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“How do you set your prices?”

by Jay Shepherd. Average Reading Time: almost 5 minutes.

Price tag question markThis is the question I hear the most. (It isn’t, sadly, “How did you get to be so flippin’ handsome?” That’s second.) Unsurprisingly, I get this question mostly from other lawyers, and sometimes from in-house counsel. They ask this question because my firm, Shepherd Law Group, stopped billing or even tracking hours back in 2006. We worked for employers lowering their workplace risk and charging fixed prices for our services. So lawyers are always asking this question.

The question is at the heart of lawyers’ hesitation to break their addiction to hourly billing and make the leap to fixed pricing. It is the root of lawyers’ fear that they will make a mistake in setting their prices.

As if. The funny thing is that lawyers don’t seem to have any trouble setting their hourly rates. And just to be clear: rates are a form of pricing, albeit an unsophisticated, rudimentary one. Ask a lawyer (we’ll call her “Monique,” because that sounds French and sophisticated and I’m about to make fun of people who try to sound French and sophisticated) who’s just hung out a shingle how she set her hourly rate:

Well, I used to charge $525 an hour when I was a seventh-year associate at my BigLaw firm. I figure people will expect me to charge less because my firm is so much smaller. On the other hand, my practice is very specialized, and I really own my niche. [It's pronounced "nitch," by the way; it does not rhyme with quiche; saying it that way does not make you sound French and sophisticated. But I digress … told you.] On the other other hand, my office is in the suburbs instead of downtown. So I’m charging $425 an hour.”

Monique’s (made-up) monologue accurately reflects the thought process — explicit or just intuitive — that most lawyers undertake to set their rates. Think about it. Layered beneath the I-was-a-big-firm-lawyer pomposity and the now-I’m-on-my-own-what-do-I-do? abject fear is some pretty sophisticated market analysis. The legal marketplace often does put a lower value on work done by a lesser-known firm. The legal marketplace usually does place a premium on the skills of a specialist. The legal marketplace does place some value on a law firm’s location on Wall Street as opposed to Maple Street.

My point is: Monique did not come up to me and meekly ask how she should set her rates. (In part, on account of her being imaginary.) So why should it be so different when we’re talking about real (that is, fixed) prices instead of rates?

The answer is: because lawyers seem to think that the price has something to do with the (perceived) cost of providing the service. Something to do with the hours spent on doing the work.

As if. (This is my new favorite sentence.) Look, genius: let me first dispel the notion that legal work that takes more time costs more. You pay your associates an annual salary, right? Very few firms pay their lawyers by the hour. So the firm’s “costs” do not rise when a motion takes six hours to write instead of three. Yes, yes. I know. “It’s the opportunity cost. The extra three hours means that lawyer can’t be working on something else, and that adds up over time.” Sorry — I’m not buying that. If you have more work than you have lawyers available to do it, then congratulations — and hire more lawyers.

But more importantly, as I have said before (see “Hourly billing: the end of the beginning“), your customers don’t care about your costs. The price they will pay is less than or equal to the amount that they value your service at that time. Period. What Monique did in her rates analysis is estimate how her potential clients would value the suburban small-firm nichework she has to offer. She did not wonder how much providing that work would “cost.”

So ask your question again:

“How do you set your prices?”

I’ll tell you. (Just promise not to tell anyone else.)

  • I analyze the client.
  • I assess the importance of the situation.
  • I assess the urgency of the situation.
  • I pay attention to what my competitors charge.
  • I consider the relative values of the different possible outcomes.
  • I figure out how hard it would be for the client to get better service elsewhere.
  • I determine how important my firm’s expertise is to the likelihood of a successful outcome (in other words, is this going to be easier because of our particular skills, or could any trained monkey use the Interwebs to find the answers?)
  • I consider what we’ve charged other clients in the past for similar work
  • I consider whether those charges were heavy or light in retrospect
  • I consider the likelihood of getting more work from this client
  • I assess how much work we’ve done for this client already
  • I wonder how important getting this particular job is to our firm (if it isn’t, I might raise the price)
  • I decide whether to do a single price for the whole gig, or whether (and how) to break up the job into minigigs with separate prices
  • and then I say, “This is our price.”

Simple, right? No, it’s not. Price things too high and you don’t get the work. Price things too low and you get work you don’t want, or clients you don’t want, or you just don’t make enough money.

But it’s not that hard. You don’t hear car manufacturers and watchmakers and restaurateurs and baseball players and movie stars whinge about how hard it is to set a price. They set the price. If people buy at that price, great. Increase the price. If they don’t, zut alors. (Oh, so sophisticated.) Lower the price and try again.

That’s how I set my prices.

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