When is a $0 Price Valid?

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This is Tax season and I see ubiquitous Ads for free basic tax filing. All players from H&R Block, TaxAct to TurboTax offer free App for basic tax filing. Is that a good decision?

When is it good to give your product away for free?

If you believe any of the proponents of freemium, their generalization is, “if your marginal cost is zero, you should give it away”. If you were to look closer at this claim you will see why this fails miserably.

  1. Free is not free marketing because marketing is segmentation, targeting and positioning
  2. Cost has nothing to do with pricing
  3. Your marginal cost and $0 price does nothing to customer demand

It all boils done to pricing 101 – Pricing is share of value created not a markup over cost. And your share of value is affected by reference price in the minds of customers. If the reference price, that is that is the price they are used to paying for alternatives, is $0 then there is signifiant value compression that prevents you from charging for your product.

Returning to the Tax filing question, if we were to use just the marginal cost argument it would appear the answer is yes to offer them the standard tax filing as free. But by extension you could argue all advanced editions must be free as well because the marginal cost is still $0. You cannot have a breakdown in the chain of logic where it applied to basic version but not to advanced versions of your product.

A $0 price is recommended only if the following conditions are met

  1. The reference price is $0 and there is no way to move it –  filling out 1040EZ manually is the easiest thing even with paper and you have free  option from IRS.
  2. The $0 price does not diminish the value of your portfolio through adverse self selection – people who have more complex tax scenarios are not going to choose free version despite it being free.
  3. A business does not incur additional investment or marginal just to serve the free users –  the tax software is built for more complex scenarios and serving the simple filings does not incur incremental cost.
  4.  Free users serve as a pipeline for premium versions (through customer delight or stickiness)- as economic mobility happen, free tax software users will find the need to use paid versions for their new scenarios.
  5. There is no other opportunity cost of taking on free users.
  6. Your brand will suffer no erosion if the free option were to go away.

$0 price is not based on your cost. It is driven by customer reference price and the decision to whether or not offer it is based on your business dynamics.