Contingency pricing is a strategy in which the final price charged to a customer or client is contingent upon the level of performance or customer satisfaction. This is a common approach to pricing in civil litigation, but it also is used in a variety of other service industries.
Basics
A contingency pricing policy typically is implemented through a contractual arrangement or implied commitment to a certain threshold of quality. For instance, a customer's price may be based on the level of money earned for him by the service provider, such as with damage claims from a civil lawsuit. In other cases, companies make commitments to deliver a certain level of quality in exchange for a preset price. Failure to comply results in a lower price or a free item. This is common in the food delivery industry.
Law Firms
A primary motive of contingency pricing by law firms is to attract clients with an offer that they pay nothing up front for legal services. Instead, the client pays a percentage, or contingent fee based on the amount of damages successfully gained through a civil lawsuit. This setup provides incentive to the lawyer to deliver strong results and allows for a virtually limitless level of pay. Thirty percent is a common percentage lawyers receive from civil damages. The enticing element for the client is that he doesn't pay out of pocket and pays nothing if he gets nothing from the judgment.
Ad Agencies
Advertising agencies sometimes use a contingent fee strategy known as pay-for-performance. With this approach, agency pay is based on meeting certain levels of performance on client company advertising goals. Common objectives include increasing brand awareness, gaining market share or improving sales. This method has become more common as advertisers want to hold agencies more accountable for results. However, the difficulty lies in coming to agreement on reasonable objectives and tools for evaluating results of performance.
Other Services
Less complex systems of contingency pricing exist in other service sectors. Pizza companies often promote on-time delivery commitments or the pizza is free. This is a hook to attract customers eager for efficiency and convenience. The logic behind such contingent pricing is that you gain more customers by tying price to performance. The risk is that poor performance leads to little or no pay despite your time and materials put into the work.
