Podcast: Value Pricing for Lawyers

Thanks to Stephanie West Allen, who introduced me to Mike (known as Charon QC) over at Insite Law.

Mike’s 100th podcast interview was with Dan Hull, who had mentioned me regarding Value Pricing, so Stephanie thought it’d be a good idea if Mike interviewed me.

We spoke last week for Mike’s 104th podcast. You can listen directly to the podcast here, or access it at Mike’s blog here.

As an fervent Anglophile, I thoroughly enjoyed my discussion with Mike, and he’s invited me back to discuss another topic. If any one has any suggestions for a topic, let us know.


  1. Ron,

    I listened to your podcast and shook my head more than ever. You wanted to price work upfront. The problem is that, up front, one likely never knows what to charge.

    Let’s take a simple matter–Vioxx. Let’s assume that one has the good fortune of getting the call to defend Merck, when it first decides it has a problem.

    We all know what the call will be—this is GC at Merck, we have a frivolous claim that Vioxx kills people. You should be able to get a couple of associates on this and get the spill cleaned up in a week.

    Later, you get a call. Just got a complaint, filed by Mark Lanier. By now you know that Mark Lanier will get a verdict north of $200 million, per case. What do you charge for each case filed by Lanier?

    And, then, in the last six months, the truth spills out. Merck was paying Dr. Scott Reuben for studies with fabricated data on Vioxx. You get the call for the now criminal investigation. What do you charge?

    In sum, the practice of law is like the practice of medicine (you don’t get an upfront there, either). That’s in part why its a profession, as opposed to other services, which are not.

    To use simple analogy. If you call up a car dealership and ask for the price of putting in new brakes, they can quote you a price because that is the only service you are buying.

    On the other hand, when a client calls a lawyer about a legal problem, the “case” is often no more than a false symptom and the client will hide the truth from the lawyer as long as possible.

    Hourly fees are nothing but the cost of doing the deep drilling and probing necessary to discern the truth. Often, by then, the problem can be resolved, so the clients basically get legal services for the costs of the diagnosis.

  2. John,

    Thank you for listening and writing.

    Here’s the problem. It’s nearly impossible to debate with someone who claims that was is being done, can’t–or shouldn’t–be done. The fact is there are firms that would provide a fixed price (with a determined scope, of course) for the very scenario you provide. As that scope expanded, based on new information, Change Orders would be issued.

    We are not advocating that you scope and price based on services you have no idea will be needed in the future. But it is very possible to scope the work you know will need to be done, and deal with scope creep with Change Orders.

    Customers want certainty in pricing–in fact, they are screaming for it. Law firms ignore them at their peril, as customers will gravitate to firms that offer these pricing arrangements. There’s nothing especially risky about litigation. My earthquake company operates with far more risk and uncertainty, yet they give me a fixed price premium. There’s no reason in the world lawyers can’t do the same.

    If you are interested, here are some links with additional readings that I think you’d greatly benefit from:

    Burying the Billable Hour, ACCA booklet, downloadable in pdf at:


    How to scope complex jobs, by my legal colleague Chris Marston, who runs Exemplar Law, which does not charge by the hour or keep timesheets:


    Chris Marston’s blog, Inside the Firm of the Future, where he discusses how he does all this, and much more:


    The practice of law is like medicine only in that the two are both professions. The reason you cannot get an upfront price in medicine has nothing to do with being a professional, or a profession. The reason is third-party payers, such as insurance and/or government that pay the overwhelming majority of most medical expenses. Since patients aren’t spending their own money on themselves, they don’t care what the price is. It’s also the major reason why medical inflation is so high–there’s simply a disconnect between prices and customer’s willingness and ability to pay.

    Look at medical procedures not covered by insurance, such as plastic surgery, or Lazik surgery. In all cases, the patient receives a price for the total procedure, upfront, before they go under the knife. The same is true in veterinary medicine, because again, the patient is spending their own money on themselves (their pet). Study the history of medicine or law and you will find that upfront pricing was quite common prior to the arrival of the billable hour in the late 1940s and 50s. It is the billable hour that is an historical anomaly.

