Value-Based Pricing

For almost 100 years, we have accepted the “billable hour” as the standard for what to charge in the world of legal professionals.  It is a method that has stood the test of time but has recently come under heavy scrutiny.  Many innovative law firms are recognizing that plenty of clients who seek out lawyers have serious gripes with the billable hour.  In such a competitive environment, rather then let them walk out of their office, smart lawyers are incorporating new ways to price prospective clients.  This is known as value-based pricing.  In very basic terms, value-based pricing refers to the act of charging a client a fixed rate, instead of charging by the number of hours spent on a case.

Billable Hours

Many lawyers have been against using value-based pricing for a few reasons.  The first being that the billable hour method protects the law firm and puts more risk on the client.  No matter what the outcome of the case, the client is billed in hours.  Another reason the billable hour still is largely in use is due to its simplicity.  It is a method that is easy to explain to clients and causes little confusion.

Some of the pitfalls of billable hours fall to the disadvantage of the attorney.  The lawyer who completes a project quickly is at a drawback using the billable hour method.  Some cases may not require many hours to complete.  In the same light, very experienced lawyers who have been in the field for a long time may be able to move faster through cases than inexperienced lawyers. The billable hour creates a situation where the veteran lawyer is creating less revenue by more quickly on a case.

Another problem with the billable hour lies in the uncertainty of clients.  Time estimates, in general, are difficult to give, even harder when litigation is involved.  A client may think that their case won’t require more than 10 hours of work to do, so they budget enough money for what they think.  Imagine their shock when they receive a bill for 20 hours of work that is double the price they thought they were going to spend.  You can see how this would leave a very sour taste in the mouths of consumers.  Value-based pricing eliminates this uncertainty and allows customers to budget the right amount of money for services received.

Ditching the Billable Hour

Over the last couple of years, we have seen a rise in legal companies ditching the billable hour formula in place of a value-based pricing one.  There are many advantages to using this system, the first being aligning value between the lawyer and client.

The biggest area where value-based pricing has a leg up on the traditional billable hour method is in lawyers’ schedules. The billable hour method creates situations where lawyers are working on cases but are unable to charge the client for those hours. For example, the law school at Yale University laid out a calculation of the estimated hours a lawyer would need to work in a year to reach the 1,800-hour billable minimum required to be a full-time lawyer. Using their calculation, to reach the yearly hour minimum, a lawyer would need to be working 2,420 hours total.

What to Charge

If you are new to value-based pricing, here are some tactics to figure out what to charge:

1. Know the collective fees in your area
2. Determine what the value is for your client. What will they get out of your services?  Highlight all areas of service they will receive.
3. Determine the price for each task – break up each task into a deliverable.

Whatever it is you decide to charge, be sure that your clients do not undervalue your work.  It’s about creating an experience for your client in conjunction with the value of your time and energy.