TurboTax Pricing... Brilliant

TurboTax is America's #1 tax software - it has been the main driver behind the shift towards online tax filing in America and it has done this by steadily eating away at a market traditionally controlled by accountants and companies like H&R block. This is a great story in itself of how a leader in an industry (H&R Block) totally missed the boat in the online space due to their presence in the offline bricks and mortar business (Very comparable to the Kodak story - also see: Innovator's Dillema)

What is perhaps even more impressive about the TurboTax story is the fact that TurboTax can charge such a massive price premium above and beyond the major competitors in the market. The reality is that all of the main tax filing offerings available likely do an equally good job of filing your taxes and getting you a return - it's also probably true that TurboTax is the best software available, in that it is the easiest to use. But it's hard to believe this would warrant the massive price differentials you see in the market. The only competitor that comes near TurboTax pricing is H&R Block, which is clearly trying to mimic pricing at the high end of the market in order to maintain pricing for their offline business:

So seeing that TurboTax is able to across the board charge from ~50-100% for their tax software, one is left asking why. As best I can tell the following factors contribute to this:

1. TurboTax legitimately has a better product - having used the product myself and read a broad spectrum of reviews I am convinced, all things equal, that TurboTax is the best software from an accuracy and ease of use perspective
2. Marketing up the wazoo - The one thing that is certain is that TurboTax outspends their competitors in marketing and advertising. This only makes sense, as they should be spending their fair share (which I estimate is ~70-80% of the online software market)
3. Human Psychology - Intentional or not, I believe TurboTax has irrational human behavior working in their favor. People will tend to go with the 'safest' looking tax software, as they are afraid the of the potential 'unknown' of what might happen should their filing be done incorrectly. This psychology is explored in some ways through Dan Ariely's book 'Predictably Irrational' - check it out
4. Barriers to switching - Once someone uses TurboTax for one year, it becomes a much higher hurdle for them to switch, as they're both comfortable with the software and they have some data carrying over from the prior year so it makes the current year easier to complete your filing

All of the above are contributing factors, but by no means a definitive answer. What's makes this even more interesting is that TurboTax does not enjoy nearly as high pricing in Canada, a smaller market where they also own the leading online tax software brand. If you have any thoughts or comments on what allows TurboTax to maintain and grow such premium pricing, I would love to hear about it! Please comment on this article!

Until next time,

1984