    Any profession is not exempt from the laws of economics, supply and demand, and customer psychology. To believe we are is folly and arrogant. Your firm is subject to the same laws as airlines, restaurants, hotels, and other businesses vying for the customer dollar. One big difference is these other industries are better pricers, attempting to establish a price based on value rather than costs and labor inputs.

    There are superior pricing methods to the billable hour. This Web site has tons of resources, and even case studies from Trailblazer firms–across all professional sectors–that have moved away from it and embraced more strategic pricing. I hope you will keep an open mind and explore what these firms are doing.

    If not, there’s nothing I can do but wish you well with the billable hour.

  3. Ron writes, “Customers want certainty in pricing–in fact, they are screaming for it. . . . [my] earthquake [insurance] company operates with far more risk and uncertainty, yet they give me a fixed price premium.

    Ron, there are always people who will make the poor business decision of under-pricing risk, especially when customers “demand” such.

    Look at AIG and all of our former investment banks. All of them under-priced risk, no doubt for clients who were demanding such.

    Simply put, you are merely arguing that lawyers disregard recent business history and take on more risk. Those in the insurance and investment banking business who did this at least had some data points (Long Term Capital) on which to build elaborate but ultimately useless models. No such models can even be attempted for a law firm.

    You offer nothing in support of taking on more risk expect that clients want such. If I were a client, I too would ask for such, but would be stunned (and wouldn’t hire) a lawyer who did such, for I would have little confidence in his or her judgment.

    There are many risk managers who would say that it is impossible to price risk like a hurricane or an earthquake. So called malpractice tort reform is, de facto, an admission that risk cannot be priced.

    There are at least 6 or 7 good opinions by law and economics judges like Posner that point out that it is impossible to price the risk of fraud (i.e, clients being less than candid about past events), which is why fraud will always remains an exception to the economic loss rule.

    I am no “fan” of houring billing. I only understand the reasons for its existence.

    And, contrary to what you would have the reader to believe, it is you, not me, that believes that law firms are exempt from the laws of supply and demand.

    I have enough faith in the operation of markets to understand that hourly billing is highly prevalent because it works better than all other alternatives, which is all that any market ever tells us at a point in time.

    And, you forget that, if there is any competition in the market for legal services, it would be impossible for any firm or to change the way it bills so as to increase profits.

    You say that my “firm is subject to the same laws as airlines, restaurants, hotels, and other businesses vying for the customer dollar.” While true, such a statement too general to be meaningful. The profits realized by airlines, because the value proposition to customers is different, are substantially less, even in good times, than the profits of hotels and restaurants.

    Private law firms, taken as a whole, are several orders of magnitude more profitable than the airline industry in any economic environment, so why would be look to that industry for lessons.

    As for medicine, your explanation is not correct. Present yourself to the Mayo Clinic with a complex set of symptoms and you will not be told what admission will cost. You are just admitted and the testing and diagnosis process starts.

    A specific, easy to diagnosis procedure may, like having the brakes repaired, have a fixed price, but that is not true for complex cases, for hospitals and doctors cannot take such risk.

  4. John,

    You are not only constructing straw men, you are avoiding my main argument completely.

    There are firms out there, right now, doing what you say can?t be done. How can that be? These are rational, economic actors whose firms are profitable and thriving. Some have been doing this for a decade. Several are among the most profitable firms in their respective sectors.

    You say that there are ?always people who will make the poor business decision of under-pricing risk, especially when customers ?demand? such.?

    So what? You can?t mention the current problems with AIG and investment banking without talking about marketplace interference from Freddie/Fannie. No sane company makes mortgages to people with bad credit. There must be something else going on. The answer is incentives: government socializing the risk-taking, and increasing moral hazard.

    But a bigger issue is: most businesses don?t make a profit. Again, so what? Capitalism is a profit AND loss system. We seem to forget that, as we want to socialize the losses and privatize the risks. Only 10% of national income is derived from profits, but it is critical in allocating the other 90%, as Thomas Sowell so eloquently pointed out in his Basic Economics book.

