Thursday, April 05, 2007

Sticker Shock or By The Clock: Myths About The Model Dispelled

This blog was inspired the a person who commented on my last post. He wrote:

"Making some sense, but still have the issue of client sticker shock. Other attorneys will talk $ per hour and that it ought to take X hours in getting a client, while as an experienced attorney I know it will take 4X hours, and that other attorney will charge 4x eventually. Client still has a hard time seeing the Value coming out of a full exploration of the legal matter."

I find this to be a wonderful and interesting topic. Here is my response:

1) Everyone knows that you get what you pay for. Sticker shock may be natural, but your concern is rooted in the acceptance that what you are selling is a commodity. . . . that your competitor selling X is selling the same product as you. . . who is at 4x. You should know better than that, right? Think about it this way, someone who is looking for a Mercedes Benz does not go to the dealer and get sticker shock! They know what they want, that they want a high-quality car, and they know it is expensive. When WILL they get sticker shock? When they go to one Mercedes Benz dealer and see price X and then go to another and see price 4X! What is my point? My point is that you are not selling cars or commodities. . . you are not selling what the "other guy" is selling, you are selling a unique service, your decades of unique experience, insights, background, etc. So, don't be afraid to be expensive. The best things in life are expensive.

After all, what would a Mercedes Benz dealer if a bus pulled up full of Wal-Mart shoppers who were stunned at the high car prices and were trying to negotiate? They would tell them if they wanted Wal-Mart quality and prices, they should go to Wal-Mart, and send them back to the store they came from! Sticker shock is natural, but your job is to educate the client on your unique value (the "can't get that anywhere else" effect) and if they are still in shock you need to put them on a bus headed toward the nearest Wal-Mart!!!! That's what we do!

2) Right concern, wrong application of value pricing theory. One of the problems with the billable hour is that one arrives at a price completely backwards from profitable businesses. . . . Lawyers let the cost determine the price. That is backwards! The most profitable businesses go ask their customers what features they want in a product and how much they are willing to pay for it, then they find the most cost effective way to deliver that to the customer in order to increase profits. OK -- Now you want to know what I am saying in English: I am saying this: for once, stop thinking about your time . . . your client don't give a crap about your time. . .
A) they want to buy an outcome.
B) You know you can achieve that outcome for them.
C) You KNOW that they are willing to pay something to achieve the outcome (and that there is also a threshold that they cannot and will not exceed).

Given this information, if you really want that business do you want to:

A) Do you what you do and just multiple your rate by the number of hours you expect to work and tell them a price? OR

B) Discover how much they value the outcome, give them a price you know that is in their acceptable range, and be resourceful, creative, and efficient in the utilization of resources to achieve the outcome for the client?

Sorry folks, but to me, a business person, this is a no brainer. B is the ONLY way to go. So, I anticipate the questions: What if my effective hourly rate is lower? I go back to this: Who gives a hoot what your effective rate is? Did it NOT EVER OCCUR TO YOU that you can be MORE profitable and actually have a lower effective hourly rate at the SAME TIME? (Clearly not. . . remember, I only ask questions I already know the answers to). How can it be? Well, first let me be clear that I think value pricing allows you to actually have a higher effective rate, but I will answer the question of profitability anyhow. Let me answer by example:

Hourly Rate: $400
Effective Rate: $400 (since you bill for all of your time)
Hours Billed: 1000
Billings: $400,000
Cost of Administration (to bill, collect, etc): 80.000 (salaries, equipment)
Lost Billable Time due to keeping timesheets: 20 x $400 = $8000
Uncollectable Bills due to post-billing sticker shock: $30,000 (Remember, you would rather have them get sticker shock before you deliver the service, not after when you have no collection leverage)

RESULTS: $298,000 Left in the Pot

Effective Rate: $335 (since you bill for all of your time)
Hours Worked: 1000
Billings: $335,000
Cost of Administration (to bill, collect, etc): 20.000 (salaries, equipment)
Lost Billable Time due to keeping timesheets: $0
Uncollectable Bills due to post-billing sticker shock: $0 (Remember, you get your money front in this model)

RESULTS: $315,000 Left in the Pot

Do you get it now? ? ? ? Your Goal, Your reason to exist in this world as a business is NOT to increase your effective hourly rate!!!! Your goal is to increase the profitability of your business. If you are even counting your effective rate you are using the wrong metric to measure the success of your business. You need to examine your overall profitability. So, stop counting time. Stop wondering whether something is "worth" your time, and start asking yourself if you can do work profitably!! Clients want outcomes, not time. They will happily pay for VALUE, not hours. Take your stop-watch-hand-cuffs off and you will realize that you can deliver value to clients and be more profitable at the same time!


Anonymous said...

I appreciate your answer. I am further in Baker's book, and in understanding the value pricing theory, to admit that my example was 4X standing for hours or anything. I give more value, but competitors quote lowball prices. You might call them wallmart prices to clients satisfied with walmart services. In other words, let him have them.

I also don't know how your example can drop my administrative costs from $80K to $20K, but that is alright.

You helped me get to the bottom line, and that is, sticker shock comes from the same side of the equation that value comes from - the buyer's side of the equation.

I drove Buicks and Oldmobiles for years, and every time I went in to the dealer, I was surprised at the price of the new cars. Seemed to jump by $8-10K each time I traded. Went to a Lincoln, and knew what I was doing, but made the jump.

Because I needed a car, and I had a relationship with the dealer, I would go in and buy it. But a car is basically a commodity. Dealer's price might be $1,000 higher or lower than competitor's, and I knew what I was doing when I went in the second time.

A car is perceived as more a necessity than many legal services. The option to do nothing is still an option for many potential clients.

Finding the way to get the clients to recognize sticker shock, yet come back in to obtain the services may be the key. Your ideas?

Christopher Marston said...

Dear Anonymous,

Great response. I will respond to this in my next post. The Administrative cost reducion is an entirely another topic, which may be worthy of yet another post as well, but I will keep it focused on the main topic for this one. Thanks for contributing,

Heather said...

Hi Christopher. I'm a librarian at a Canadian law firm and I manage and publish to the firm's internal blog. I directed our lawyers to this post of yours (and I've directed them to previous posts as well). One lawyer came back to me angered about your post. The example, he said, didn't take into any consideration the amount of time it would take to figure out a flat fee for the various and varied work our corporate lawyers do. With that in mind, he was very dismissive of the value-billing approach. I will add that, to me, what you are doing is the most logical and client-friendly approach to legal services I've heard of. It just makes total business sense and I did say to my disgruntled lawyer that regardless of how he feels about the time and effort it might take to determine a fixed fee, such practices are likely to eventually be client driven as are so many of the other changes that are taking place in law firms today. How would you suggest I respond to this lawyer in furthering the argument for value-billing?

By the way, I appreciate your enthusiasm, business sense and vision.

Christopher Marston said...

1Dear Heather,

Thank you kindly for you thoughts and question. I think it would make a wonderful topic for my next blog! The story about the lawyer was very interesting. I look forward to giving him some guidance.

Anonymous said...

Hi Heather,

Regarding your disgruntled lawyer, have him read my short book, Burying the Billable Hour, available for free at our Web site at:

This would be a good start to convincing him, with impeccable logic, that pricing by the hour makes no sense whatsoever.

Afterwards, you can check out our Web site and Blog for more information on professional knowledge firms that have made the transition to Value Pricing, and some even no timesheets.

Ron Baker, Founder
VeraSage Institute