Wednesday, April 11, 2007

Sticker Shock: Dealing with YOUR Psychological Barriers and The Clients'

This blog continues a great discussion with an anonymous commentator regarding Sticker Shock and fixed pricing. (See comment to previous blog). In this post, I will explian some of the psychology behind "Sticker Shock" and the psychological barriers that you will have to overcome as a professional in order to deal with it.

I first want to address "anonymous" who asked about how to deal with the fact that competitors who bill by the hour will quote "lowball" prices to get the business (and then screw people later). The answer here is clear.

(1) General counsel and experienced consumers of legal services know that lawyers who bill by the hour and try to "quote" prices have lost their "estimating" credibility, because experienced consumers know that the project goes overbudget 80 percent of the time (unless they spend 20hrs a week managing outside counsel, and most people have better things to do with their time.

(2) Newer, less experienced consumers of legal services are the best, because they will either hire you right away because they recognize the "added" value you deliver and understand and value that higher than your competitor, OR they will hire you right after they went price shopping for their brain surgeon and realized that they got screwed. I love our customers who never had a lawyer before because they find what we do so intuitive. . . and after experiencing us they would never go to a firm that billed by the hour, but I also LOVE the customers who went to another lawyer who "estimated" some cheap price and then screwed them with all kinds of extra fees. . . because they will never trust a law firm that bills by the hour again. . . and I don't blame them. That business model is screwing clients by the thousands every single day.

Here, I want to draw a distinction between competing against a fixed price quote from a competitor and a fixed price estimate from a firm that bills by the hour. The result is both different and important from the viewpoint and psychology of the client. Assume the client chooses the lowest-cost provider in the market here:

1) Lowest Price (fixed price quote): Client who chooses this will do so because they are Wal-Mart shoppers. They know you get what you pay for and simply don't value or comprehend difference in the value of services between firms. So, if you lose this client it is either because you did a crappy job communicating the value you offer, you missed the value proposition, or because they simply want to go to Wal-Mart for their services. Exemplar NEVER competes on price. Price competition is a fools game. Our clients know they get what they pay for. Lowest-cost providers in a fixed-price model suffer from a problem called "Winners Curse." The bidding way drives prices farther and farther down. . . all the while making it impossible for the "winning bidder" to do the work profitably. Put differently, what did the winner really win? Higher Gross Revenue and LOWER Net Profits? Who the hell wants that? They can have it! :-) Ron Baker put it well in his book when he wrote: "It is possible to make pizza so cheap that noone wants to eat it!" -- AGREED! So, you get what you pay for. Exemplar is a Ritz Carlton. We send the Wal-Mart shoppers to the sweat shops where lawyers do mundane work 90 hrs a week for low profitabiliy!

2) Lowest Price-Estimate from a Billable Hour firm: Clients who choose this firm are NOT doing so on the belief that they are getting a cheaper product. Because the client is not the subject matter expert, the client would tend to think that the lowest bidder has some magical way to be more "efficient" and that is why the estimate is lower. You see, in this case there is an inherent trust in the integrity of the service provider. Once it is broken it can never be recovered. Let me give you an example of "winners curse" in this situation, but let's add this fact: It costs 5 times more to acquire a new client than it does to retain a current client. In light of this fact, which would you rather be?

A) The winner in a bidding war as a fixed-price provider against a billable hour firm that "underestimated" the bill. Result: Low to No Profit, a "cheap" brand perception by your client of your firm causing the client to forever be price sensitive? (It is easy to lower prices later, but very difficult to raise them). Congratulations! You just won a client that cost you plenty to obtain, you chopped your prices to hell to get them, he does not value you highly and will pay you so little for your expertise that you will barely be Profitable.


B) The losing bidder to a billable hour firm that "underestimated". (I tell these clients "I want you to know that I am here for you when things don't work out") Then, they subsequently get screwed by my competition. I promptly write them a "thank you" letter but never send it. The client comes back to Exemplar pissed off about their predecessor counsel (now, I am on the receiving end of every gripe that clients have about their lawyers . . . valuable competitive intelligence for free). They no longer trust the billable hour model. They now value the fixed-price because of the integrity of the model, even if the price is higher, and become loyal clients!!!! Cost of acquisition? Significantly less because we are not dancing around in a bidding war with other firms . . . we are confident in our value proposition. furthermore, we are able to serve them a hell of a lot better because we have not had our margins decimated by a price war. Better service --> Happier Clients --> Happy Attorneys --> Better Outcome for Clients --> Higher Profitability

I don't know about you, but I would take Option B any day!! Price competition is a fools game. Beware of Winner's Curse. Know your value proposition, over-communicate it to clients, and stick to it!! Never conceded without taking value off the table. Sticker Shock is NOT a price objection, it is a value objection. The proper way to deal with Sticker shock is to communicate and build the client's perceived value, NOT to lower your price.

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