Episode 3

Victor and Mark yap about the value of a lawyer’s time, advanced widget-making, attorney guilt, TED, Victor’s blue collar, Karl Marx, mandatory estate planning in New Jersey, Bartleby the Scrivener, the price of placebos and other matters of import — and all in under 30 minutes!

Victor:

I’m always amused when I hear lawyers talk about their hourly rate. Do you know what I could be doing with this time? Then they translate the amount of effort going into something, or the failure to do it, into some computation of lost dollars.

Mark:
That is something I laugh about too. An attorney adding up the cost of doing a seminar will say to me, “I bill at $250 an hour. It’s going to take me three hours to do this seminar, including driving there, setting up, doing the seminar, and then coming back. Therefore, we have to add $750 to the cost of this seminar.” I always laugh about it.

The attorney is assuming there is three hours of paid work sitting on his desk at the rate of $250 an hour that he won’t be able to get to, and can’t be done any other time. So it’s a loss of $750. Or, there are three clients sitting in his waiting room that are willing to pay him $250 for a consultation, and they can’t come at any other time. So it’s lost income. I always think about these guys playing with their kids. Do they say, kids, this time is worth $250 because that’s what I get paid per hour?

Victor:

That speaks to some of the fallacy and limitations of charging hourly for what you do. If I only bill on an hourly basis, there’s an upper limit to how many people I can see much and how much I’m going to make. Because it’s all governed by the amount of time that I have. There are two factors that I can control: how much am I going to charge per hour, and how many hours am I going to work? And even both of these have an upper limit.

Mark:

In talking with my clients, they talk in terms of an hourly rate. I say, that’s fine. Tell me how many hours a week you’re willing to work and what your hourly rate is, and I’ll tell you your maximum income. Do you really want to live that way? I think most of us who are ambitious or want to work harder, don’t want an upper limit on our income. We like to think that it’s infinitely expandable.

Victor:

Traditionally, widget makers can scale what they sell to make more money. However, you don’t want to commoditize your offerings. So where is the balance in terms of professional services companies?

Mark:
I think the efficiency of your office, which is obviously important, is the widget maker part of it. That’s where you have systems and efficiencies in place that will enable you to become more and more profitable. Other factors are your ability to counsel or advise clients; your charisma, as far as the sales process goes; and your credibility as an authority. All of these things come into play.

In terms of fees and prices, I’ve run into so many different psychological blocks that lawyers have to get over before they can arrive at a happy and profitable practice. I can’t tell you how many new attorneys I’ve found whose strategy is, “I’m going to undercut the market. My prices are going to be lower than everybody else’s. And that’s going to be my advantage.”

You cannot win that game. There’s always someone who’ll undercut you. You’ve got LegalZoom out there, who’ll provide documents for $125. Then there’s OfficeMax, where you can buy a trust for $15. And then, of course, there’s the Internet, where you can find the information for free.

Trying to compete on the low price end is just absolutely useless and fruitless. I think a lot of attorneys feel guilty about the fees they charge, because their profession doesn’t involve hard physical labor. Aside from drafting documents, attorneys don’t have to do a lot of things. Therefore, I think it’s hard for them to believe that what they are doing is actually worth what they charge.

Victor:

I saw an interesting tech conference video recently – Dirty Jobs by Mike Rowe. He had a pretty nuanced and sophisticated view of his own program, comparing it to a fish out of water. He was pretty philosophical about it. He said, at some point in time, we got away from the idea that compensation was linked to risk. It’s the amount of risk people are willing to assume, and the amount of people who are willing to assume that risk.

Back in the day, when you wanted to make money, you were a railroad worker. You went out and made ties. That’s how you made the bulk of your money. Or, you went out and made skyscrapers. Slowly we transformed into information workers, because people didn’t want to assume the risk. And my hands are as soft as they come.

You’re right. I think there’s a lot of self-guilt among lawyers. Not only do some lawyers not think it’s hard labor, but believe it’s easy to do. And if it’s easy for them to do it, they shouldn’t be charging a lot.

