06 Apr Fair Fees

I’ve been doing a fair bit of work lately with lawyers on pricing issues – looking at the communication challenge and how lawyers can achieve the double whammy of both generating more revenue and ensuring their clients feel good about it.

At some point in the conversation – normally when ‘the penny drops’ and there is a realisation of how to price more confidently – I’m asked whether all this is ‘fair’?

It’s an important question. All legal fees have to be ‘fair and reasonable’ according the LPA, and there is indeed lots of caselaw and commentary trying to break down and clarify exactly what ‘fairness’ is, including the introduction in some jurisdictions of the fascinating concept of proportionality.

Ultimately, however, its unlikely there will ever be a clear legal authority for what or isn’t ‘fair’ in terms of legal fees because fairness isn’t about absolute prices, or even any specific measure of value, its about feelings. Specifically it’s about whether the client ‘feels’ the price they are paying is fair.

Feelings?  Hmm, tricky.

Working with feelings and the concept of fairness is even more tricky than focusing on value. At least value is economic and can often be quantified, fairness is usually soft and squishy, personal and subjective. What’s fair to one person can certainly seem unfair to another.

Many economists, however, think they have a simple answer to the question of fairness in pricing. They suggest that all prices in a transaction must be seen as fair – or the purchaser wouldn’t pay them. If the client is willing to pay the price, they must think its fair, no? This applies to much legal work – especially for sophisticated clients, but by no means all. Buying legal services is still seen as a ‘grudge purchase’ by many: something you have to shell out for whether or not you think the fees are fair or not.

As fairness deals with subjective feelings rather than absolutes, I believe the key to fairness lies in the communication and messaging around the price and service rather than any price or structuring of fees itself. In my experience, practices charging at or below market rates actually receive more pricing/cost complaints and resistance than those who charge significantly above market rates. To some people this seems counter intuitive but it isn’t really. When I pay above average rates for (what I perceive as) as a good service, I normally feel good about it. If I pay less, I feel I’m paying for a compromised service and I normally resent it.

So, to ensure their prices are ‘fair’, lawyers have to remove themselves from the LPA and engage in the would of feelings. Rapport, trust, pain, pleasure, relief, dreams, values, objectives. Lawyers have to play in this space so much more and worry about pricing technicalities less.

The more lawyers can engage with emotions, the more likely they are to win client trust, build rapport and build the value of a successful solution so that clients feel good about a purchase. As discussed, feeling good is an emotion that is often unrelated to an actual price. Many clients will often fell BETER,  yes BETTER, if they pay more rather than less. Its the same as when I recently bought my first proper hi-fi system for 10+ years. If’ I’d spent significantly less, I’d have been making a compromise and wouldn’t have got the same positive vibes out of the experience. I think its a fair analogy – assessing the sound quality and aesthetics of different music systems is nearly as difficult as assessing the ‘quality’ of one lawyer compared to another, so I took price as an important indicator of quality.

Economists call this effect ‘consumer surplus’. There has to be a surplus, an emotional profit, for the client in every transaction: a gap between what they are actually paying and what they might have been willing to pay. This surplus is the feel-good factor, the ‘fairness’, and can be achieved with higher prices as much as with lower.

One important caveat to all the above is that the market for legal services is not yet the ‘perfect market’ that much economic theory is built around and which assumes consumers/clients have a perfect knowledge of providers, prices and relative quality. (We’re not there yet, but it’s coming: in a few years there will be a variety of websites comparing the prices, services and relative value of legal practices.)

This means that consumers will sometimes be unaware that they may be paying significantly more at one practice than they might at a practice down the road for an equivalent service.

Is that fair?  Sometimes, yes, even most times, but there may be times when you could be seen as taking advantage of unsavvy customers.

In an imperfect market, there might have to be at least some justification, or reasoning as to why you can charge more than the place down the road. This might be something ‘hard’ and relatively tangible like years experience or specialist accreditation but doesn’t have to be. It could be a referral (which brings with it trust and reassurance). Fair pricing is all subjective and emotional so it could equally be based around claims of differentiation, service attributes, rapport-building abilities, convenience, an attractive (let’s say male) receptionist, or even just a good website that implies a vague sense of reassurance and quality.

The good news, however, is that as the market becomes increasingly sophisticated, clients know that they can nearly always get cheaper, and it would be very difficult for them to accuse you of unfairness on the grounds that they didn’t know they could get it cheaper somewhere else. Yes, clients make decisions on imperfect knowledge – a bit of a sniff  – but increasingly clients know when they’re paying a bit of a premium – and are happy to do so.

Happy pricing!

www.gileswatson.com.au/blog