Expanding into Cyberspace

A booming market in transition. Get ready, tax accountants, practically every aspect of the tax preparation field is changing. In fact, it's evolving into a totally new market and business. First of all, the number of tax software brands is shrinking, leaving thousands of CPAs tax software orphans with fewer replacement products to choose from. And while the number of brands declines, the market expands into cyberspace as, slowly but surely, accountants begin to abandon their annual ritual of loading the latest tax CDs onto their computers. Instead, they're logging onto Web sites and preparing taxes online. And despite nearly unanimous earlier forecasts that the business of tax preparation was static--if not declining--tax CPAs are busier than ever processing returns and providing guidance. Let's look at these developments to see how they affect professional tax preparers and the dwindling number of software vendors. THE SHAKEOUT CONTINUES Ten years ago, there were more than 100 tax preparation software products. That number has since shrunk to about 40--a result of acquisitions and product dropouts caused by the intense competition and vendors' inability to keep up with technological advances. Although some industry observers think the worst part of the industry shakeout is over, others expect the shrinkage to continue a few more years until less than a dozen tax vendors survive. Those vendors that have endured the market consolidation have learned that only three marketing strategies appear to succeed in this high-tech, fast-moving, keenly competitive environment: consolidate, innovate, slash prices. Survivors have used one or all of the strategies: buying up the weaker stragglers for their customer lists, inventing ways to make their software stand out from the ever-dwindling crowd of competitors and offering first-time customers large discounts. Price-pruning, while always a costly last-ditch strategy, has become even more expensive now. In the past, customer turnover was relatively low because changing software products was such an expensive and time-consuming headache: Not only did CPAs have to go though what was often a painful process of loading the new programs, but then they had to learn how to use them and convert all their client records. Today's tax software generally is easier to install and the conversion process is mostly automated and very accurate. In addition, many of today's products come with powerful interactive training features, so the learning curve is much briefer, less painful and more successful. Thus new customers don't feel as locked into a product as they did in the recent past; as a result, a deep discount for a first-time customer who becomes dissatisfied and subsequently switches has turned into an especially expensive loss-lead. In addition, today's customers are more demanding: They have grown to expect each annual software update to be faster and include more states, forms and schedules. They also expect the software to be easier to run and learn, so that new users will be able to crank out tax returns with little or no training. The more financially and technologically resourceful vendors know that getting beyond mere survival in this market environment requires more than just consolidation, innovation or discounting; they have to offer all three. And that's exactly what some of them are doing. For the tens of thousands of professional tax preparers, this is both good news and bad. The good news is that they are benefiting from the results of the heavy investments in product improvements, including the addition of more auxiliary functions, such as tax planning, automatic client invoicing and seamless integration with write-up software and electronic tax organizers. But the bad news--being cast into the role of software orphan--has become less traumatic because switching to a new product is now easier. …