    I hope you are not arguing that capitalism could exist without insurance? You say risk can?t be priced, but an entire actuarial profession exists to defy this argument. I, too, admire Judge Posner, but he?s not arguing against insurance, he?s arguing against the notion that the optimal level of fraud is zero. That?s as economically illiterate as arguing that the optimal level of traffic deaths is zero. The costs would be prohibitive??imagine having to do a 50-point inspection before you drove car anywhere. I find nothing in Posner?s writing that says insurance can?t be priced. Indeed it?s priced everyday. The story of risk is the story of capitalism, as told by Peter L. Bernstein in Against the Gods.

    But back to law firms. I do offer more in support of law firms taking on more risk, other than that the client wants it. The more is this: if you assume some risk, you can charge a premium price. This is no different than a fixed-rate mortgage commanding a higher price than a variable rate mortgage, since the customer is shielded from risk. The additional risk premium has NOTHING to do with the cost to the bank of processing this mortgage.

    But there is more to the practice of law than risk. You are also providing a valuable service, which should be priced based on external value, not internal cost to produce. You write you are no fan of hourly billing, and I?m glad. Even the ABA?s Model Rule 1.5 advocates that you look at many other factors to determine a reasonable fee beyond the time it takes to perform the work.

    Hourly billing does, after all, place an artificial ceiling on your net income. Bill Gates doesn?t have this ceiling, because he doesn?t believe he sells time. Neither do you. You sell intellectual capital, and there is no standard price for it??it all depends on the value and results you create. To believe your value is captured by your labor time is to fall prey to Karl Marx?s false labor theory of value, as I describe in detail in my post:


    We advocate price discrimination, a common practice that comports with supply and demand. Far from believing you are not subject to it, we teach you how to optimize that theory so you can capture more value. You should read my book, Pricing on Purpose. You will find that I am an enormous advocate of the free market, meaning consumer sovereignty. We don?t really care about businesses, since creative destruction is what the free market is all about. No business should exist that doesn?t create more value than the resources it consumes.

    Hourly billing exists because it is easy and simplistic, not because it is the most optimal pricing strategy. The entire business world has been moving towards Value Pricing for the last 25 years, with organizations such as the Professional Pricing Society hosting educational events to help companies price better, and even certifying professional pricers as a separate discipline and profession. Every major consulting house now has pricing consultants.

    This is the free market at work John. Obviously, these companies are investing in this function because there are profits to be had. The free market improves itself every single day, and to believe the reason hourly billing is still alive is because it is the best strategy is to deny the history of how professions improve?slowly, glacially. Look at my book review of Bad Medicine for how long it takes a profession to change:


    So it is possible for law firms to change the way they price? We see it every single day. Sometimes they make less money, because the value they provide is low. Most times, though, they make more money because these other pricing strategies are better at capturing that marginal value. Customers are happier.

    And I?m not advocating you only look to airlines for pricing. Look at hotels, rental car companies, cruise lines, the retail industry, and a myriad of others, for dynamic pricing, and Yield Management, two pricing innovations that have made a dramatic difference in these industries. The professional firms are laggards in this area.

    You?re also avoiding my argument with respect to health care. I?m not arguing that the Mayo Clinic will give you an up-front price. I know they won?t. But again, it?s because the patients aren?t spending their own money on themselves. If they were, you better believe every health organization would have to price up-front, like plastic surgeons, Lasik surgeons, veterinarians, etc. You did not deal with this fact at all.

    Here?s my question: why do you get a price upfront from these doctors, but not the Mayo clinic? The only answer is because you are spending your own money on yourself. Milton Friedman called this Category 1 and 2 spending, versus Category 3 and 4 spending, in his masterful book, Free to Choose.

    Here’s another question: name for me something you buy as a customer where you don’t know the price upfront? Again, medicine doesn’t count, as it’s not a free market. I bet you can’t come with many, if any at all.

    If you really want better profits, I don?t know why you?d want to continue with a pricing method that limits your income right out of the gate, simply because that’s the way it’s always been done, or that’s what the majority do (the majority at one point thought bloodletting was a medical cure; that didn’t make it so).

    Of course, if you think you?re only worth your hourly rate, maybe you?re right. But I believe you provide more value than that to your customers. The only way to capture that value is with more optimal pricing strategies.

