How Starting At Zero Can Really Add Up

"We see a free product offering as a solid component of our financial strategy," writes Intuit CFO Neil Williams.
Neil WilliamsMay 24, 2016
How Starting At Zero Can Really Add Up

It can be puzzling for investors when you give something away for free. Yet that’s just what Intuit does with its free tax offering: TurboTax Absolute Zero.

Essentially, during a portion of tax season, we give taxpayers with relatively straightforward tax situations a risk-free way to try our software and learn that they can prepare their own taxes. Why would a company in the business of selling tax software allow someone to prepare and file their federal and state returns for free? It’s an important question. On CNBC, markets commentator Jim Cramer even joked with Intuit CEO Brad Smith: “When I first heard it … I didn’t believe it.”

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As we explain to investors, one of the top goals for any growth-oriented software company, and one of our core finance principles, is to grow customers faster than revenue. The product is free, but adding customers gives us additional opportunities to monetize over time. Basically, we want to drive product adoption and grow our customer base without giving away the store.

Neil Williams

Neil Williams Neil Williams, Millennials, Finance

We see a free offering as a solid component of our financial strategy, especially when we think in terms of an output metric like average revenue per customer (ARPC) that contributes to the bottom line. Here’s a closer look.

Addressing the Addressable Market

Companies that grow and enjoy a high valuation have large addressable markets — the opportunity to attract many potential customers who could use their products but don’t currently.

If you’re in a new market or are otherwise aiming to drive adoption, many of those customers come in either on a free-trial or discount offer, so they don’t pay as much right away as your regular customer base.

Investors wisely ask if these new customers are really going to be good for the long term. Are they going to drive revenue for the business over time, or are you just giving stuff away?

In the broad software-as-a-service space, investors ask that question over and over again — whether it’s of Yahoo or Google or Facebook or Twitter. At Intuit, we track the answer for each of our key offerings, such as QuickBooks Online and TurboTax. We do so to make sure that as new customers adopt our services they have the potential of moving up and paying for more full-featured products over time.

For TurboTax Absolute Zero, we point to our ARPC in TurboTax, which has risen nearly every year since 2005 when we introduced free tax products. Even with Absolute Zero customers as part of the base last year, we’ve gone from average revenue per tax return of $29 to $49 over the past decade.

The program is clearly helping Intuit grow share at the same time it is helping filers with basic 1040EZ and 1040A returns, who have the potential to move up the product line as their financial life matures and grows more complex. The base of people who are filing a return in the United States is growing less than two percentage points a year, yet our customer count is growing from 7% to 10% a year. In fact, we just announced that TurboTax Online units grew 15% this tax season, with overall TurboTax units up 11%.

Is Free Really Free?

Of the roughly 60 million Americans who have simple tax returns, nearly 5 million of them used TurboTax Absolute Zero in tax year 2014 to prepare and file their federal and state return for free. And yet one of the questions we get asked is: Is free really free? What’s the catch? Do you risk alienating potential customers if they try it and find out they don’t qualify to use it?

For any company with a free trial or “freemium product,” that is something worth watching closely. It is done by monitoring calls to customer care, comments on social media channels, and Net Promoter scores, which measure how willing customers are to recommend a company’s services to others.

Opinion_Bug7At Intuit, we conduct this monitoring and we also go through extensive testing. Long before tax season we seek customer reaction to certain offers. And sometimes, we even make adjustments during tax season. This year, we saw how well Absolute Zero was performing and decided to extend it through the end of March.

Finding the Right Way to Get Paid

Many software companies give products away, but eventually they have to find a way to get paid — whether it’s with an advertising model like Facebook, on a per-usage basis like payment startup Square, a subscription model like a streaming video service, or by “attaching” extra paid services to an otherwise free product. With Absolute Zero, for instance, Intuit offers a range of optional premium services to Absolute Zero customers for a fee.

Following are some tips on finding the right mix for your product and company on the path from free to paid:

  • Convince Me. Investors are going to ask how this is positive for the company. It’s imperative to have a convincing case to show how the company will make money with “free” in the mix.
  • Test, Measure, Report. As you implement, you must test and measure to determine if you are on the right path. At the end of the day, the metric to come back to is overall ARPC. If that is moving up, odds are high that you are on solid ground. Report milestones at least once a quarter to show how you are doing.
  • Experiment. Trials, test results, and consumer feedback can show you if the approach is measuring up. If it’s not you have to be willing to experiment. You don’t want to be locked into a multi-year initiative that is not proving itself worthy. Be sure your commitments are short term enough to be able adjust to the needs of customers.

It’s wonderful to have a wide open opportunity to attract new customers in a large addressable market. How do you convert them into users that will benefit your company over the long haul? The key to success lies in three “T’s” – tinker, test, and tally.

Neil Williams became Intuit’s senior vice president and chief financial officer in January 2008. He is responsible for all financial aspects of the company, including corporate strategy and business development, investor relations, financial operations, and real estate. Before joining Intuit, Williams was CFO of Visa U.S.A.