As February approaches, prepare for the onslaught of T4s, T5s, and tax software ads. You don’t need to submit your taxes until April 30th, but makers of tax software will be out in full force. A quick glance at the market reveals that switching costs shape the field.

Quicktax recently sent me some direct mail, offering special bonuses to prompt me to buy their product. However, since I don’t need Corel PhotoPaint or an encyclopedia, these bonuses do little to sway me. Still, I happily forked over $60 for Quicktax for Small Business. I’ve used Quicktax for years and have little incentive to stray.

Like many Quicktax users, I perceive that trying a new tax package would involve switching costs. I’m already familiar with previous versions of Quicktax. I can quickly and easily navigate through the software. I know it’s fairly easy to use and that I can turn to online and telephone customer support. Quicktax is a known quantity.

In comparison, I know very little about Taxwiz or UFile, let alone another Canadian tax packages. These packages are cheaper than Quicktax and may be just as easy to use. But I don’t know and don’t have the time to find out. I’m not even sure that these packages offer small business forms. Even if I usually worked with the $40 consumer version of Quicktax, I would still be willing to pay extra for Quicktax. For me, it’s worth $15 to avoid the risk of switching costs.

As a marketer, I’d be interested in finding out how Quicktax, TaxWiz, and UFile came up with their pricing. Intuit owns both Quicktax and Taxwiz — did the company map out switching costs or just experiment with pricing? Have Intuit and the makers of UFile found a way to value their software, in comparison with professional tax services and people who use pen and paper? It’s unlikely that either firm uses a cost-plus scenario to determine pricing. Having been in the market for a few years, these firms face descending curves for development costs.

Tax software is just one example of a product with switching costs. Buyers face switching costs every time they consider changing banks, grocery stores, hairdressers, or online bookstores. Smart companies find ways to build in switching costs without alienating buyers.

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(c) 2005 by Andrea Coutu. Vancouver Marketing Consultant. All rights reserved.