Making Tax Digital for accountants - Value based pricing for MTD

Making Tax Digital is here

As of April 2022, all businesses will need to follow Making Tax Digital (MTD) rules, regardless of turnover. And many of these businesses will need support from accountants in order to get their processes up to date and MTD-compliant.

The time is now to change the way you price. The old-fashioned, redundant way of pricing in our profession is based on time, like how long the work takes. It’s flawed for so many reasons and here are two big ones:

1. Clients hate it - they don’t get to know what the price is until after the work is finished and the hours added up. The bill is always a surprise to them.

2. In this increasingly digital world, compliance tasks that used to be manual, are being automated. It’s taking less time to do things. If you bill based on the hour you will see prices coming down, and you'll make less money.

As part of getting ready for a new digital world we need to change the way we price our services.

A better way to price

When we drill it right down there are only two ways to price. One is cost-plus pricing. This is where you price by adding up costs and adding on a margin for hoped-for profit. Time-based billing is a form of cost-plus pricing.  It’s a bad way to price.

But there’s another way to price.

I’m sure you’ve heard of value pricing. Unlike cost-plus (which focuses on internal costs) it focuses on the client and what they want. Value pricing means arriving at a price based upon the client’s perception of value.

So, let’s look at how to apply value pricing in this new digital world.

The opportunity

Many UK businesses will be affected by MTD for VAT, HMRC’s plan to bring UK tax into the digital age. It’s important they use online tax software so they're compliant. So, the first thing you need to do is get all your clients who are not currently set up on QuickBooks to move across.

This represents a huge opportunity when you understand value pricing.

I’ve carried out many surveys over the past few years and discovered some interesting facts about how the profession prices moving clients to a cloud accounting system. I’ve surveyed thousands of accountants and bookkeepers. When I ask how much is charged for moving clients across to a cloud accounting system (assuming the books and records are up to date and reconciled) I find:

• 30 - 40% of respondents don’t charge for this service - They do it for free

• About 40 - 50% charge a nominal fee of less than £500 - This is too cheap

• Less than 10% charge in excess of £1,000 every time

What do we learn from this?

Too many people do this work for free, despite this being a valuable service.

And most who do charge their clients will have a low price, probably because they are basing it on time. For sure, moving a client’s accounting system to QuickBooks (when their records are up to date and reconciled) doesn’t take long. But that’s because you’re the expert and know what you’re doing. It’s very valuable work and should be charged based upon the value.

Some accountants and bookkeepers have figured out a better way to price and turn this into a highly profitable service. Those firms are using value pricing.

How to price moving clients to QuickBooks

You need a pricing system for getting over £1,000 every time you set up QuickBooks for a client. Here are some of the key things you should consider:

1. Add more value. The more value you provide, the higher the price you can charge. What more can you do to help the client get more out of their new cloud accounting system? For example, you could offer telephone support, training or set up powerful customised reports.

2. Give clients choice. Everyone values things differently. The challenge is, it’s difficult to know for sure which clients would see this service being worth £1500 and which only £1000. The first step of the solution is to use menu pricing; create different packages/bundles and let the client choose. Take some of the most valuable items from step 1 above and build them into a premium offering.

3. Get better at explaining the value of everything you do.  For each element of your service (e.g. setting up a chart of accounts) have a system of explaining what it is you do, why you do that, how the client benefits and the pain you’re taking away.

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