Know thy customer… and don’t mess up with him - even less in the Web 2.0 era, in which news spreads like wildfire and disgruntled customers can very quickly come together and turn into a virtual lynching mob against you. In this era, serious, organized, massive boycotts can happen, and can be triggered in a matter of days, if not hours, should consumers are outraged enough. It is a real threat, so companies cannot afford to fail in understanding their customers and taking them seriously.
Case in point: Intuit (NASDAQ:INTU), the developer of the –until now - leading tax preparation software, Turbo Tax. Over the years, Intuit has been building a growing and profitable franchise of loyal Turbo Tax users who year after year would buy its new version at tax time. This has been a major undertaking for Intuit: most taxpayers are still skittish about leaving something as important as preparing their tax returns to a software application and are simply not comfortable working on something of this perceived complexity on their own computers. Nope. When dealing with the IRS, most still want to make sure an expert takes care of it and want to see a solid, tangible, black-and-white packet safely shipped to Uncle Sam in a totally certified, absolutely delivery-confirmed, personally-mailed-from-the-post-office parcel.
But this of course is changing, as computers become more pervasive and more and more people are perfectly comfortable with them. Once a customer overcomes his apprehensions and is persuaded to try doing his taxes by himself with the help of tax preparation software, chances are you got him for life. It is not only a superior and more effective way of doing the taxes, but as confidence and familiarity with the product is built in a process that by nature is always complicated and stressful, the users just don’t want to go out and experiment with a different application. In addition, a significant history of transferable data gets built into the software for future use, providing another strong reason to just stick to the application you’ve got to know over the years. So, for Intuit, this was a solid business model. In a society rapidly embracing the digital world as the norm in everything from the way you do your banking to how you find the love of your life, steady growth could only be expected.
But this year, Intuit screwed up. In an attempt to squeeze more money out of their customers, Intuit tried to change the rules of the game on them. In essence, Intuit tried to re-position its business as a provider of tax services rather than that of a software vendor. The first mistake was to significantly increase the price of Turbo Tax, trying to justify it by adding “free” federal e-filing to the package. This backfired badly. Many customers didn’t care about e-filing, so they perceived they were been charged for a feature they didn’t want to start with.
Furthermore, realizing that a portion of their franchise used the software to prepare the taxes not only for themselves but also for other members of their family, Intuit thought they could create a new revenue stream from that. So they imposed a fee for each tax return printed through Turbo Tax. That was the straw that broke the camel's back. Their former loyal customers were infuriated, and many clearly stated their intention to switch to Turbo Tax’s closest competitor, H&R Block’s (NYSE:HRB) Tax Cut.
Even though Intuit backtracked on its original intentions, eliminating printing fees and slashing their price, the damage was done. As a marketer with a strong, loyal franchise, the most important thing you have to avoid is for your customers to have an excuse to go and try your competitor, lest they like it and leave your franchise for good. Intuit’s ill attempt to gouge its customers left the door wide open for that. And H&R Block aggressively took the opportunity.
They positioned Tax Cut at a lower price point to Turbo Tax, including the free federal e-filing Intuit was hoping to use to justify their hike. In a brilliant, aggressive move, H&R Block even sent out their Premium Federal Tax Cut version for free to tens of thousands of consumers, pretty much eliminating a key barrier for disgruntled Turbo Tax users to try their product. And ultimately, taking advantage of its robust infrastructure as a true tax advisor, H&R Block is backing its software product with the promise of personal support to solve questions and, most importantly, to provide support and representation in case of being selected for an audit.
H&R Block’s advertising campaign, “You’ve got people”, is a superb concept that goes to the heart of the emotional burden that preparing taxes means for most people. It’s a very complex and confusing process that generates a lot of anxiety and a dreadful feeling of cluelessness and vulnerability. “You’ve got people” is a comforting, reassuring message that humanizes the relationship with the company and creates in the target audience the comforting feeling of not being alone in the process.
Bottom line, I expect Intuit’s blunder to have a significant negative impact in its stock performance. For this tax season, the winner will be H&R Block; we should see a positive upside surprise in its tax software business. In an investment decision between these two companies, I bet for the people!