Values-based pricing, otherwise known as values pricing, recognises that price is not necessarily the only contributor to value in the eyes of the client, and the legal matter fee is often not compensatory to the law firm in comparison to the value the client enjoys.
Imagine if a negotiator is hired at an hourly rate or a fixed price to negotiate a merger and acquisition agreement where the proposed sale price is $14 million. If the negotiated price ends at $9 million, the perceived savings to the buyer is significant. This was the ‘value’ in using a professional negotiator’s service, yet the negotiator’s fee was effectively fixed. If the negotiator was remunerated on a percentage of the difference in saving, then they are likely to be more motivated to stretch their talent to achieve even greater results.
A definition for values-based pricing[1] is “… the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.”
In effect, it is the difference a client is willing to pay for a real or perceived benefit.
Understanding the Importance of Emotional Influence
An individual’s personal values and belief systems have a great bearing on their behaviours and actions. Values and beliefs are influenced by upbringing, religion, culture, attitude and past experiences. It plays a significant role in their interaction with the outside world through their five senses (sight, hearing, smell, taste and touch) annd the meanings they give to things and experiences.
In fact, neuroscience has showed that the filtering process that occurs between what our senses capture to what is allowed into the neurology basically is a distortion, generalisation and deletion of the raw information. This is why philosophers have argued about what is truth, as the comparatively small information taken from what is available, that is then passed through the personal biases and prejudices filtering system, that is also hampered by any individual impairments or disabilities, may cause disillusion to what is reality.
The thalamus is a region of the brain that is responsible for emotional-based processing that drives an individual’s fear, doubts, and other limited beliefs. It is referred to as the limbic system and emotional brain[2].
Emotions drive an individual’s decision making, however the emotional brain plays off against the logical brain. It has been found that 80{f2f34f8ccf078d00edc9c87e107bf555a3545134b99da9962c07023f796f5c0f} of decisions are more emotional-based over the 20{f2f34f8ccf078d00edc9c87e107bf555a3545134b99da9962c07023f796f5c0f} that are driven by practicality and objectivity[3].
The key point is that ‘value’ is largely an emotionally driven perception, and individuals have a unique perception of what matters to them, and this means clients will see value in different ways. The value proposition therefore for one type of legal matter can change dramatically to that of a different area of law, making values-pricing tricky.
Imagine the hiring of a vehicle. A person may be much happier to pay a higher price for an exclusive car than a standard car. In many high-priced race style road cars, there is not the normal luxury items like air-conditioning, as each item adds unwanted weight to the vehicle, impacting its performance potential. These items are sold as options to the base model of the car. This means that the more everyday standard car available for hire may actually offer more room and more features, and even better fuel economy, however the value of the ‘driver experience’ is deemed to be different. The cost of the more exclusive car may be emotionally valued as more worthwhile and it leads to be higher price paid. Yet another person not having the same values may not be interested in cars and may be simply wanting the best price to get from one place to another. This is the argument of providing options to clients: a low base price, with add-on choices.
Historically, the impact of label brands on clothes through to the emblem on a vehicle has being associated with social status, and therefore provides a value that people are often willing to pay for. This is similar to the value people place on the brand of a prestigious university or law firm. This ‘association’ to that brand can have a perceived value, and can therefore be priced higher to meet the client expectation.
Unfortunately, many decisions to buy legal services are cost driven.
Values Pricing Focuses on the Outcome
Understanding the emotional impact on decision making, when comparing the differences in hourly rates between law firms, the focus becomes on the price, whereas values-based pricing keeps the client’s focus on the outcome.
Going back to the car hire scenario, if the person was told the different cost of running the vehicle for every single kilometre they drive (if having to pay insurance, service, fuel etc), the shine of the driving experience may be altered enough for them not to take the exclusive car.
A focus on the outcome and a total packaged price where a high value is perceived to be gained, the more the client will be willing to pay for more personally perceived benefits.
To progress values-based pricing is to first look at the potential benefits or factors that apply to a potential difference in price. These benefits can be real or perceived in the eyes of the client, and therefore are influenced by their own values and belief systems as discussed earlier, and often the values of the organisation.
Value begins by considering how it is delivered as being different, which comes down to two key factors:
- Provision of Choice – the ability to provide differing levels of service or outcomes (a comparable difference in offerings), such as providing an option between a standardised versus customised product, where the customised option is arguably more specific to the client and provides greater risk management to their needs;
- Quality Level – the recognition that there is a definite link between quality and price. As law firms tend to seek quality outcomes by nature of the profession, the ‘quality’ factor tends to be in the robustness and breadth of the research, depth of the analysis, and the strength and applicability of the advice or product.
