Neurogenetics of pricing: Why fee discounts destroy client loyalty

Pricing is one of the biggest concerns facing law firms in the 'new normal' of constantly-fluctuating client needs and loyalty. Since 2007, demand for external legal services has flattened and, as a result, fees have plateaued.

One of the reasons for this is the higher volume of discounts being given by major law firms to preferred customers in order to retain their loyalty and the firm's market share. Another is that many legal services are increasingly seen as a commodity and so the brands of individual law firms are far less important than they were. Without a strongly differentiated brand and a credible value proposition, law firms often feel that there is little to compete on except price.

In this article, we will explore the neuroscience behind pricing and why discounts are counterintuitive for those areas of law that are not commoditised.

Decision-making process

Many firms give far too much attention
to the issue of pricing. Discussions
about fees often mask a whole range
of issues which centre on the relationship that the firm, or an individual partner,
has with a client.

From the perspective of genetics and neurobiology (the human neurogenetic system) price and legal work are the currencies of a relationship - the excuses for making a relationship happen. They
are not ends in themselves.

New research casts light on how the human neurogenetic system appraises and decides to make a purchase of products and services.¹ Purchasing decisions are made on the basis of one or more of
three factors, which are interlinked:

1. people's need to create or reinforce supportive relationships - past,
   present or potential;

2. people's genetic propensity to
   favour one choice over another;

3. the value (reward) that we think
   we will get from the purchase.

Each of these can be used by a skilled lawyer or firm leader to create a price and value proposition favourable to both sides.

Role of relationships

Eighty per cent of our genetic and neurobiological inheritance is, in some way, geared to the objective of surrounding ourselves with a nexus of supportive relationships. We are, overwhelmingly, relationship-forming animals. The thing
we fear most, even more than death,
is exclusion.²

The reason for this is fairly simple. Picture a hunter-gatherer alone on the ancient African savannah. He is faced
with numerous predators and other dangers; alone, he is defenceless. His
only protection is in the company and support of other members of his band.³ Over the eons of our existence, this
need became embedded in our genetics, and hence in our neurobiology.⁴

The need to form and maintain relationships which are deemed supportive has become one of the three primary drivers of humans, along with the acquisition of food and the passing on of one's genetic inheritance.⁵ Mutually-supportive relationships are key to both.

This means that any transaction - no matter what it seems to be about - will, in effect, centre on the perceived relational value. So, what any professional services firm (especially a law firm) is really selling is a real or potential supportive relationship.

If someone feels that the firm, or an individual partner, is part of their essential support network, they will be a loyal client to the firm. They will do what they can to retain that relationship, even if the advice of the firm or a particular lawyer turns out to be wrong. This relationship commitment is called 'adult attachment'.⁶

Power of attachment

Attachment theory was first devised to explain how children bond with their parents. If a child has a secure parental attachment, then she will grow up to have good and secure relationships in later life.

As adults, most people (psychopaths excluded) subconsciously see safety
in terms of secure attachment. This outlook is embedded in our genes. As
a result, we tend to see people who have greater power, knowledge or authority, or who are able to protect us in some significant way, as parental figures.⁷
This has huge implications for anyone selling professional services, especially legal services.

Research conducted over the past few years has shown that, because clients control the purchasing decision and the funds to pay legal fees, partners and lawyers generally see them as parental figures. However, clients generally see their lawyers as parental figures because of their knowledge and ability to protect them.⁸

A parent is the ultimate authority figure. A good parent is sure of their boundaries and clear about the rules of the house. They know that there are times to bend the rules, but a child's sense of safety is based on the feeling that their parent is 'in control' and that the rules and boundaries they enforce are consistent and can be relied upon. If there are no reliable rules,
or if they are applied inconsistently, the child will feel unsafe and will act up in order to force the parent to formulate
and apply consistent rules.⁹

In terms of selling legal services, this means that if a firm fails to instil a sense of secure attachment in the client (actual or potential), the client will probably go straight to a rival firm.¹⁰

In our experience of working with law firms in the UK, Australia, Asia and the US, the overwhelming reason firms or partners lose valuable clients is that there has been a relationship failure on either the part of the firm or the individual lawyer.

Sometimes, there is a lack of consistent attention and communication. Sometimes, the client feels aggrieved because the partner he worked with has passed the work on to another lawyer without
keeping in regular touch or without showing that they are still in charge
of the matter. To the brain, this is the equivalent of parental abandonment.

