H&R Block's Secret to a Big Tax Return: No Poor Clients

Selling to the bottom of the socioeconomic pyramid is a savvy strategy for those in the shampoo business. Tax services might be a different story.

H&R Block has been not-so-subtly snubbing low-income households. It spiked its free service for bare-bones filings and tweaked its online offerings so that a greater share of more complicated tax returns falls into categories of service that cost more money than they used to. Meanwhile, it has raised prices overall.

When consultants talk about this type of thing, they draw a bisected box representing a company’s four types of clients, from those who require a lot of work and offer little return (on the lower right) to those offering lots of return and requiring little work (on the upper left). The goal is to lose the lower right box—those accounts Block calls “low-loyalty filers”—while keeping the other three.

It appears that Block has executed this bit of business-school judo perfectly. In the fiscal year just ended, sales climbed 4 percent, to $3 billion, while Block prepared 6.2 percent fewer returns at its brick-and-mortar storefronts in the U.S.—13.6 million in all. Not only did its CPAs have more time to serve affluent customers, but because Block wasn’t trying to capture the breadth of taxpayers, it spent 12 percent less on marketing and advertising.

For the full year, Block boosted profit by 7.5 percent, to $500 million. “We achieved exactly what we set out to do,” Chief Executive Officer William Cobb said during a conference call this morning.

The big risk Block is taking comes in the long game: the “lifetime-value” part of the customer equation. The proletariat put off by H&R Block at the moment may not be so keen to bring the company their business if—or when—they climb the wealth ladder.