Identifying the Benefits to the Value Proposition
When considering the value of various benefits in determining a pricing strategy, the following areas may be particularly relevant for consideration:
1. Access to Superior Expertise – the ability to access high calibre experts with specialised knowledge;
2. Business Knowledge – the knowledge of the specific client business or previous experience in dealing with the same type of business. Having previously been engaged by the organisation and having exposure to its people, internal workings, systems and processes can provide a value over using an outsider. There is great value in relationships;
3. Industry Knowledge – the ability to access high calibre experts with specialised knowledge;
4. One Stop Shop Service – the ability to provide an end-to-end solution inhouse or as an integrated service, which enables a single relationship with the client. This is often reflected in a packaged solution offer;
5. Level of Innovation – the use of technology or other form of innovation that sets the legal service apart. Such innovative practices generally benefit from speed, quality level, productivity and / or efficiency;
6. Speed to Respond or Deliver – the ability to provide a priority or fast service, which is generally deemed to be giving a preferential treatment to progress the legal matter;
7. Availability and Responsiveness – the accessibility to get to lawyers, particularly for urgent matters. This is often the value proposition for paying high monthly retainer fees;
8. Geographic Locality – the close proximity to the client that suggests benefits such as an easier means to meet face to face, level of regulation between regions, access to and power from more local relationships, and a greater understanding of local nuisances and environmental pressures;
9. Value-add Bonuses – the provision of items that provide value, from eNewsletters, professional development opportunities (highly desired by inhouse counsel), and through to access to other informative resources. These are bonuses to a relationship that counter the higher price; and
10. Comparative savings – the business or personal value in the return on investment of the legal service to the client. This may be in many forms, from less stress in a litigation matter that ends early, to a better transaction price in the purchase of an asset, to money saved due to a risk being treated early or swiftly, to a higher remedy payout, and to the opportunity cost. It is not a reflection on the legal services charge, but the benefits to the outcomes for the client.
In concluding the price, the law practice also needs to consider the market forces, such as client expectations, competitive options available and comparable rates between service providers.
Where it applies in the Cost Calculation
To determine the client fee, is to start first looking at the cost of the legal service, both the direct and indirect (overhead) costs.
Consider the charge to the client:
Direct Cost $10,100
+ Indirect Cost $1,010
Total Matter Cost $11,110 (this is the cost to the law practice)
+ Profit Margin $2,222 (this is the profit being retained by the law practice representing the value)
Client Fee $13,332 (this is the fee charged to the client)
In this example, the mark-up (profit margin) gets adjusted for the inclusion of value-based benefits, so that the Client Fee changes to reflect the values-based price. The value proposition would need to be made clear to the client.
In Summary
Values-based pricing is based on understanding and being able to convey the individual benefits from the legal matter outcome. It must consider the market competitiveness and the alternate options available to the client.
In applying a model, it will tend to vary between law disciplines, and different legal matter types. It heavily relies upon the law practice’s position and capability, and the alignment of the value proposition to the client’s emotive drivers.
Values-based pricing is about the value in the outcome to the client, so it needs to be client-centric to their needs and what they get from the legal service engagement.
The benefit to values-based pricing, like other alternate fee arrangements, is it provides certainty to the client if provided as a fixed price.
About the Author: adjunct Associate Professor Todd Hutchison LPP
Adjunct Associate Professor Todd Hutchison is the Chairman of the International Institute of Legal Project Management, a former global Board Director of the Project Management Institute, and an awarded and practising international project manager.
He heads the global management consultancy and training company Peopleistic, including the Peopleistic Legal PM division. He also holds adjunct positions with CQ University, Edith Cowan University and Curtin University, resides as part of the MBA academic staff at the Australian Institute of Management, and is undertaking legal project management research in collaboration with universities such as Leeds Trinity University.
Todd has worked as an advisor, consultant, trainer and practice manager for law firms, and in-house counsel. He is an international bestselling business author, a certified professional speaker, has been recognised in the Top 101 Industry Experts specialising in project management, and is listed in the prestigious Who’s Who of Business in Australia.
[1] Dholakia, U (2016) A Quick Guide to Value-Based Pricing, Harvard Business Review, URL https://hbr.org/2016/08/a-quick-guide-to-value-based-pricing.
[2] omninos, A (2017) Our Three Brains – The Emotional Brain, Interaction Design Foundation, URL: https://www.interaction-design.org/literature/article/our-three-brains-the-emotional-brain
[2] Levine, M (2012) Logic and Emotion,yhology Today, UR:L https://www.psychologytoday.com/us/blog/the-divided-mind/201207/logic-and-emotion
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