Discounting attachment

If a partner or a firm discounts the price
of their services too readily or too much,
a client can react rather like a child who feels unsafe because her parents are constantly bending to her demands.¹¹
The result is that there is little loyalty
to the partner or the firm. Many firms are
aware of this and resist the temptation
to discount, even for preferred customers (though, like good parents, they know
when to bend the rules a little).

"The structure of pricing arrangements is not really the critical issue," says Paul Bonomy, chief marketing officer at Herbert Smith Freehills. "The relationship with the client is the most important thing. Given
a good relationship, we can work out with them a structure that is fair to both them and ourselves."

Clients will often make a big issue of pricing as a way to test the degree of support and safety they can get from the partner or the firm, much like a child acting up to get a parent's attention. That is the very time to resist the temptation to discount; instead, the firm should concentrate on clarifying the value the
client will get at that price.

Professional services firms and individual lawyers speak a lot about their 'value proposition', but usually fail to articulate anything really different from what their competitors offer. So, in the business of
law, what does value really mean?

Neurogenetics of value

"Value is what's best for the client," says John O'Callaghan, COO of Australian law firm Arnold Bloch Leibler. "And you can only know what that is by forming the kind of relationship with them which leads you to really understand their drivers, their hopes and their fears. We're in the business of relationships, and price is
only one part of that fabric."

In neuropsychological terms, O'Callaghan is absolutely right. The decision-making part of the brain sees 'value' in quite different terms from the constructs conjured up by the more
rational parts of the brain.

Value is tied to what is called the dopamine reward system. This system ensures that we do things which a part
of the brain called the ventromedial prefrontal cortex perceives will bring us the maximum reward in terms of the neurochemical dopamine.

Dopamine is an opiate sometimes mistakenly called the pleasure drug.
This reward system is the basis for most of our actions and decisions. The greater the prospect a person has of a dopamine reward, the more value the brain places
on the projected experience or action
and the more likely it is that he or she
will follow through with it.¹² Again, this
is quite unconscious.

How do you determine what value means to client? A skilled partner will use questioning to discover the product, service, information or advice a particular client requires, and the ballpark price they are probably willing to pay at this time, before submitting a proposal.

Value is essentially about 'here, now, me'. Lawyers have tended to see value in terms of what they offer, but a true value proposition is what the client wants it to
be and, sometimes, is only for a particular time or matter.¹³

"Value is very ambiguous," comments Maria Polczynski, head of group legal at Bendigo & Adelaide Bank. "And it's not what firms have tended to think it was. They saw it as being their expertise, their strategic insights, their 24x7 availability
and so on".¹⁴

She believes that lawyers have tended to be risk averse and have wanted to stick to the safety of what they know (the law), rather than undertake the more lengthy
and time-intensive business of discovering their clients' real drivers.

"We prefer to look at value not so much in terms of what we can offer, but in terms of what the client wants," says Bonomy. "That differentiating factor, which all firms seek, is really an ability to sit down with the client, when the clock is not ticking, and really understand them and their business."

Within reason, price is only a primary consideration when the firm or individual lawyer has failed to discover what would trigger the target brain's dopamine reward pathway; a strong hit there will trump all other considerations.¹⁵ Getting this right
is what the human system sees as being part of its relational support network.

Neurogenetics purchase

A decision to purchase is not a rational one, but rather one predicated on emotions, genetics and habits formed through early experience. No matter how fact and data-driven a client may want to make the selection of a lawyer or firm, it will never, in the end, be based on reasoning since, basically, no purchasing decision ever is.¹⁶ It's not the way the human system works.

For example, in terms of our genetics, some of us are naturally risk averse, while others are not. Only skilful questioning will determine which side of the risk line anyone will fall on; never assume you know. This risk acceptance/aversion plays a large role in what we buy and from whom. 

For example, it can affect whether we buy branded or unbranded goods or select small or large law firms; whether we try new foods or experiment with unfamiliar law firms; whether we vote for a conservative (small c) party or a more radical one on the right or left side of the political spectrum.¹⁷

A prospective client with a high risk tolerance is more likely to choose a small or mid-sized firm, to experiment with different lawyers or firms and to be more likely to accept the option of hourly billing; it’s better to know that before you put in a proposal. 

A client with a low risk tolerance will probably opt for a larger firm, be more reluctant to change the law firm he is with and want the comparative safety of a fixed price or joint-risk fee arrangement. Clearly, there is no point in seeking a particular pricing structure until you have discovered the client’s risk tolerance.

The neurochemical/genetic make-up of a client may, on the face of it, seem impossible to fathom, but there are some obvious and fun clues to watch for if you are one of those who are willing to open their minds and look differently. 

