters that you set and with reference to what others are selling for and (2) a company called Savored that enables restaurants to offer a certain number of tables on “off nights” for substantial discounts without damaging a restaurant’s brand. Another technique discussed is employed by an Atlanta-based realtor which charges a modest flat fee for listing rather than a set percentage of the sale price, but also provides fewer services in exchange for the lower flat fee.

Although businesses have reported success with alternative and dynamic pricing, most lawyers by contrast are reluctant to depart from the billable hour or flat/fixed fee pricing even where doing so would benefit lawyers and set appropriate pricing signals for clients. For example, most lawyers don’t want to take on a case at the last minute. It creates added stress for the firm, leads to the possibility for error and a worse result for the client. Thus, lawyers who communicate and charge higher fees or an added premium for last-minute retention can incentivize clients to act timely. And if clients still insist on paying the higher fee, at least the lawyer is more fairly compensated for the opportunity costs of putting other matters on hold to complete the rush job.

For lawyers for whom business is slow, dynamic pricing can help too. As with the restaurant owner, a lawyer who offers reduced fees during down time can bring in business without feeling compelled to cut rates overall. And because business is slow, the lawyer would not have to worry about compromising quality when handling the reduced rate matter.

Lawyers who charge hourly don’t need to charge the same rates for all clients either. If there’s a certain class of client that you like to represent who can’t afford your fee, charge less for that category and more for other matters. What counts isn’t your hourly rate so much as your overall profit.

Existing ethics rules are also obstacles to creative pricing. I’m not talking about the ethics requirement for “reasonable rates” – because so long as lawyers have a monopoly on the market, regulation rather than competition is needed to keep rates in check and protect consumers. But other rules are problematic. For example, trust account rules deter lawyers from offering a substantial discount to clients who are willing to pay in full up front. After all, if the money has to go into a trust account and can’t be withdrawn until the case is complete (note: this isn’t true in all jurisdictions), the lawyer doesn’t receive the kind of cash-flow benefit from pre-payment that accrues to a small business. Meanwhile, most courts still require lawyers to document hours for cases where attorney’s fees are recoverable, thereby discouraging alternative arrangements in those cases as well.

Ultimately, though, blind tradition weds lawyers to hourly and fixed fee pricing which is unfortunate, because pricing innovation is another tool to expand access to justice in a way that works for lawyers as well as for clients.

How do you price your services? Would you ever try any of the innovations employed by these small businesses? Please share your thoughts below.