Intuit’s QuickBooks Online is its Software As A Service (SAAS) business. It is replacing Intuit’s legacy QuickBooks Desktop software. QuickBooks Online is part of Intuit’s effort to transform its revenue from highly repeatable transactional sales to highly recurring subscriptions.

QuickBooks Online is experiencing strong adoption and growth. I wouldn’t say it has built an enduring business moat yet. But I see two potential drivers for Intuit to build a moat around its QuickBooks Online business: Network Effect and Switching Costs.

Network Effect

Accountants & Small Businesses

One Intuit’s strategies for growing QuickBooks Online is to target the accountants for small businesses and the self-employed. These are the nodes from which QuickBooks Online can branch off of.

If a small business hires an outside accountant and that accountant uses QuickBooks Online then you as the small business owner would most likely use QuickBooks Online too.

The most significant one right now is really working with your accountant and we know that if an accountant switches their practice to QBO, they’ll bring their clients along with them and they’ll help the client in the transition. So that’s the big idea we’ve been working on for the last year or so, but I think it’s going to be pretty steady for a while. -Neil Williams from INTU Bank of America Global Tech Conference June 7, 2017

It also works in reverse.

The more small businesses that use QuickBooks Online the more pressure it is for accountants to use QuickBooks Online too. It can help the accountants win more business.

Two-Sided Network Effect

I see this as a Two-Sided Network Effect

Network effects can also be two-sided: increases in usage by one set of users increases the value of a complementary product to another distinct set of users, and vice versa. In many cases, one may think of indirect network effects as a one-directional version of two-sided network effects.

3rd Party Integrations

QuickBooks Online is an open platform. Other companies can build and integrate their software with it. For example, Intuit has its own Payroll and Payment Processing products but Intuit allows ADP, Paypal, Square, and others to integrate with QuickBooks Online.

The more 3rd party integrations QuickBooks online has the more valuable it is to their customers. And the more customers QuickBooks Online has the more valuable it is to 3rd parties to integrate their software with QuickBooks Online.

Indirect Network Effect

This is the Indirect Network Effect.

Network effects may also be indirect, where increased in usage of the product spawns the production of increasingly valuable complementary goods, and this results in an increase in the value of the original product. For instance, while there are some direct network effects associated with Windows, the indirect network effects that arise from the increased quality and availability of complementary applications software are probably much more important.

Switching Costs

If you’re a small business that uses QuickBooks Online, your accountant uses QuickBooks online, and all your other business software integrates with QuickBooks Online then it becomes hard to switch over to a new platform.

  • Can all your information and transaction history transfer over seamlessly?
  • How much work do you have to do the transfers?
  • How much will it cost in time and man hours?
  • How long will it take to learn the new system?
  • How many people need to be trained on the new platform?
  • Will you have to find a new outside accountant?

Unless something drastic happens with QuickBooks Online and the decision to switch becomes urgent and vital, you as the business owner are unlikely to switch.

I put QuickBooks Online’s switching costs in the following categories as laid out by Strategyzer.

Data Trap

The ‘Data trap’ consists encourages customers to create or purchase content and apps that are exclusively hosted on a platform. These platforms can be websites, software or devices. But, leaving one platform for another forces customers to let go of data or activity that can’t be migrated to another app.

For QuickBooks Online it is your data. It must be transferable. I see less of a risk of losing your data.

But I see the Data Trap as the worry that your data won’t transition smoothly between software platforms. You risk spending a lot of time trying to fix it. Or you’ll have to spend a lot of money and time working with your new software’s data transition team. Or you’ll have to do it through Excl exports increasing the time it will take and increasing the risk for entering the data wrong.

The time, money, and effort to transfer your data must be worth it.

Learning Curve Trap

Customers can be discouraged when they have to start over and learn how to use a new product. The ‘learning curve’ trap is centered around offering a great value proposition that’s only accessible to those willing to train to know how to use it. Salesforce and Adobe use the ‘learning curve trap’ to get customers hooked to their products–some users get so good at using their software that they become certified experts. They don’t feel like switching to something else unless they experience a very strong pain with their existing product.

If QuickBooks meets your needs and the user interface isn’t utter garbage then why learn a new system? A small business owner wants to focus on running and growing their business not learning new accounting software.

Plus, Intuit wants to retain its users and Intuit knows it needs to continually update and improve QuickBooks’ user interface to do so. Any current user interface issues can be resolved quickly.

Industry Standard

And then to a smaller extent the Industry Standard trap. This could be a bigger switching cost if QuickBooks Online becomes the industry standard for small business accountants. Right now QuickBooks online is the top choice, not the necessary choice.

QuickBooks Online Opportunity

Intuit has a real opportunity with QuickBooks Online to build a product with a strong network effect and high switching costs. It is why they are aggressively trying to gain more users. QuickBooks Online doesn’t have an enduring business moat yet and it’s still vulnerable to outside competition at this stage. But Intuit has a big head start with its entrenched users of its legacy QuickBooks Desktop software. Converting all of them to QuickBooks Online will make it extremely hard for competition to overtake Intuit.

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