Is low-balling fees to win new clients rational? This is a deeply
empirical question which can never be resolved in the abstract, as the
answer is dependent upon "microeconomics," which in the strict sense
means highly industry- , firm-, and market-specific factors.
One industry where this tactic is rampant is that of discount airlines,
where a Southwest or a JetBlue will enter a "city pair" market with fares
deeply discounted compared to the incumbents, and there the track record
of success (by and large) of lowcost airlines suggests the approach is
indeed rational.
What characteristics of that industry make the tactic sensible? Most
importantly is the cost structure: High fixed and very low marginal
costs, combined with a "perishable" product. Theoretically,
every empty seat as a plane pulls away from the gate represents a lost
revenue opportunity even if the price to fill the seat had to be set
to $0.01 (this isn’t strictly true since people weigh more than zero
and fuel consumption is increased, but the point is still strong). How
does that industry resemble that for legal services, if at all?
Interestingly, there are some similarities, starting
with high fixed and low marginal costs, and a "perishable" service: An
hour not billed today will in all likelihood not be recovered tomorrow. And,
according to this Financial Times survey snapshot, London firms,
at least, are embracing this reasoning.
But then again, far be it from me to hypothesize that law firms face
the laws of economics like other industries.
