Strategic Pricing: Setting the Billable Hour at the Intersection of Psychology, Feedback, and Growth

By David Ackert, Co-founder & CEO of PipelinePlus

Setting legal fees is both an art and a science, requiring firms to balance their business goals with clients’ expectations. Beyond alternative fee arrangements, firms should consider hourly rate adjustments with three factors in mind: psychological pricing, client feedback, and growth. All three are vital for aligning fees with perceived value while supporting the firm’s financial health. By thoughtfully applying these strategies, firms can establish rates that are clear, fair, and optimized for long-term success.

Psychological pricing principles enable firms to present their fees in ways that resonate with how clients naturally perceive value. Rooted in behavioral economics, these tactics ensure that legal services are well-positioned while maintaining client trust.

1. Threshold Pricing

   Setting rates just below a significant round number can influence how fees are perceived. For instance, $490/hour feels more affordable than $500/hour, even though the difference is small. Conversely, incremental increase within a round number threshold, such as raising rates from $360/hour to $375/hour, often falls within clients’ expectations of acceptability. These adjustments are rarely questioned, especially when the value of the service is evident. Threshold pricing helps firms manage their fee adjustments for optimal profitability while ensuring rates remain reasonable for their clients.

2. Anchoring Bias

   Presenting a higher-priced option first establishes a benchmark for value, making subsequent options seem more approachable. For example, initially proposing $600/hour and then offering a discounted rate of $500/hour helps clients view the latter as more reasonable. This strategy sets clear expectations and communicates value effectively.

3. The Importance of Clean Numbers

   Odd rates like $446/hour can prompt clients to question their reasoning, shifting the focus from value to math. Rounded figures, such as $450/hour, feel deliberate and professional, helping maintain the focus on the quality of service rather than the pricing mechanics.

Even firms who understand these principles struggle with pricing due to a reliance on internal factors or incomplete data. Their pricing strategy is based on historical rates, operational costs, or benchmarking against competitors—who themselves lack a robust approach to pricing. The missing ingredient is input from the legal buyers themselves. Without direct feedback from clients, firms rely on assumptions about their willingness to pay, which can lead to missed opportunities for revenue optimization or underpricing valuable services.

 

Client-centered pricing shifts the focus onto the buyer, ensuring that the perceived value of the firm’s services informs its pricing calculus. Engaging clients directly through feedback provides actionable insights into how they view the firm and their willingness to pay for its services. Many firms rely on consulting firms like ours for this critical work, outsourcing it to neutral third parties who can facilitate candid, confidential conversations with their legal buyers. These discussions often reveal insights that most firms find awkward to broach with their clients. The data provided goes beyond assumptions or competitive benchmarks, enabling firms to refine their pricing strategies in lockstep with their clients’ mindsets.

 

Finally, fee adjustments are not an exercise in making everyone happy. They should also align with the firm’s strategic growth goals. If a firm isn’t getting any pushback on new rates, it’s a sign that the increase was too low. Each strategic adjustment should help cull a few unprofitable clients, focusing on a high-value client base where quality is more important than quantity. A fee adjustment does not necessarily need to mirror inflation or apply the same increment as last year’s adjustment. One of the firms in our network demonstrated this point when it decided to significantly increase its rates in some categories by as much as 20% in 2024. The result? Only two client complaints, the loss of one unprofitable client, and a significant boost to their bottom line. Rethinking traditional pricing methods can yield substantial benefits.

 

By integrating the principles of psychological pricing, client feedback, and long-term growth, law firms can create a dynamic that not only optimizes profitability but also aligns with clients’ perceptions of value. Firms that manage to strike this balance will retain the clients that can help them grow, shed the clients that hold them back, attract better talent, and ultimately, move upmarket.