    That means burying the billable hour like thousands of firms around the world have already done.

  5. Ron,

    You write, “Hourly billing does, after all, place an artificial ceiling on your net income. Bill Gates doesn?t have this ceiling, because he doesn?t believe he sells time. Neither do you. You sell intellectual capital, and there is no standard price for it??it all depends on the value and results you create. To believe your value is captured by your labor time is to fall prey to Karl Marx?s false labor theory of value, as I describe in detail in my post.”

    Ron, I don’t subscribe to the labor theory of value. Unfortunately, our code of professional responsibility does, which I would change if I could. The same is true in many other areas of the law (construction, for example), where “hours worked” time rates is the measure of damages in quantum meruit.

    As for Bill Gates, the analogy is a false one. Gates reaps the profits he does for two reasons. First, and foremost, he has a natural monopoly on operating systems which he is able to leverage for higher prices. Second, and increasingly, he has capital substantially in excess of his customers, so he is able to leverage that advantage also.

    By contrast, lawyers have neither. This is a fundamental aspect of business economics that your arguments disregard. You view hourly billing as a result of free will exercised by sellers of legal services. I do not. I view hourly billing as the cheapest way, over time, for large firms to buy legal services, as determined by the market. Such a broad, open, competitive market doesn’t “lie.”

  6. Christopher,

    I am going to just “Rosalita” this debate. If you know Mark Lanier, you will understand what I am writing.

    Just answer this simple question: If time based billing is not the cheapest method for pricing or buying outside legal services for large businesses, what is the cheapest method of setting the price for legal services?

    What evidence do you have in support of your assertion.

    My position is very simple. Time based billing results in the lowest fees for the buyers. There is a very simple reason for this, well explained by Peter Drucker in his classic, Managing in a Time of Great Change 48 (1995)

    In discussing Cost-Driven Pricing, Drucker wrote, ” The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on the top.

    The only sound way to price is to start out with what the market is willing to pay?and thus, it must be assumed, what the competition will charge?and design to that price specification.”

    In the market for legal services, what the market is willing to pay, and no more, is hourly billing. This is what other firms will charge. Therefore to meet competition, one must charge by the hour, at similar rates.

    It is all pretty simple and has nothing to do with value pricing. If other firms could lower their fees by “value billing,” they would do that, in order to attract business. Obviously, given the number of laywers and law firms, many have looked. The lack of tacker show that prices, already, are as low as they can go and/or the firms at present can resist taking on the greater risk

  7. Matthew Tol says:

    This whole discussion seems to have been a dance around the issue.

    Value is perceived by the customer – as a professional, we need to take them through a process where we uncover that value and assist our customer in determining what it is they actually need to have us achieve.

    By taking them through the process, we will uncover exactly what needs to be done (to a large extent) and then have the proviso that if any further/additional/different/coonflicting or other information becomes available, we will need to discuss this information with them at the time and possibly adjust the scope of our engagement. Hence the change order which is discussed above.

    By taking the customer on the exploration, we then develop our relationship with them, further our understanding of their needs as they pertain to the particular issue/matter and we can then all move forward “on the same page”.

    To argue that your competitor down the street sets his fees at a level therefore he establishes a cap on your fee capacity is simply ludicrous. Why is there a difference in price between a Ferrari and a Hyundai? They both do largely the same things (and, ultimately get you to the same point), but they do it differently and they have established their brands to support their value proposition. If you let your competitors establish your pricing, then, my friend, you have a big problem.

    I suppose it all comes down to self belief. I think it was Henry Ford who said, “If you think you can or think you can’t, you’re right”.

    Challenge your thinking – if you keeping throwing up obstacles, you’ll bever be able to see over them to a new way of doing things.

  8. Well done Matthew!

    You’ve brought the “argument” back to where it should be. Value is in the eye of the client and one of the skills of any professional – medics included – is helping them understand it.

    I’m not a lawyer but I am a hugely enthusiastic advocate of Value Pricing.

