Wednesday, February 22, 2012

A La Carte: Myths and Reality

In law, there has recently been a push towards provision of "a la carte" legal services.  I've made some efforts to do so:  On some matters with low dollar values and/or cost sensitive clients, I've occasionally tried to facilitate them handling their own matter to the maximum extent possible to limit my own cost and involvement.

But it's difficult.  There's too much liability.  Even with good engagement letters, setting out exactly what I'm doing and what I'm not doing, in some ways there's going to be a higher burden on me to make sure that I'm properly communicating to the client what needs to be communicated, because of my limited involvement.  Further, it's much harder to ensure that I'm aware of all the relevant facts where my involvement on a file is limited.

To address these, I need to spend more time on the individual a la carte elements I'm providing than I would if I were more deeply involved in the file.

The classic example is employment policies.  There's a real debate among employment lawyers as to whether or not there's any real savings by having the client draft their own policies for legal review.  On the one hand, seeing what the employer has drafted will get me a pretty good sense of what they're trying to accomplish.  Yet for me to amend their drafts to actually accomplish such objectives could easily take just as much time as me tailoring my own policy precedents to the employer's specific needs.

Not to mention the difficulties in that litigation processes aren't really set up for lawyers to have limited involvement:  If I go "on record" as representing my client, then active steps are needed to get me back off the record, and in some cases that may not even be possible.

But in general, I wonder if these problems are true generally of "a la carte" billing.

The Myth

People offer "a la carte" pricing options to address the fact that not everybody wants the whole package, whatever the whole package may be.  Whether we're talking about cell phone contracts, TV subscriptions, meals, travel packages, or legal services, the pitch is always the same:  Pay only for what you want, and not for the other aspects of a package that might appeal to others but not you.

Packages are seen as being unfair to those who don't use all aspects of the package.  I recently read a story in the Star about GO Transit parking, in which it is observed that GO takes the position that parking is included in the fare, but that some argue that this "penalizes commuters who walk or bike to the station."  The logic makes sense on its face:  Owning and maintaining parking lots is a cost to the service provider, which must ultimately be passed onto the customer.  So does it get passed onto the customers generally?  Or just the customers who actually use the parking lots?  If it's the former, then non-drivers are paying for a service they don't use.

Persuasive reasoning.

Therefore, by turning it "a la carte", you save non-drivers money.

The Trouble with the Theory

"A la carte" costs more, item by item.  That's pretty easy to figure out just by looking at any fast food value meal:  The 'meal' is priced by looking at the total a la carte prices and knocking a modest sum off the top.  But for someone who really doesn't want fries, it saves money, right?

Sometimes.  Maybe.

Remember that you're getting less value for money altogether.  You may pay less for that particular meal, but if you're always buying all the food you eat a la carte, you're probably paying more generally than you would if you were purchasing it in 'combo' formats.  And possibly eating less, too.  Of course, when we're talking about fast food, that's not necessarily a bad thing, so let's move off of this reality to, say, cell phone contracts.

Most cell phone providers have gone a la carte, charging for each 'feature'.  Yes, features involve a cost to the provider, mostly infrastructural, like parking (and unlike fries).  So it has to get passed on to the customer.  I got a new personal cell phone plan last year, and found that most providers will charge extra even for call display and voicemail.  Some offer a discount if you get them both together, from $5 per month each to $4 per month each.

Is that reflective of the cost of providing them?  No, not at all.  This is not cost recovery; this is a premium price for what most consider a fairly basic aspect of the service.  If every subscriber got them, the required infrastructure would certainly not cost anywhere near the scale of $4 per person.  Most of those monthly fees would be swallowed as additional profit over and above the profits on the subscription itself.  Imagine, instead, that these services were included in the base subscription, with the actual cost built into the price with a modest markup.  This would amount to a very modest increase in price for everyone.  (Can anyone familiar with telecommunications put a number on this?  I'm inclined to guess that it wouldn't even be close to a dollar per person, but I can't substantiate that.)  But this means that even the people who don't want it have to pay.  That's not fair, is it?

Well, there are two points to consider:  First of all, even people who may not choose to pay extra for it would have it, and most of them would make use sufficient to justify the additional marginal cost (if perhaps not the premium prices currently charged).  Secondly, there are savings in simplicity.  In many respects it requires less staff and resources to give the same thing to everybody, or to have a fixed set of options, than to have a comprehensive opt-in/opt-out system.

