Anchoring – In a non-commoditised business (which still covers a significant proportion of legal services), clients generally do not know what a particular service is worth and it can be difficult for them to compare the value of one service to another. The first price that a client hears essentially provides an anchor against which they compare all subsequent offers. If a client receives an initial quote for £2,000 for a piece of work, it will be a challenge (although not necessarily an insurmountable one) for another firm to win the work with a quote of £10,000. The second firm may have greater experience in that area, a stronger reputation, similar clients willing to give testimonials, more favourable payment terms … the list could go on. The simple fact remains that if the anchor is considerably lower than the price that the second firm offers, it will take them greater effort to win the pitch than if they had pitched first.
Framing – The value that clients place on a product or service is subjective and can be influenced by context. Understanding different alternatives and framing the price in relation to those can be a useful technique. A mug of Twinings tea may be priced at £2.50 in a local coffee shop. While a consumer could purchase a box of 40 tea bags from the local convenience store for the same price, they could not enjoy a single hot cup of tea until arriving back home. In addition to the time element, the menu frames the price of the tea against the price of the other hot drinks on offer, such as coffees range from £1.80 for an espresso through to £3.80 for a latte macchiato.
Perception – One decision-making element that plays in favour of pricing higher is that higher prices are generally perceived as signifying greater value. If one were to see a designer bag advertised for £20, an automatic assumption would be that it was a fake. By comparison, seeing the same bag advertised as a limited edition for £1,000 may compel some people to buy it, even in preference of a very similar (but regular) edition of the same item priced at £500.
Decoys – Offering a client a choice between three prices not only helps the client to pre-commit to paying the price they agree on (based on the psychological factor of them having personal involvement in ruling out two of the three options), but also enables the firm to subtly direct the client towards one of the options. A simple ratio is 3:4:8. Imagine a matter that it is difficult to value price. Based on the billable-hour and 40% margin, the price will be £3,000. The second price on offer could be £4,000. The extra value might be explained by offering an additional meeting to explain the details, a quick review of a related topic for the client, or another ‘value add’ option. (The firm could even offer the client the choice of which one of the three additional benefits they wanted.) The third offer is then the premium priced at £8,000. This additional cost should be justified in some way (perhaps by offering all of the additional services that the client could choose between under the second option). All of the additions need to be achievable should the client choose this option, but the real reason for proposing the £8,000 is that it makes the £4,000 price more appealing than the £3,000 price. If the only two options proposed were the £3,000 and the £4,000, most clients would go for the cheaper option – the more expensive option of the two is not obviously the more valuable). However, when the decoy £8,000 option is also offered, four times out of five, the client will chose the £4,000 over the £3,000.
Time – Time can be a useful point of leverage both in terms of the delivery of the product or service (you need only think of the delivery date options on Amazon), but also in respect of payment terms. Time-based delivery only works if the firm can be certain of delivering the product or service on time or provides the client with a form of guarantee in case the firm fails to deliver on time. Alternative payment terms (eg offering a lower fee if the client pays up front for the work) can be useful for reframing the pricing discussion without focusing on discounts or premiums based on the service delivered. Depending on the firm’s financial terms, alternative payment terms may even represent a discount to the client while being of net benefit to the firm.
“The purpose of psychology is to give us a completely different idea of the things we know best”
The above introduction to the psychology of pricing is no more than a brief introduction. There are a wider range of different pricing models than any one person may first think of, from the most obvious (fixed fee, completely bespoke, and percentage of value generated) through to those less common in the legal sector (freemium, bundled packages, and advance commitment) and many more besides. While cost-based pricing based on the billable hour can be a starting point, placing too great a reliance on the billable hour will leave significant value on the table to the detriment of the firm and the firm’s clients.
Think, just for a moment, exactly like a client.
You asked me to provide you with a quote for a particular legal service – one that you are relatively unfamiliar with. You have just received a copy of the firm’s terms of engagement and a fee quote that tells you that the work will cost £10,000 and is payable within 28 days of the final bill being issued, which is estimated to be in two months’ time.
Do you have any questions for me?