I recently received an interesting e-mail from a friend who is a senior manager in a large law firm. He raised the idea of “dynamic pricing”, which is how airlines price seats and a mechanism some thinkers suggest will become more common for other consumer goods. I share here our e-mail exchange. 

Friend: I want to share with you an article with a very interesting summary of consumer trends. Section 3 of 11 Crucial Consumer Trends for 2011 focuses on new ways of shopping for goods and services. Note especially the very last paragraph on dynamic pricing:

    “Dynamic pricing. Traditionally practiced by the airline industry, improvements in real-time information are now allowing other sectors to experiment with innovative dynamic pricing models, such as the US-based Off and Away, which auctions hotel rooms, and Swoopo, a German ‘entertainment shopping’ site where every bid placed extends the auction’s time period.”

This idea will likely become relevant in the legal market, i.e., lawyers offering and clients asking for lower priced services for lower utilized staff for less time critical work, something called dynamic pricing. This will require very accurate and up-to-date information on what capacity is available, and real-time tools to find the correct pricing for this capacity. My guess is that there will be quasi law firms – probably spurred on by the changes in UK funding in this area – that will cotton on to this quite quickly and put further pressure on the legal market. I suspect law firms will be late to this potentially disruptive pricing scheme. They might be forced to ‘sell capacity’ into third party networks – in other industries these are called ‘platforms’. You may think of Apple’s iTunes / App Store as a platform, and observe the damage this is doing to Microsoft, Nokia, Dell, RIM BlackBerry, etc, etc.

Ron: The dynamic pricing idea is interesting but, even for me, somewhat futuristic. Aside from the practical issues to implement it, there is market psychology. Consumers like a bargain and don’t want to feel they paid too much. To some extent, those two require a trade-off. I’m thinking of the souk or any other merchandise sales where price is subject to negotiation. There is a cost to the negotiation in both time and in the anxiety that you have left money on the table.

So dynamic pricing might induce some of the same anxiety in general counsels. Unless of course clients can be trained to deal with legal service as they do flights and just accept a highly variable and often incomprehensible pricing scheme.

Another reason I am skeptical is that I’m not sure there are enough similar transactions to support D/P in law the way airlines can. Airlines can predict future demand based on history – do you think that’s true, even in law factory work? If I want to maximize revenue, I’d rather figure out each customer’s price elasticity and extract the highest possible price per customer. If someone willing to pay a lot comes along when I have capacity, I’d rather charge the high price.

PS – not sure I completely get the platform analogy. Are you suggesting suppliers would sell into a distribution network with broader reach?

Friend: My thinking is that there will be platform providers (e.g., Thomson Reuters or perhaps a commercially set up virtual law firm) who will allow clients, lawyers, support service providers and other specialists to trade services. I think this will take quite a bit of time but may arrive in the medium term at the more commoditized end of the market. Platform players may ultimately become market makers and dominate this space – may take a while to arrive at BigLaw – but may come sooner if the pricing and the service experience are very compelling.

Ron: Irrespective of dynamic pricing, the idea of a platform provider in legal is interesting. Arguably, Lexis Nexis and Thomson Reuters West are best positioned, as you point out. Especially TRI, with its recent purchase of a legal process outsourcer (LPO), may be angling to become such a platform. Do you think, however, the platform might come from a start-up, say Legal Onramp, which is trying to be more of marketplace than a provider per se?

I still struggle with the underlying economics of dynamic pricing in the legal market. By available capacity I assume the focus should be on people (lawyers or related professionals), not machines. Aside from the fact that legal automated systems are not that advanced, adding capacity to them is very inexpensive. So staying with staff, I wonder if a profit maximizing supplier – whether a law firm or alternative supplier such as an Axiom or LPO – would not be better off limiting capacity to what it can reasonably expect to sell. Holding excess human capacity is very expensive, irrespective of who “owns” it. Unless the “spot price” of capacity were a lot higher than the long-term price, I suspect suppliers would be careful to limit capacity, preferring to fall short of meeting demand (foregoing revenue) than risk a significant over supply (incurring unnecessary cost).

So, is this too futuristic? Comments welcome.