Fewer dollars may take you further

Ashley Milne-Tyte Apr 21, 2009

Fewer dollars may take you further

Ashley Milne-Tyte Apr 21, 2009


Bob Moon: All right, I’m cheap. Cheap, cheap, cheap. There’s always a nagging worry that if I paid full price, I paid too much. We’re getting pretty used to seeing discounts these days, on everything from clothes to cars to fancy vacations. Almost makes you wonder: Does anyone pay full price for anything anymore? Well, they do, of course. But not often. The discount list keeps getting longer. And you might be surprised to find out what’s on it. Ashley Milne-Tyte reports.

ASHLEY MILNE-TYTE: Robin Forman is a psychologist in Manhattan. She spends most of her time working with children. Last summer she noticed their well-heeled parents were becoming anxious about money.

ROBIN FORMAN: I was starting to hear about people losing their jobs. And at that point I began to realize that my fees which had been quite within the range of normal the year before were beginning to be high for some people. And I felt that the time had come to lower them.

Forman cut her fees for new clients by 10 percent. And if they hesitate when she quotes her price, she knocks off another six to eight percent. She says many of her colleagues are doing the same thing.

Lawyers are also under pressures to cut their fees, but they’ve been more reluctant to tinker with their sacred system of billing. Joel Henning is with Hildebrandt, management consultants for the legal profession.

JOEL HENNING: The incentives in the law firm are to pile it on and to put as many people on a case as possible, and to bill for their time on an hourly basis.

Or as Gene Hackman’s character put it in The Firm…

GENE HACKMAN: Everything depends on billing. How many hours you spend even thinking about a client. I don’t care if you’re stuck in traffic or shaving or sitting on a park bench.

OK, Joel Henning says that’s a slight exaggeration. But he says traditionally big law firms have had little incentive to be efficient or cost effective. And in a good economy few clients complained. But lately they’ve begun pushing back. And law firms have begun cutting back, in some cases lowering hourly rates or charging flat fees.

HENNING: They will offer to handle, for example, all of the litigation of a company for a fixed fee or all of the labor and employment matters for a fixed fee. And I think we’re moving towards that kind of model, although very slowly.

Cash-strapped companies don’t want to pay the usual rates for their marketing efforts either. So some ad agencies are also reducing fees or switching to a pay-for-performance pricing model.

These tactics may help businesses hold onto clients now. But what happens when the economy recovers, and they want to bring prices back up? Tom Meyvis is a marketing professor at New York University. He says businesses will have to raise fees gradually to keep clients from walking. He says customers are happy when a price falls. Still…

TOM MEYVIS: When you raise it back up of course it’s a negative change, but that negative reaction is much stronger than your initial positive reaction.

He says the brain is hard-wired to respond more strongly to bad news than good. So consumers will sulk when a price goes up and all but forget the unexpected bargain they got when it dropped. Meyvis says one way for businesses to keep their options open is to manage expectations.

MEYVIS: I mean you can try to make sure that you lower your rate without affecting the long-term reference price by making it seem like an exception. You know, it’s a recession special.

Psychologist Robin Forman says she’ll be ready to take her special off the menu as soon as she gets her cue.

FORMAN: If things begin to turn around, and people start sounding like they’ve got much more disposable income then I will raise my fees too. You know, I don’t want to be the last person on the block to make a living!

She’s waiting until clients start packing kids off to camp again, and hitting the beaches of Europe.

I’m Ashley Milne-Tyte for Marketplace.

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