If You Don’t Discuss Value, Expect to Discuss Hours

We hear it from partners in every firm, no matter where in the world we are: “Our clients just don’t want alternative pricing methods. They always bring the conversation back to hours.”

Of course they do. Because you aren’t discussing value up-front with them. Mostly because firms haven’t taken the time to understand the value they are creating. If you don’t understand the value you create, you’ll never be able to capture it with effective and strategic pricing.

The empirical evidence is overwhelming: Customers do want alternative pricing methods. There is an enormous backlash against the billable hour, since it misaligns the interest between the firm and the customer and rewards inefficiency. Customers want certainty in price, and more value than the price they are paying.

If you don’t discuss value, expect to get beat up on your price. The problem with this is obvious: customers have an incentive to maximize value, but minimize price. Which would you rather discuss?

Before the famed consulting firm McKinsey & Company will accept a customer, they claim they have to provide at least three times more in value than the price they charge. What would happen if all professional service firms were to use this approach?

They would have to focus on value.

A June 2, 2006 article in Lawyers Weekly (“In House verdict: no more time billing”), an on-line ezine for Australia’s legal profession, cites an Australian Corporate Lawyers Association (ACLA) survey of 1,800 in-house counsel members, 55 percent of which still use the hourly billing method. But get this: “96 percent are looking for a change.”

In the article, Peter Turner, the CEO of the ACLA notes: “most corporate and government departments are value conscious. If they think they get value, then cost is a secondary issue.”

Furthermore, a 2004 survey conducted by the Association of Corporate Counsel (USA) found that 75 percent of in-house counsel were unable to cite a single innovation offered by their outside law firms. Of the 25 percent who did cite an innovation, it was with alternative pricing arrangements.

So, your customers consider pricing on a basis other than hourly billing to be an innovation. How lucky for professionals! No major R&D costs developing a new iPod or other new service; simply put some intellectual capital and creativity behind your pricing and you will have an enormous competitive advantage.

Another complaint we hear from professional service firms is their customers are quite sophisticated buyers: using procurement officers, strong-arm negotiating, beauty contests, Requests for Proposals, along with a myriad of other buying tactics to beat up on the firm’s pricing.

Cry all you want, but this isn’t going to change. Buyers have an enormous advantage when it comes to comparing buyers and their prices. Sellers cannot do this—it’s illegal—so they have to think smarter when it comes to being compared based on value, not price.

If your firm is going to be involved with professional buyers, then you better have a professional seller to engage in a discussion of value. Even the most hardened procurement officer is still interested in value, which is why the IBM slogan, “No one ever got fired for buying IBM,” was such an effective advertising campaign

Why not put a “Chief Value Officer” (CVO) up against procurement or in-house counsel. Someone who understands the value your firm is creating for the customer. Someone who is a professional pricer and understands that customers are not price sensitive, they are value conscious. Someone who is the eyes, ears and throat of the customer internally within your firm.

Until your firm makes the required investment in intellectual capital in order to comprehend, create and communicate the value you provide to your customers, you will not be able to capture that value intelligently and with confidence.

And if you can’t do that, you will end up talking about efforts, activities, costs, and hours. All of which have absolutely nothing to do with the value your firm creates.

This is not the customer’s problem. It’s yours. In the entire history of pricing changes, nearly all of them have been driven by the seller, not the buyer. After all, the buyer doesn’t have the same incentive to change your pricing methods as you do, since they buy relatively infrequently.

So, change your conversations from hours to value. Do this up-front before you do any work on behalf of a customer. Appoint a CVO and Establish a Pricing Cartel in your firm—a group of people who will become, over time, experts in creating and capturing value.

Your firm will become obsessed with value. Your customers will appreciate it, and then won’t bother with hours. I guarantee it.


  1. “McKinsey & Company …..claim they have to provide at least three times more in value than the price they charge.”

    I don’t have a problem with this concept and have been providing clients on an “irregular” basis with a statement of the value we add to their business.

    There are two areas which I would like to explore in more depth:

    1. If a suggestion will save a client a substantial amount of tax on an annual basis. Should we be including the saving every year.