Mark:

Here’s a great piece of career advice: do what’s easy for you and difficult for others. Back to Mike Rowe and the Dirty Jobs video. That’s an important point, because the traditional economic model was actually articulated by Karl Marx. A lot of people might be surprised to find out how Marxist their parents were. The model is: time plus labor equals value. That’s the root of hourly billing as well. Dig a ditch, that’s the labor. You dig for three hours, and you’re earned $6 based on that.

The problem is that in today’s information society, we want results. What’s the result of the action?

Victor:

Black box working. You put something in, then work your magic, and presto.

Mark:
As you know, I work on a monthly retainer. I’ve had potential clients call me up and say, for this monthly fee of X, how many of your hours are we going to get? And I say, that’s irrelevant. And they say, why is it irrelevant? I say, you’re paying me to achieve results for you in your practice. Right? Right. If I succeed in doing that, do you care how long it took me? No, you’d probably like me to do it in as short a time as possible. And if I fail, will you feel better if I spent 100 hours a month failing for you?

Although the hourly measurement of time plus labor equals value might still be true for ditch diggers or something like that. In the information society and professional services work, it’s a completely irrelevant notion.

Victor:

In other facets of professional service industries, clients readily accept the notion of a trade-off in value, especially if it’s a discretionary action. I don’t want to say estate planning is discretionary, especially since I practice it, but it’s not crisis driven. You’re not facing jail time. What I’m talking about is financial services, where somebody is making the bulk of their money based on their ability to provide value to you. So you accept it. It’s a fair trade off.

Mark, do you find that your clients are resistant to the idea of value billing? What has your clients’ experience been when they propose this to their clients?

Mark:

In my view, the value of an attorney’s services is essentially two things. On the one hand, it’s the attorney’s ability to tell you what you should do. The knowledge, experience, training and intelligence that goes into that. On the other hand, it is the actual doing of it. The drafting of documents, the meetings, and whatever.

In my experience, attorneys are only charging for that second thing. The deliverables. They say, “this particular job is going to take two hours of meetings and two hours of drafting, so that’s four hours. And I get $250 an hour, therefore the price is $1,000.” That assigns no value to their years in law school, years in practice, talent, and ability to think. Those things are intangible. And I think that’s ridiculous.

That mental step is the first step toward commoditization. As soon as you say that the value is the deliverables, now you’re competing with LegalZoom and all the other low-cost providers.
Victor:

With the advent of the Internet and the ability to do research on their own, are clients requiring the services of a lawyer less and less? Is a client going to be willing to pay $500 for high-quality attorney to put documents together, as opposed to paying $29 at LegalZoom?

Mark:

I don’t see too much of that. You’d know better than I … if people were coming in and saying that. Maybe you need to tell those people, “I’ve got a card for the attorney down the street who fills out forms for $200.” Or, “If you already know what you’re doing, go to LegalZoom.”

Victor:

I do exactly that. I let them know a couple things. First, if you are going to start spending lots of money, make sure that you’re getting something for it. There’s a break point. It’s not too complicated how we get things done. The folks that are charging a few hundred dollars or maybe a thousand dollars less than I am, are actually making more money than I am, all things considered. They have a huge mark-up on a factory that’s cranking out widgets based on forms. In fact, the least they could do is make sure their forms aren’t skewed, because of all the copying that’s been done over time. I do let my clients know that they could and should save money by hiring the least expensive form-filler they can find.

My practice doesn’t really attract that many form-fillers. That’s pretty clear to the people I work with, my own clients, and my referral sources and the people they refer to me. That’s not really what I’m about. I over-deliver on experience and counseling, so my clients know where their money is being spent. There is a dollar value associated with doing the planning. It’s more than just the deliverables.

Mark:

And that goes back to our original point. How do you communicate that? My argument is that you communicate that with price. You do these valuable things that are way beyond form-filling. You communicate that by charging $4,000 for an estate plan. That tells the client, the referral sources, and everybody else, “I do a valuable thing here that has nothing to do with filling out forms.”

Victor:

Not only do you communicate that with price, but also subconsciously with the idea that you’re still in business. It’s one thing to charge a lot of money, and another to actually stay in business doing it.

Mark:

Yes. You charge that much and people will pay you that much. There is a credibility issue there. Think about an area where consumers have no knowledge. This is what makes the hiring of an attorney, doctor, or other professional so harrowing for the consumer. You do this thing that I don’t understand how to do.