    As a Business Coach I want to help my clients’ businesses to thrive, and I do so. I quote a fixed fee per project and I collect at least half of the fee before I start work. Since I changed to Pricing by Value my clients’ reactions have changed from “We’ll have to think about it” to “That’s a bargain; how soon can you start!” AND my fees have increased between 150% and 400%!

    There are so many good reasons not to charge for your time, but the two key reasons for me are:
    1/. Clients are not scared of letting skeletons out of cupboards, because they know they won’t have to pay extra – And I get to do a better job for them with fuller information.
    2/. I have an incentive to get better at my job! If I was charging by the hour, I’d bizarrely have an incentive to stay poor at my job and get paid more!

    If I am adding ?500,000 to a business’s bottom line over a 6 month project, firstly why should it matter to the client if I spend a day or a week or a month of my time on this? And secondly why should I not get paid more by them than if I added ?5,000?

    As Matthew says, it’s a new way of thinking! Get your head round it!

  9. John,

    1. “An identity statement is true due to its definition.” Not true. Reconcile, “This statement is false.” Just because you say A is B does not make it so. Please review –> http://www.verasage.com/blog/the_laws_of_thought/

    2. Once again, you have hopelessly confused cause and effect. First, supply and demand are also theories, not truths. Second, the supply and demand is not for HOURS but for RESULTS. There is NO demand for hours. Period!

  10. John

    I can’t speak for Matt, but I feel you have missed the point.

    Supply and demand relates to commodities, where the customer has a theoretically large number of potential suppliers of similar if not identical goods, and the seller has a theoretically large number of potential purchasers. I do not believe this is the case for any Professional Service organisation, for example Lawyers.

    As I have said previously, I am not a lawyer but I would be prepared to bet that lawyers are not all equally good. I would be surprised if those who are “shopping around” went to more than two or three firms to check prices, and I would be surprised if any of those firms offered them precisely identical services because, for a start, they don’t all employ the same lawyer.

    The point of Value Pricing as I see it is to allow the client to understand their true dilemma and to appreciate what it would mean for them to no longer suffer the pains and anxieties it produces.

    Then one can explore their ‘budget’ for getting the problem fixed, relating it the whole time to the value of having it fixed, before finally quoting a fee for the project which will, for the client, pale into insignificance when compared to the value of the result.

    In this way, the client’s attention is focusing on the return they will get for their investment, and not looking at the fee merely as a cost. If there was no return, why would they pay a fee of any size?

    If the value is small, the fee will be smaller and, if you are not happy doing the work at that level of fee, you are at liberty to politely turn down the project.

    My answer to the question in your last sentence is that I would not attempt to explain/justify it in this way using supply and demand!

    The fee goes up because the client now sees the true value of the solution, and you can charge accordingly. The demand goes up because your reputation increases as the client and other parties tell the whole world what a brilliant job you did, right from the very first meeting!

    One truism I have learned since I started setting my own Pricing by Value is that “Too expensive” actually means “I don’t understand the true value”.

  11. Matt, David, and Ed Kless


    Everyone of you need to take several years of economics classes.

    My quotation was straight off this web site, authored by Ron, himself. The only way that “value pricing” can work, given the laws of supply and demand, would be for it to changes the assumptions.

    David argues that value pricing might change the assumptions—a better educated customer will realize the value of the service and pay more for it, then having less to pay for other products or services. The flaw in this argument is that it does not change what others will charge the now educated buyer for the service. A truly informed buyer will thank you for the education and then go with the lower cost service (outsourcing litigation work to India, would be an example).

    This happens all the time in the construction business, where owners and generals take the ideas of one sub contractor, then hire another.

    Beyond that, supply and demand is not limited to commodities. The laws of supply and demand apply to all goods and services, from air craft carriers and fighter jets and bombers (big ticket items) to nails and screws in a hardware store, from health to dental care (why else do we have 50 million uninsured workers—the price is too high) or hair cuts.

    If hair cuts and shoe shines and car washes were less expensive, wouldn’t people use these services more often? The same is true for legal services.

    As to Ed Kless, the laws or supply and demand are laws and are fundamental truths of economics, not theories. Start with this website’s discussion and then turn to Wikipedia. Your comments continually show that you are hopelessly uninformed about all of these matters.

