Every time I see IBM‘s “$8 jar of cashews” commercial, with its touting of “premium pricing” as “our Holy Grail,” I shudder. The commercial reminds me of Ron Baker‘s example of movie theater popcorn as an acceptable pricing strategy for professionals (discussed here and below), and of the promises from Baker and other gurus of lawyer value billing and law firm branding, that their techniques offer the key to unlocking premium prices from clients. (See many prior posts, e.g., “ethics aside”; ron baker: sensitive guy?; Brand LEX, and Value Billing or Venal Bilking? )
update: In this post at his Verasage weblog, Rob Baker mocks my worries about premium-priced cashews and admits he uses this commercial as a case study in his seminars. He also offers this link to the 30-second IBM Mini-bar Commercial.
You probably know the ad, if you watch the talking-heads news shows. I’m most likely to catch it on Sunday morning, viewing ABC’s This Week. Not having a transcript (nor a photographic memory) for the ad, I must paraphrase:
A man in hotel room picks up a small jar of cashews, but returns it to the shelf on the room’s mini-bar. A voice-over tells us that it is quite a markup taking a $2 jar of cashews and selling it for $8. But, that’s premium pricing, which is “our Holy Grail.”
Meanwhile, the fidgety man goes back to the cupboard and picks up the $8 jar for his snack The announcer then says you can achieve such premium pricing by being there at the right moment — and, of course, that IBM has the resources that will allow you to reach that goal.
[As mentioned above, Ron Baker endorses the approach in this commercial and provided us with this link — IBM Mini-bar Commercial.]
Of course, cashews already fetch a “premium price,” as shown by the tiny “$2 jar” seen in the IBM ad, and by our current Rite Aide weekly circular (May 7, 2006, at 10). Rite Aide has a sale price of $2.99 this week on various packages of nuts. For that price, you get 24 oz. of peanuts, 11.5 oz of Mixed Nuts and 9.25 oz. of Cashew Halves (not even whole cashews!).
Lawyers have a similar built-in premium for their services, as compared to most other service providers and workers. Among lawyers, too, there are firms analogous to whole, half and split cashews. Not satisfied with getting $2 for a tiny jar of “lawyer-cashews”, however, Ron Baker, his acolytes, and fellow gurus and hucksters, want to use value billing, price sensitivity, firm branding, and other modern marketing tools, to propel professionals into the world of $8-jars of cashews. [e.g., Suzanne C. Lowe, discussed here]
In writing our post on price sensitivty, we looked at articles like “Pricing Strategies” (SmartPros, Jan.2000), and “Hourly Billing Limits Profitabilty” by Ron Baker, and browsed in his book The Firm of the Future. Your Editor pointed out the centrality of price (in)sensitivity in Ron’s pricing strategy, as he campaigns against hourly billing and its”‘limited profits,” and we summarized:
Baker advises professionals to maximize their “leverage” over each client, maneuvering so that the client is far less price-sensitive. This allows the professional to charge “premium fees,” well over the amounts that would be yielded using the billable hour method, resulting in increased profits (and more leisure time for the professional). This is apparently Ron’s ethics-sensitive alternative to client dissatisfaction with hourly billing — fueled with a righteous theory, in which it is the billable hour that is condemned as unethical. The professional gets significantly richer and the client gets the subjective feeling of receiving more value.
Frankly, then, IBM’s cashews ad reminds me of the perils of value billing for the client.
Am I being unfair to Baker and his cronies by making the leap from IBM’s cashews ad to value billing by lawyers and charging clients similar “premium” prices? Well, two years ago, Matt Homann of the [non]billable hour called Ron Baker “an absolutely amazing visionary.” A few months ago, he did it again, handing his weblog over to Baker, to let him promote his new book Pricing on Purpose.
The very first chapter to Pricing on Purpose is devoted to explaining why movie theater popcorn costs so much — and to justifying the price. At page 2, Baker explains that the theater owner wants to maximize his profits and knows that some movie goers love popcorn more than others. Therefore:
“The purpose of expensive popcorn is to extract different sums from different customers.”
Amplifying on the explanation of economist Steven Landsburg, Baker explains that the movie-goer buying a ticket to the theater is buying “an opportunity set” — “an opportunity to enjoy the movie, or to enjoy it with popcorn.” This two-part tariff is, according to Baker, a form of price discrimination that increases overall welfare. Instead of charging everyone a higher fee to maximize profits::
“By engaging in price discrimination, businesses are actually increasing social welfare, and making more products and services available to the poorest members of society.”
We don’t want to sound cynical, but this saintly rationale just doesn’t ring true coming from Ron Baker — except for the maximizing profits part, and the strategy of charging more to those who are less price-sensitive (even if you have both fiduciary and ethical duties to avoid excessive prices). More important, price discrimination increases overall welfare when the seller continues to sell to all consumers, but Baker has no such intention — he is cherry-picking and pruning away clients who won’t pay premium prices. Also, those paying higher prices have a decrease in their own welfare (and lose the ability to make other purchases with the increased portion of the price), which is absorbed by the seller.
