Law firms can use Threshold Discounting in a creative way to offer clients a way to control costs and also build volume (loyalty).
The billable hour, as we all know puts firms and clients at complete odds. The firm benefits from more hours and the client is looking for a way to control costs on an engagement. The best situation for a client is a fixed price. If the firm has a good deal of expertise in an area they might be less concerned about taking a “hair-cut” with even a small bit of risk a fixed price matter might bring. Clients are looking for an alternative arrangement other than just billable hours. The firm might be creative by offering the client a “Threshold Discount” based on either hours or dollar value. For example, The firm believes they can handle the matter for $100,000, they offer the client a 25% discount for any dollars from $100,000 to $110,000 and a 40% discount for any billings over $110,000. In this scenario both parties share in the small but ever present risk involved. Likewise, the firm could instead offer 500 hours at a standard rate and a 25% discount for any hours between 500 and 600 and an additional 15% discount on any hours required over 600. The client likes this arrangement and the firm uses this as a marketing tool to generate work in areas where they excel.
In this scenario the firm wants to encourage a client to provide the firm with more and more work. This is an everyday marketing issue. If you go out to buy widgets the price can fluctuate between buying just 1 widget, a box of 100 widgets, or a box car load of a million widgets. This method of pricing also has its own checks and balances, firms like the reliability of “guaranteed” work, however they have to better manage the engagements since the more work they do the lower the rate might be. An additional twist might be to lock in a “stop date”, for example the firm offers an additional 10% discount on all work done before November 1st. The firm would use this incentive in hopes of get payment (income) in the same fiscal year (assumes a calendar fiscal year).
Most time and billing system can automatically handle Threshold Discounting engagements either by progressive discounts on hours or dollars billed. The system will even assign one or more discounts during a single billing month.