I frequently attend junior athletic tournaments with my partner, who is a coach.  Many of the tournament organizers order pizza (perhaps not the meal choice of champions, but whatever).  They simply order a stack of pepperoni pizza, vegetarian pizza, maybe some Hawaiian and meat lovers.  Those are the options for folks who want pizza.  Take it or leave it.  What they absolutely do not do is canvass those present to ask "What toppings do you want?" and then order x pepperoni pizzas, y with pepperoni and mushrooms, z with just mushrooms, a with pepperoni and green peppers, etc.  Why not?  Because it would be absurdly complicated, and a waste of time and energy to put it all together.  Sure, this way they're just guessing at the number of pizzas they need, and errors might create cost, but the value of the time saved by this simple approach is incalculable.

The point is that specialization comes at a cost.  This is the truth of "a la carte". If I go asking for a specialized pizza, or a specialized phone plan, it can, should, and will cost more than if I just take what everyone else is getting.  When the specializing is in the form of reductions (fewer toppings?), then there might be cost savings based on the reduction, but in many cases that will be offset by my needing to be treated differently.  So no, I don't think it's unfair if marginal costs of extras are built into the base price so that the extras can be forced on everyone.

A properly-priced all-in package should be attractive to people even if they don't plan to use all the features, even for consumption-based purchases, in part because of the fact that not everyone will use all the features, and in part because the volume of consumption expected will permit bulk discounts for the purchase.  So "all-inclusive" resort packages are relatively affordable, and attractive to people even if they may not want to have all the cheap rum they can get, because they're drawn by other attractive and valuable components of the package.  (Of course, I have seen some packages with large numbers of components priced on the basis of an assumption that every purchaser will take maximum advantage of all components.  That can be a different matter.)

Starbucks has cinnamon, chocolate powder, sugar, and nutmeg available to its customers.  Depending on what drink I get, I may use some of those, but never all.  I don't feel that, just because I don't put nutmeg in my hot chocolate, I'm somehow not getting my money's worth.

Even Worse, the Reality

Remember when Mulroney brought in the GST?  That came in together with the elimination of a series of manufacturer taxes and import tariffs.  Notionally, it was revenue neutral for the government, intended to streamline taxation as a VAT to be uniformly applied to everything and therefore easily accord with NAFTA.

The government at the time predicted that there would not actually be an increase in what end users paid for most products.  The theory ran thus:  Right now, the shelf prices build in manufacturer taxes and tariffs, and are thus inflated.  We're tacking an extra 7% (at the time) onto the shelf price, but the shelf price should come down to offset the difference.

Of course, the theory was wrong, for reasons which should have been easily foreseen:  Prices are sticky downward.  The ratchet effect applies to prices:  They will increase as a result of certain pressures, but the increase will not necessarily go away when the pressure is removed.  So the shelf price no longer needs to build in the hidden taxes, but when the hidden tax vanishes, it takes highly competitive market pressures to push the manufacturers and retailers to pass the savings along to the consumer.  Even if the consumer is paying a new tax altogether.

Fair?  No.  Real?  Yes.

Shifts to "a la carte" billing often have similar features, turning into a premium surcharge for previously-included features.  Air Canada recently changed its checked baggage policy to charge for the first bag on flights to and from the U.S.  Most airlines have gone this way, true.  And, as is the case with other airlines, the base fares were not otherwise adjusted downwards to reflect the fact that a previously-included feature has now been removed.  So rather than a shift in the price away from those who don't have checked baggage, this amounts to a rate hike only, for those who check baggage.  Which is, I believe, most travellers.


There are few things that irk me more than agreeing to pay a substantial amount of money for an object, and then being told by the salesperson, "But you'll need this, too."  (Extended warranties are the worst offenders:  So you're asking me to pay a thousand dollars for a piece of electronics, but you're telling me that these devices are unreliable enough that I should really pay an extra three hundred dollars to extend the one year warranty to three years.  Sorry, why am I paying a thousand dollars for unreliable equipment?  This rant is kind of off-topic, but kind of not.  Manufacturers should stand behind their products without needing you to pay extra for it.)

Should Tim Hortons start charging for sugar and cream?  (After all, why should the cost of these things be passed on to people who drink their coffee black?)  Should pay toilets be implemented in restaurants and airplanes?  (After all, the cost of maintaining septic systems and cleaning toilets has to get passed on to the customers, so why not do it on a pay-per-use basis rather than charging people who don't use them?)  Napkins and straws?  Plastic bags at grocery stores?  (Oh, wait...)

Yes, there are certain things for which a premium should be charged.  And there are situations in which people who know what they want should be able to opt out of meaningfully-costly aspects of a basic package.  But in general, the move to 'a la carte' has seemed to mean 'charging more for low-cost items that used to come standard'.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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