When you buy a can of Coke, a car or whatever, it’s a very empowering thing. You take control. You consume it. You can taste it and take it for a test drive. You can bring it back if you don’t like it, and the odds are, you’re going to get your money back. With a lawyer or doctor or professional, you’re handing over control. And you’re handing over control in an area that is of vital concern to you – your money or your health, or something like that.

You really don’t know if an attorney is any good at what they do. And you’re not in any position to judge. The only way you can know if he’s any good is to go to law school yourself, and then see if he’s any good. Sure, you can do the usual things, ask around, talk to people he’s worked with, look up his bar record. But in the end, that’s not very much information at all.

Victor:

And it’s doubly difficult when you’re spending money on something like an estate plan, the results of which you aren’t going to be around to see.

Mark:

Another example is jewelry. I don’t know anything about jewelry. I don’t carry a jeweler’s loop in my pocket so I can look into a diamond. I’m not a certified gemologist. They’re all pretty colored stones, as far as I can tell. So why does one cost $8,000, and the other $2,000? I have no idea. Two things convey value to me: packaging and price. That’s how I know if it’s any good or not.

Victor:

That is why you would go to Tiffany’s, as opposed to the shop down the street.

Mark:

I think Tiffany’s is part of the packaging. The setting and the prices communicate value.

We’ve all heard the saying, You get what you pay for. What a lot of attorneys fail to understand is that the world is full of people like me, who walk into a store and see two basically identical items, and take the higher priced one every time. Why? Because I think it’s better. Why? Because if it wasn’t better, they wouldn’t be charging a higher price for it.

Victor:

A lot of attorneys are the opposite. They’re skeptical about everything. They want to tear it apart 15 different ways. They want to know exactly how it ends up working. And then and only then, they open their wallet. And with deep regret, because once it’s paid for, that’s it.

Mark:

That’s right. And that’s not how a normal consumer behaves. Let me back that up with an experiment that I read about recently. I’m not sure if it came from Predictably Irrational by Dan Ariely, or another book I read recently. The experiment was conducted in a pain clinic, with two control groups. However, both groups were given placebos. So obviously, there would be no effect on either group’s pain. Group one was told the placebo pill costs 10 cents each. Group two was told the placebo pill was $3.50 each.

The result of the experiment, of course, was that group two, who were getting the allegedly more expensive pills, experienced almost four times the pain relief as group one. That’s fascinating on a number of levels. Price not only affects consumers pre-sale, but after the sale as well. People experience a higher degree of satisfaction from something they paid a lot of money for.

So in terms of your experience as an estate planning attorney, your clients are going to be happier with your work if they pay more for it. That is very counterintuitive. You might also think that more people will buy if they pay less, but in fact, both things are exactly the opposite. You’ll get more customers and higher client satisfaction with a higher price. That’s a tough one for attorneys to come to grips with.

Victor:
You and I both know some folks out there who have put a value on what they do somewhere in the realm of ridiculous. For example, an hour with me is $1,000 or $3,000. That’s not going to pass the giggle test.

Mark:

I think their first mistake, and the thing that makes me giggle the most, is the use of the word value. As if the seller can arbitrarily assign a value to something. If that’s their price, fine. But is anybody actually paying that price for their services? Show me that you get those sales.

It’s like assigning a value to an hour with your true love or something. Value is a meaningless concept to me. If your price is $3,000 an hour and you get it, great. That communicates the value. But you can’t arbitrarily assign a dollar value.

Victor:

I’ve seen attorneys trying to market their own practice. They say, “I’m giving you the opportunity to meet with me so that I can engage you as a client. The value of that hour of my time is $950. Congratulations, you’ve just gotten a $950 gift!”

Mark:
I’m more open to that, because I think there is value in talking with an attorney for an hour about your estate plan. If you say it’s a free consultation, in the mind of the consumer, free equals worthless. So I don’t have a problem with saying it’s a $350 consultation, for which you will get a gift certificate. I think that’s great.

MasterCard really does that well. That commercial that says, “Tickets to a baseball game … $49. The opportunity to see your son’s face as he watches his first game … priceless.”

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