    2. How do we quantify the value of checking the “books” to help avoid tax investigations. The fact is that if we do our work well there won’t be any cost! Or have I answered my own question?

  2. I hate to throw a spanner in the works but I believe that the vast majority of small businesses are NOT sophisticated buyers. Whatever the reason (and I believe there are many)they focus solely on price.
    The problem is therefore two-fold: first to teach them the concept of value and then to show them the value. Perhaps I have been ground down over the years but I see this as a big problem when dealing with the smaller business. Other peoples’ thoughts and ideas would be very welcome.

  3. Great post. As compared to Asian and Eastern European law firms, American firms are behind in terms of getting away from hourly billing. Nearly all of our Russian clients demand fixed fee billing and the same is true of our Chinese and Korean clients. American firms often mistake the desire for a fixed fee as requiring the entire matter be done on a fixed fee basis, when in reality, the client would accept a fixed fee up to a certain point, with either a new fixed fee once that point is reached, or switching to another fee basis at that point. I have found that the better we explain exactly what we are going to do on a matter, the more it becomes clear to the client why we are charging what we are charging. @Stuart Jones — I completely disagree with you about the vast majority of small companies being unsophisticated buyers. I think the vast majority are sophisticated buyers (at least they are in my practice area, which is international law). I think the key to having a sophisticated small company client is a law firm that explains as much as possible to the client or potential client as to what is going to be involved in the legal matter and why something will cost what it will. In other words, it is our job as lawyers to educate the client and to help them become sophisticated.

  4. One of the difficulties with generalisations is that they are rarely general!

    My market place is the SME (Small/Medium-sized Enterprise)also known as OMB (Owner Managed Businesses) – does this translate OK?

    They range from the one-man band to companies (still owned by only one or two people) employing < 50 people. They have little or no contact with lawyers and in my opinion buy accountancy services on price because they don't understand what is being sold (which must be our, the accountant's, fault). Sometimes, too, they don't want to understand which I suppose is a pretty clever negotiating tactic!

  5. Dear Ron
    My company carried out the Australian survey you refer to and the article in Lawyers Weekly didn’t give the full picture. In reality, very few corporate clients are being offered arrangements other than some version of hourly billing – the main alternatives were fixed fee or blended rates and I classify the later as just another version of hourly billing.
    One of the reasons for the survey was to provide substantive evidence to law firms that clients do want to find a better alternative. The reason is not simply trying to reduce fees, but more to have certainty of fees. My personal experience in offering fixed fees for our services is that the certainty factor is a major attraction for a client.
    I have no doubt, from experience as a consultant to lawyers and clients about lawyers fees, that the barrier comes from the lawyers rather than the clients. The lawyers feel “safe” with hourly billing, rather than recognising that hourly billing does not reward value delivered, efficiencies achieved, expertise, or investment in technology.
    One of the additional problems for Australian lawyers is regulatory legislation which restricts billing options. For example, success fees are restricted.
    I follow your work with interest.

  6. My concern with value pricing is what happens when the client discovers someone else providing the same value for a cheaper price. If he feels “ripped off” then the danger is you loose the client.

  7. Dear Witney Accountants,

    Thanks for your comment.

    Here’s a question: How do you deal with that situation now?

    A customer can always find a cheaper price, always. Your job is to provide enough value to justify a premium price over the competition. There are many strategies to do just that throughout this Website, here’s just a few:

    Offer Fixed Prices
    Offer a Price Guarantee
    Offer a Service Guarantee
    Provide the customer with different option at different price points.

    Customers will pay a premium for certainty in price and excellent service. They do not shop for the cheapest price, but rather the best value relative to price.

    Hope that helps.

  8. http://Matthew%20Tol says

    I think you also need to remember that a customer is looking for a relationship. Price doesn’t come into a relationship (a true relationship anyway!)

    You will always be able to get a cheaper price – but price isn’t everything. If it’s the sole focus of the customer, then maybe, just maybe, they’re not the right customer.

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  1. On Conscious Capitalism and Pricing

    Originally, I intended to just write up a quick post on a book I am rereading, Conscious Capitalism by

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