Is Dynamic Pricing an Alternative to Hourly Billing?

A quick detour from my search for the Grand Unified Theory of Legal Value…

I had high hopes for Carolyn Elefant’s blog post The Billable Hour Stifles Pricing Innovation. I heartily agree with Elefant’s premise that the billable hour can stifle innovation. Unfortunately, I don’t especially like her article’s logic for getting to that conclusion.

In her post, Elefant discusses a recent New York Times article on dynamic pricing. It reports on how companies like Uber are using technology to constantly adjust pricing to both react to and stimulate customer demand. Elefant then suggests that lawyers can and should do the same thing, particularly as a way to drum up business when times are slow. She also proffers that a litigator could use the same tools to increase prices for a client hiring a lawyer close to a trial date.

My feeling is that a company like Uber, or an airline, is able to use dynamic pricing in part because they have an excellent understanding of the value that their service will bring to different customer segments. Business travelers value speed and predictability and are willing to pay for it. Family vacationers value economy and are willing to sacrifice convenient flights for lower fares. Certain Uber customers value staying dry in a rainstorm and will fork over for the privilege.

True, these companies are also able to use pricing to load-balance their services—an airline wants to fill planes and Uber wants to entice its drivers off the couch and behind the wheel. But they could fill planes and have lots of customers by offering low prices across the board. The trick is luring those high-end customers to drive your profits while accepting lower margins on the rest.

So, if Elefant’s hypothetical solo lawyer going through a slow patch wants to discount his services to drum up some business that’s fine, but there had better be some higher-margin work in the mix. Otherwise he’ll find himself in a downward spiral. (I can see this working slightly better in a large firm setting where the firm might offer underutilized resources at some discount to work on b-level projects for existing high-value clients).

I think the above examples of dynamic pricing work in large part because the marketplace sees these services as commodities. And as many of you can surely attest, when legal work starts looking like a commodity then the price customers will pay only goes in one direction.

For a great article on the perils of this (albeit written for a different industry), see Tim Williams’s post from last September, Are You Really in the Service Business?. In a nutshell, Williams argues that service professionals in general should stop thinking of themselves as being in the service business and start thinking about themselves as being in the solution business.

Using that line of thinking, the last-second litigator in Elefant’s example can command a higher price not because of the laws of supply and demand, but because she is able to offer a solution to the doubly thorny problem of being involved in a lawsuit and being under a time crunch. This may seem like two sides of the same coin, but as Williams points out, the side of the coin with which you identify can impact your ability to command premium fees for premium work.

I agree that dynamic pricing has a place in legal services, in fact it may be essential (though I’m not sure the sort of high-tech solutions required by the businesses in the NY Times article are necessary for lawyers). However I believe it is critical for lawyers to engage in dynamic pricing through an extrinsic understanding of their client’s needs rather than an intrinsic reaction to their own desire to fill their days with work.

Agree? Disagree? Let me know either way.

© 2014 John E. Grant.

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