For example, men usually have longer fourth digits (ring fingers) than second digits (index fingers). Research has shown that men (but not women) who have less of a difference in the length of their ring and index finger have more testosterone and are more aggressive.¹⁸ These people will be more likely to be determined to beat their lawyers down on price and to call at inconvenient times. Someone with the opposite ratio will be more likely to settle quickly on fees and to assume you know what you’re doing.

There are many other verbal and non-verbal clues; knowing the science of pricing will help you around 80 per cent of the time to make an accurate assessment of where to pitch your fees. But, this will only work if you take the time to ask the questions and make the observations that will give you clues to your client’s neurogenetic make-up. 

As Michael Rose, managing partner of Allens Linklaters, puts it: “You’ve got to ask the questions. You’ve got to ask ‘what do you want and need of us, and how can we deliver it?’” 

 

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Creating valuable client relationships

• Concentrate on the relationship, not the service or the matter

• Ask questions to understand a prospective client’s interests, experiences and preferences

• Find out what ‘support’ means to each individual client

• Spend more time listening to clients than telling them what to do

• Never assume you know what each client will accept

• Remember that ‘value’ is not what you offer but what the client wants

• Use questions to discover the client’s ‘here’, ‘now’ and ‘me’ ideas of value

• Listen and observe to discover each client’s neurogenetic drivers

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Alicia Fortinberry, PhD and Bob Murray, MBA, PhD, won the 2012 American Science achievement award for their work on the behavioural neurogenetics of motivation and personality. They are founders and principals of global consultancy Fortinberry Murray
(www.fortinberrymurray.com).

References

1. See 'Learning from Experience Simply',
   J. Zhang et al, Marketing Science,
   Vol. 34 No. 1, pp 1-19, 2015

2. See 'Effects of social exclusion on cognitive processes: Anticipated aloneness reduces intelligent thought', R.F. Baumeister et al, Journal of Personality and Social Psychology,
   Vol. 83 No. 4, pp 817-827, 2002

3. See The Illustrated History of
   Early Man, John Haywood, PRC Publishing, 1995

4. See Evolutionary Psychiatry, A. Stevens and J. Price, Routledge, 2000

5. See Sociobiology and Mental Disorder, B. Wenegrat, Addison-Wesley, 1984

6. See 'From childhood to adult relationships: Attachment theory and research' K. Bartholemew, in Learning about relationships. Understanding relationship processes series, Vol. 2, Sage Publications, 1993

7. See 'An Overview of Adult Attachment Theory', P. Shaver and M. Mikulincer,
   in Attachment Theory and Research
   in Clinical Work with Adults,
   Gilford Press, 2010

8. See 'Attachment and leader's development via experiences', M. Popper and K. Amit, The Leadership Quarterly, Vol. 20 No. 5, pp 749-763, 2009

9. See Raising an Optimistic Child,
   B. Murray and A. Fortinberry,
   McGraw-Hill, 2006

10. See Commitment in the workplace: Theory, research, and application,
    J.P. Meyer and N.J. Allen, Sage Publications, 1997

11. See 'Consumer - retailer love and attachment: Antecedents and personality moderators', P.A. Vlachos and A.P. Vrechopoulos, Journal of Retailing and Consumer Services,
    Vol. 19 No. 2, pp 218-228, 2012

12. See 'Anticipation of reward in a nonaversive differential conditioning paradigm and the brain reward system: an event-related fMRI study', P. Kirsch
    et al, Neuroimage, Vol. 20 No. 2,
    pp 1086-1095, 2003

13. See 'A stakeholder perspective of
    the value proposition concept,'
    P. Frow and A. Payne, European
    Journal of Marketing, Vol. 45 No. 1, pp.223-240, 2011

14. From Maria Polczynski's address at 'The 2015 World Masters of Law Firm Management: Improving Client Value in the New Law Paradigm' conference, Sydney, 12 March 2015

15. See 'Neuroanatomy of Dopamine: Reward and Addiction', K. Taber et al, Journal of Neuropsychiatry, Vol. 24
    No. 1, pp 1-4, 2012

16. See 'Old and New Marketing Techniques: Using images to penetrate the mind of the consumer' paper,
    I. Contardo, presented at the CMS Conference, 7-9 July 2004

17. See 'Ventromedial Prefrontal Cortex Encodes Emotional Value', A. Winecoff
    et al, Journal of Neuroscience, Vol. 33, No. 27, pp 11032-11039, 2013

18. See 'Finger length ratio (2D:4D) correlates with physical aggression
    in men but not in women', A. Bailey
    and P. Hurd, Biological Psychology,
    Vol. 68 No. 3, pp 215-222, 2005

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