This “visionary” has a track record and a paper/pixel trail:
In the Introduction to his The Firm of the Future, Baker “affectionately” calls a chart showing price sensitivity “The Beloved Value Curve” [at 4]. He coos over his curve [at 5]:
“The curve shows the relative value added by the professional has an inverse relationship to the price sensitivity of the customer . . . For now, it is important to understand your firm is all over this curve for any one given customer, at any one point in time. The major mistake professionals make is in treating all customers equally by pricing their services with one hourly rate method, no matter where they are on the curve.”
In The Firm of the Future, and in the article “Hourly Billing Limits Profitabilty“, Baker gives a tutorial on “pricing psychology, and emphasizes that “Regarding price leverage, the important point to remember is that you want to set prices when you possess the leverage.”
As an example of leverage, see Baker’s article “Change Orders: What a Concept!“, where Ron says:
“A favorite way to make the client insensitive to premium fees is the use of Change Orders when services are needed beyond those covered in the initial fixed-price arrangement [no kiddies, pricing can’t really all be done up front]. ”
(Ed. note: those are Baker’s words in the brackets, not your Editor’s)
In “Change Orders and Innovative Pricing Methods,” Baker brags about the results he has seen from those using his pricing techniques: if properly “leveraged,” clients will offer to pay two or three times as much (sometimes ten times as much) as a professional’s regular fees.
But, you ask, doesn’t that mean that the client is receiving more “value”? Well, take a look at Ron Baker’s idea of the customer getting greater value: In “Burying the Billable Hour,” he emphasizes that the following pricing strategy from Harry Beckwith is central to his theory of value and value billing:
“Like money, price talks. It changes perceptions. Price changes the actual experience of using the service: A high price actually improves the experience. Watch what your price says. Push price higher. Higher prices don’t just talk, they tempt.”
Still, you say, Baker doesn’t look out for the little guy — telling firms to discriminate in pricing so that the poor will also get needed services? Let’s let Baker answer you himself, with this piece of advice from “Pricing Strategies“:
“. . . If you cannot conquer price resistance through educating the customer, then I would seriously suggest you not take the engagement. Never decrease your price in order to acquire a customer suffering from price resistance – that cheats your firm’s best customers, those who value what you provide, and subsidizes your worst customers, those drawn to you by price considerations alone.”
So, yes, cashews remind me of popcorn, and IBM’s promise to help you achieve premium pricing reminds me of Ron Baker’s similar siren call for lawyers.
The f/k/a Gang believes that the gurus of value-billing — along with those easily-tempted lawyers, who buy their books and attend their seminars, and applaud from their websites, in the hope of obtaining premium clients and fees (with both increased profits and more leisure time) — have forgotten or ignored the ethical and fiduciary duties of the lawyer to insure that the client is treated fairly (without manipulation), fully informed, and, in the end, charged a fee that is reasonable.
No, it’s not okay for lawyers to charge fees significantly higher than their hourly rates as an ironic response to client complaints that bills are too large under the hourly-fee system. Fiduciaries don’t manipulate clients to reduce their price sensitivity. Period.
The price of cashews in restaurants and popcorn in theaters are simply not relevant to our learned profession. If you want to “leverage” premium prices from the price-insensitive, please find a job outside the legal profession. And, please, don’t tell us that your premium fees themselves create client value, or that they are automatically an ethical improvement over hourly billing. Paying $50 or $150 for one of Ron Baker’s books, or many times that for his seminars, may soothe your conscience by telling you what you want to hear, but it is not like buying an indulgence that will absolve you of your sins.
Baker is right about one thing: better service will help create client loyalty and attract new clients. However, where I come from, excellent service is part of the regular fee.
More chestnut haiku from Kobayashi Issa translated by David Lanoue:
worm-eaten–
the best chestnut!
the best!
in mountain shade
rest without a care!
nut-less chestnut tree
big chestnuts–
the travelers stop
and gathefallen chestnuts–
the crow gets first
dibsknocking chestnuts
out of the little garden…
thief cat
flashing ambulance lights–
rain still filling
every puddle
at the bus stop
our backs to the wind
the sunrise changes color
she comes back–
the ocean drips off
every part of her
huge trees in the park–
a different dog
chasing the stick
“she comes back” & “at the bus stop” – breathmarks: haiku to read in the dark
“flashing ambulance lights–” – Walking the Same Path (HSA 2004 Memb. Anth.)
“huge trees in the park–” the heron’s nest (April 2001)
the world today–
even for mountain chestnuts
a night watchman!… by Kobayashi Issa, translated by David Lanoue