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The Science of Price Sensitivity – Yep, It’s A Thing

One of the many shortcomings in our current approach to pricing legal services is the preoccupation with merely pricing the job. While at face value this would appear to be all that is required, it is in fact only half of the calculation. The other half of the equation is pricing the client.

Pricing is contextual. Put simply, this means that legal services do not have an abstract value. To the extent that anything has value, someone has to be willing to buy it and the ‘value’ will be determined by what that person is willing to pay for it.

Like almost every other product or service, legal services only have a value;

  • to a particular client
  • in a particular set of circumstances

Put another way, the value of what we do is subjective and value, like beauty as the saying goes, is in the eye of the beholder.

Amongst the many factors unique to the particular client and the set of circumstances will be that client’s price sensitivity or to use another phrase adopted by pricing specialists, willingness-to-pay.

If we bring that reasoning full-circle then we inevitably get to dynamic pricing, otherwise known as surge pricing. A working definition is; the practice of pricing something at a level determined by a particular customer’s perceived willingness and ability to pay.’

We experience it when we order an Uber taxi during rush-hour traffic or on a Saturday evening in the city. We sometimes experience it with changing ticket prices for major sporting or cultural events. We also experience it as we strap ourselves into our airline seat in the certain knowledge that everyone around us has probably paid a different price for their ticket.

In fact, its deployment in our day to day lives is ubiquitous without as consciously considering it.

It makes no sense therefore to attempt to price a piece of legal work without also ascertaining the context within which it sits, one component of which is the client’s willingness-to-pay and their price sensitivity.

This however begs the question ‘how does one ascertain a client’s price sensitivity and willingness-to-pay?’ Well, you could ask them but aside from the fact that they are likely to look sideways at you, it is unlikely to elicit a reliable response.

At a work stream level, it is possible to research this with a technique such as conjoint analysis. ‘Conjoint analysis’ is a survey-based statistical technique used in market research that helps determine how people value different attributes (feature, function, benefits) that make up an individual product or service.

Another option at work stream level (ie. not individual client or matter level), is to undertake a Van Westerndorp price sensitivity analysis. This is achieved by asking a series of questions;

  • At what price would you consider the service to be so expensive that you would not consider buying it? (too expensive)
  • What price would you consider the service to be priced so low that you would feel the quality couldn’t be very good? (too cheap)
  • At what price would you consider the service is starting to get expensive so that it is not out of the question, but you would have to give some thought to buying it? (expensive/high side)
  • At what price would you consider the service to be a bargain-great value for money? (Cheap/good value)….  Click for Full Article