The Debate Over Value Pricing Rages On

Over the past two weeks, there has been some significant traffic on the legal list-serves I belong to over the issue of value pricing. Lawyers want to know how it’s possible, whether they can really ditch their timesheets, whether clients really understand it or whether they  prefer hourly billing, whether you can really use anything other than hourly billing in the context of litigation.

Accountants struggle with some similar issues. Ron Baker, one of the foremost proponents of value pricing, is an accountant. An article from the UK site AccountingWeb entitled Value pricing: a debate without end discusses many of the common objections to value pricing. As the article notes, “[o]ne issue could be that you end up charging clients wildly different sums for the same work.” Professionals are afraid that clients will talk, and the client that was charged the higher fee will be angry. The article also claims that it is also worth pointing out that the billable hour prevents these problems occurring in the first place.” Really?

Let’s take the second statement first. In an hourly context, do two clients with the same legal issue, even in similar circumstances, end up with the same total legal bill? It’s highly unlikely that the total cost of the engagement for each of those two clients is going to be exactly the same. The hourly rate might be the same, but the total legal bill isn’t going to be the same. And sometimes the hourly rate isn’t even the same, is it? You may have different rates for different clients.

So if two clients with ‘the same’ work don’t pay the same for their legal services in an hourly context, why don’t they complain about it? There are three possible reasons:

First, there’s an illusion that they’re paying ‘the same’ amount because they’re paying the same hourly rate (although we know this may not always be true either).

Second, no two clients, even two clients in similar circumstaces, are going to have exactly the ‘same’ work. No two clients or engagements are ever exactly the same. The difference with value pricing is that you price the engagement based upon the value of the engagement and the benefit that your services bring to your clients, instead of on the time it takes you to complete a specific task.

And third, it’s unlikely that clients talk that specifically about their total legal fees. The information is too sensitive, and clients don’t share that kind of ‘inside information’ easily. Do your hourly clients get together now and compare the total cost of their legal services? Can they really make that comparison?

Whether your clients complain about your fees or not, you’ve got to be able to show that your fees are reasonable based upon the client’s stated goals and objectives and the benefits that they receive from your services. You have to be able to tie your work and your fees to their desired outcome and show how your services are necessary to advance their goal or to prevent other problems. When the client understands that, and when they agree to the specific work being performed and the specific fee up front, they’ll be much less likely to complain.

Of course, if you truly think the work is ‘the same’ for two different clients, you’re free to charge them the same fee. If you’ve been practicing long enough and pricing long enough, you’ll probably get a good idea of how clients with certain problems, in a particular business or industry or in similar circumstances value your services, and you can price based on that value and the benefits that your service provides, without charging different fees to different clients for those services.

As Baker himself notes in a comment to the article:

Yes, Value Pricing is difficult. It requires creativity, innovation, creating more value for your customers, thinking, experimentation, and hard work.

This is probably why most firms can’t do it, or don’t want to do it. Much easier to bill in arrears by the hour.

The AccountingWeb article also raised the issue of timesheets, which I’ll discuss in a future post.

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