    For example, you keep writing that the client’s demand is for results. True but meaningless as regards what we are talking about. My consistent point has been that time based billing is the cheapest way for clients to buy results. The evidence of this is the shape and form of the present market, one in which there is substantial competition amount sellers of legal services.

    I have repeatedly asked you for any evidence that “value billing” will lower the cost to clients. You have had many days to provide evidence to the contrary but have not. If method of doing business does not lower costs, it has no competitive advantage and will not be agreed to by informed clients.

    The reason I am correct is simple enough. The cost of major legal work is too uncertain for law firms to quote fixed prices—there is too much risk to the provider (David, above, demand 1/2 his fee, up front, showing this kind of intolerance to risk).

    Given that risk, there are two possible approaches. Ron argues for a “change order approach,” a constant re-negotiation of the cfee contract based on new developments. The problem with this approach is Coase’s theory of the firm. Constantly renegotiating the fee contract has costs and is expensive and inconvenient.

    Hiring a law firm based on time is a suitable alternative to this conflicting positions for two reasons. First, the time based billing reduces the law firms risk. Second, the contract can be easily changed by the client just asking for more or less work, moment to moment, now, with email and text messaging. IOW time based billing is not different in kind from Ron’s stream of change orders, just more efficient and less expensive.

    Last, David Winch writes that he trys to get, “the client?s attention is focusing on the return they will get for their investment, and not looking at the fee merely as a cost. If there was no return, why would they pay a fee of any size?”

    David, the only short simple answer I can give you is that clients do not tell lawyers the truth. There are a myriad of forces at play, all of which strongly incentive clients to activitely hide and conceal the scope and extent of their legal problems from their lawyers. To the lawyer quoting a few this is “risk.”

    Consider, for example, the case of William Jefferson Clinton. Do you believe that Clinton told his lawyers about Monica’s blue dress? David Kendall produced an extraordinary result for Clinton, keeping him from being impeached or indicted. When hired, Kendall had no idea where the case would go. This is the way of most big bet your life cases. One does not know their worth until the end game is within site. Until that moment, there is no “value,” to price.

  12. Matthew Tol says:


    With respect, I think the argument around economics of the issue is a little off the point (as my Dad – an economist himself – says – you could line all the economists in the world up and you still wouldn’t reach a conclusion). The issue is not one of economics, it’s one of value.

    Value is an assessment by the client. How can we, as professionals, fully determine the value to the client of the work we do for them? It’s for us to discover as we take them through the scoping and engagement process.

    To put it in terms of the bell curve with the standard deviations, an astute pricer will actually take their customer through the process to move them to the right of the curve (higher value for both) rather than merely commoditise the process.

    I also take issue with your argument about haircuts, carwashes and shoe shines. You assert that if the prices of these items dropped, people would use them more. I point out the following – if you keep cutting your hair, you’ll end up bald, there’s no point cleaning an already clean pair of shoes and why wash a clean car? To argue that price discounting will increase turnover reminds me of the statement made by a very wise old fellow I know “You go broke buying bargains”.

    Customers want certainty, they want comfort and they want to know that the issue they are coming to you for is going to be dealt with. The only time that time is relevant is where the issue is time critical for the customer – the value to them goes up if this is the case.

    I’ll bet Bill Cinton was fairly high on the bell curve when he went to Kendall. Clinton’s perception of value would have had nothing to do with price. To argue otherwise misses the point completely. Sure there was a process of discovery through the case – always is. It is the discussion during this process that helps to further uncover the value and this enables both parties in the transaction to agree on the way forward with a price attached to each successive stage as it develops.

    I don’t believe I have ever argued that value billing would lower the costs to customers. By having the discussion up front and attending to their concerns, they understand the value you offer them and the price is established accordingly.

    For the life of me, I do not understand the “value” in $400 per hour.

  13. John,

    While I think you are very nice guy, for the third time, I submit you have “hopelessly confused cause and effect.”

    I shall not reply further, you have the last word.


  14. PS – Ron did not say that identify statements are true, he said, they are NOT theories. In fact, one of our categories is called “Debits do not equal credits.”

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