You have probably seen HR Block commercials on television advertising free tax preparation. At the same time, you have probably seen TurboTax commercials advertising free live assistance with their software. There seems to be a perfect storm brewing in the world of tax preparation. As simple tax preparation gets more manageable for the average taxpayer, the competition for fees and revenue amongst these taxpayers gets more intense.
This year, HR Block lost its teaser item, tax anticipation loans. The federal government clamped down on these loans, and HR Block’s lender HSBC refused to back loans. This forced HR Block to stop offering the product. The free preparation of 1040 EZ filings is in response to this.
Things are not rosy in the tax preparation world. Unemployment has caused a 1.7% decrease in overall filings, the largest drop since 1971. HR Block saw a reduction of 6.1% in total returns last year. Combine these factors with more tech-savvy consumers and the general propensity for do-it-yourself in a tough economy, and you see the need for free tax preparation.
This free preparation I HR Block may be a bitter pill to swallow, but at least it offers the upside of state tax preparation, more complex tax preparation, and addition of younger tax paying customers. This free taxes move has several potential pitfalls:
- Will free customers buy additional services?
- Will free customers come back next year and pay, or are they only customers if it is free?
- Only 10%-15% of customers are expected to qualify for free preparation, does this leave a bad taste in the mouths of customers that do not qualify?
- For the customers that do not qualify, does the “for you it’s not free” create more bad will than the good will created in the free customers?
- Does doing taxes for free lower the perceived value of all tax preparation?
What does all this mean for the business model of HR Block and other tax preparation services like Jackson Hewitt and Liberty? At first glance it appears to be the beginning of the bloodbath. This fast and serious race to lower prices and giveaway services does not seem to have any revenue upside only costs, decreased revenue, and lower perceived value for paid services.
The real issue is what will these companies do to innovate their business model and recover from this mature market issue? Let’s explore some options:
- Fight the trend as long as possible preserving as much revenue as possible.
- Attempt to add premium services to upsell customers and get average customer spend back on track
- Find an alternative to profitable tax anticipation loans. It appears the government views these loans as predatory and will end them all together. They carry an average interest rate of 55+%. By the same token a percentage of HR Block’s customers are the un-banked. HR Block had found a profitable method to fill a need of these customers. HR Block may be able to find a palatable alternative to tax anticipation loans. For instance, a preloaded credit card or similar instrument in which some of the money was delayed might be profitable and meet government requirements.
- Find a way to capitalize on the millions of customers currently served with other services. Examples might include: payday loans, retail banking, life basic legal assistance like LegalZoom, or other services that capitalize on HR Block’s strengths.
Do you agree with HR Block’s free tax preparation strategy? Is this the beginning of a slippery slope of ever decreasing tax-preparation revenues? What does this mean for HR Block’s business model?
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