"People's behavior makes sense if you think about it in terms of their goals, needs, and motives" - Thomas Mann, German novelist & Nobel Prize laureate (1875-1955)

The conditioned reflex...

Pricing is usually viewed as a means to impact turnover and in so doing increase profit. Laudable and valid though these objectives are, this one-dimensional view of pricing overlooks other equally valuable strategic uses to which the pricing ‘lever’ can be applied.

Most are familiar with the Russian physician and physiologist Ivan Pavlov. The concept for which Pavlov is most famous is the "conditioned reflex". He researched the concept of conditioned reflex when examining the rates of salivation among dogs. Pavlov demonstrated that when a bell was rung contemporaneously with food being presented to the dog in consecutive sequences, the dog would as expected salivate when the food was presented.

The dog came to associate the ringing of the bell with the presentation of the food and salivate upon the ringing of the bell. Once the conditioned reflex was established, the dog salivated upon the ringing of the bell, even if no food was presented.

So, what on earth does this have to do with pricing and the client perspective? Before trying to answer this, let’s look at two examples of apparently irrational pricing strategies used in other fields of commerce.

Intelligent and adaptive pricing...

Why do cinemas have seniors Tuesdays? Why are Las Vegas hotels much cheaper from Monday night to Thursday night? There are a number of reasons but the one they have in common is the use of pricing to influence customer behavior.

There could be one or more reasons for doing so including:

• Advantages for the organisation in better managing their staffing resources and costs.
• Benefit to the organisation in spreading demand more evenly through the week, month or year.
• Higher utilization rates in relation to fixed costs such as premises and equipment as well as variable costs such as staffing and inventory.
• The pricing structure is intended to ‘punish’ customers who behave a certain way and conversely reward those that behave in the way that better suits the business.

What do these all have in common? They all use price as a tactical tool to manage the customers’ behaviour. These tactics may also positively impact the enterprises’ bottom line but that is often a collateral objective.

Cinema matinees & cheap Vegas hotel rooms

Why do cinemas have seniors Tuesdays? Because seniors are often more price sensitive, being on fixed and modest incomes. The seniors often do not enjoy sharing the experience with hyperactive youngsters shrieking and dropping icecream down their necks and may choose not to go at all for this reason. The cinema would be virtually empty on a Tuesday between 10am and 3pm. With high fixed costs, the cinema is better to have some ‘backsides on seats’, even at a discount.

Without an intelligent, adaptive pricing strategy, the cinema would not collect that revenue, virtually all of which is pure profit. So, we have a pricing strategy that delivers good outcomes for the cinema and a particular category of patron.

Las Vegas, busy at the best of times, is positively invaded over the weekend placing accommodation and the entire infrastructure under considerable stress. The high rollers arrive on a Friday and leave on Monday in their droves. When my wife and I were there recently, I watched the airport from our hotel room window on Monday afternoon and counted 23 Boeing 747s taxiing for takeoff.

For many, they have no choice but to go there over the weekend or at least prefer to do so to minimise the use of annual holiday leave. Others like my wife and I weren’t bothered either way. The hotels used pricing to incentivise us to book our 4 days mid week. The difference was huge; something in the order of $100 a night from Monday to Wednesday, $200 on Thursday, $300 on Friday and $450 on Saturday.

If the rooms were $400 every night, we would probably have only stayed 1 or 2 nights instead of 4. Their accommodation revenue from us might have been similar but they would have lost 2 or 3 nights of our spending on food, beverages and entertainment. If they had priced the rooms at $200 all week, they would have foregone the premium revenue that the very keen punters were prepared to pay on the weekend.

The thing is that this is not done with ‘smoke and mirrors’. It is all very transparent, everyone sees how it works, accepts that this is how it works and organises themselves around these commercial ‘rules of engagement’.

And this works for lawyers how exactly?

How might these concepts be deployed in legal practice? My self-imposed word count restraint on these blog posts precludes a complex example but I hope a very simple one will serve to illustrate the point and the potential. We will explore this further in future posts.

It is a curious thing but most lawyers working in the Private Client sector find that their clients have a frustrating proclivity to want wills or even more complex succession planning arrangements finalised, just before the clients go on annual leave or engage in air travel. Evidently, disaster is a seasonal issue!

One firm I worked with was for some reason particularly beset by this workflow problem. We fixed the problem overnight by advising clients that any wills prepared during December (immediately prior to the Christmas break), would attract a 50% premium. What happened? Mass revolt? Numerous complaints? ‘Authorities-to-uplift’ from competitors? Not a peep from anyone. There were however numerous will instructions in September, October and November and hardly any in December. Problem solved.

It is safe to assume that no clients will ever salivate with anticipation like Pavlov’s dogs but there is nonetheless considerable scope to use price as a means to ‘ring the bell’ to encourage specific responses and behavior from clients.