Hello, everyone. I'm Andrew Boone. I cover internet here at Citizens. I'm very happy to kick off the conference with LegalZoom. We have Jeff, the CEO, and Noel on stage with me. Thank you guys so much for participating.
Thank you.
Thanks for having us.
Yeah, appreciate it.
Jeff, let's start with a big picture question. Let's talk about the transition to business under your leadership. What are the key goals that you want to achieve with LegalZoom over the next three years?
Sure. I'd say the first, when you ask me with regards to three years, is to focus on the first 12 months. I think our company, a lot of companies, have aspirations that go beyond kind of that first standard deviation of success. The first thing that I want to do is focus on making incremental progress, stable, solid growth. That comes in traditional financial profile, start bringing the company back to healthy growth, start improving margins, start looking at ways in which we can build an indelible business and brand. For us, what we've done is we've started to reorient the business from transactional subscription. That creates a stable core from the underlying fundamentals of the business. Second, we've started to look at what our core competencies actually are. Where do we have the right to own in our business and category? Where don't we?
Where we do, we should dominate. Where we do not, we should partner. For us, that is legal services. We created this space 24, 25 years ago. We created most of the category and the products. We brought legal online back in the early 2000s. We lost our compass to some extent because we started to broaden to other SMB service offerings. That is something we do not have the right to own. What you will see more and more of over the next, call it, 12 months is us refocusing all of our efforts on being the best in category, expanding our serviceable market into our true TAM or total market. Where we have a larger and larger base of subscribers, we already have over a million, we start to partner over time.
We have already started to do that, stopping investing in those non-core products, using those dollars to invest in core, and then partnering alongside. As we look forward to year three, year four, we should be synonymous with this category. We should own this space. Our efforts to educate should be marketing. Because if we educate the space on why they should go not to a lawyer down on Main Street, but to a technology provider like us, inevitably, they should be thinking LegalZoom and all the others.
One of the takeaways that I've had in terms of the last couple of quarters with you at the helm has been really the transition to more quality customers. Talk about how we understand that through marketing, through pricing, and basically the evolution of the product offering.
Sure. This tends to be, I think, a problem with growth-oriented businesses generally. You focus on market share effectively at all costs. We've seen this cycle over and over again. It's usually a cycle between market share and profitability. In our case, we had blinders on in terms of what our market was. We use small business starts, formations, EINs to drive our determination of what the market actually is. As a result, we were bringing in, in my estimation, customers that didn't have the ability or capacity to pay us significant dollars thereafter. When you use the EIN as the reference for the market, effectively, you can get blindsided by the fact that you could be bringing in effectively empty calories.
We launched a couple of years ago a free product that I think to some extent was innovative, but it wasn't something that the market leader should have done. It ended up creating a race to the bottom. What we ended up doing was increasing our market share, but we lost sight of those quality customers that we could over time upsell and cross-sell. What we have done now is through education and education alone so far, shifted our focus internally from market share to quality share and started to educate externally to try to push customers from that free product, even though we still offer it, over to our value-added products and services and saying, if you really are a small business and you really want to succeed, you do get what you pay for.
What we've seen has actually been a pretty good early indicator of success. We've started to pivot our customers coming in at the front door from free to pay. Year over year, we saw a 10% shift from our free offering to our premium offerings, all through education. We didn't take away that free offering. What that meant was a large chunk of customers are naturally upselling right out of the gate at the top of the funnel. Some are falling out and saying, you know what, maybe LegalZoom isn't right for us. From my perspective, that's OK. That's actually a positive sign. Because once we get those customers, then in our flow, starting to pay for these services, we know how to upsell and cross-sell them over time.
We will be able to do that with our core legal services products and through our partnerships, whether it's through 1-800Accountant, which we just partnered with, Wix, which we've had a partnership with for a number of years, Bank of America, or any other of those small business services. Because we know if we treat these customers well and we help them start their business, they will come back to us to determine how to build their business.
How do we think about the evolution of that over a time frame? How far along are you on the process of moving towards kind of that quality customer? The other way to frame that is, hey, when does share of business formations kind of stabilize? Is that a two-year plan? Is it a one-year plan? How do we think about that?
Sure. Evolution is the right word in the traditional sense of the word evolution, biological sense. Evolution happens slow. There are not these punctuated states where you go from X to Y. We are moving slowly, methodically, deliberately. It comes back to your first question. Why do I not want to answer year three? Because we have got month three to focus on. My hope is this is a never-ending evolution. We will continue to improve. We will continue to optimize. We have done a number of things in the early periods that give me great confidence that we are going to succeed and continue to execute. It is all been focused on stabilization. For me, I think about businesses in three states. You have got stabilize, diversify, then grow. That is linear. You do not do those in parallel. Our business needed to be stabilized.
We needed to identify what our core competencies were, make sure that we were actually focusing on those core competencies, and then only then look at those answering opportunities and start to diversify around them. We did that very, very quickly. We figured out what our core competencies were. We stopped investing in those non-core competencies. We started talking to some of the best-in-class partners out there for answering services. 1-800Accountant is a good example. It is one of the biggest categories. It is in the top, I think, top three, but at least top five unaided responses for what do you need now that you have incorporated a business. That partnership is going really well. Longer term, we are going to focus on growth and doing that in a healthy, sustainable way. By healthy, I mean with margin expansion.
By sustainable, I mean we're not going to grow 30% one year or one quarter and then 5% the next. We're looking for predictability throughout our business.
I think just to build on that real quick, Jeff mentioned early indications of success as we make this transition to focusing on quality share and quality customers. That is going to continue to be an iteration as we learn more about exactly what we want and what we're looking for. Over time, we'll expect that to start to settle. From there, after that settling and stabilization, we will absolutely be looking to regrow share from that quality share lens.
Transitioning somewhat to subscription. Big picture question, just to frame it. Are there any products that should not be a subscription sold item? Or can everything eventually move to subscription over time? How do we think about that transition of the product offering towards subscription?
I'm guessing you're not going to let me answer this.
I already know what he's going to say. We already know the answer to that one. It's 100%, but.
How do we think about that evolution?
Yeah, I mean, look, I think the way to reframe this is what do our customers need? And our customers need an enduring relationship with someone who can help them over time, help them navigate the complexities of the legal space, and then help them to move into bigger and broader opportunities as their business grows. From my standpoint, I really do believe this needs to be a recurring revenue business. If we're not at 100%, back to your early question around evolution, if we're not at 100%, we have room for improvement. I think ultimately, long term, that might be 30 years, we should be at 100% because we owe that to our customers. In terms of where we're going, we're trying to find the lowest hanging fruit first.
Those opportunities where you see real pain points with businesses because they're confused, because other people are offering them something as a transactional product that shouldn't be, and then converting that to subscription. Beneficial ownership reports is a good example here. Beneficial ownership or BOIR is a new requirement from the government requiring all businesses to submit a report on the ownership of the business. This has been a never-ending change in what the rules and regulations are, should be, will be, or maybe will not be if they take it away entirely. We came in eight months ago and said that absolutely should be subscription. We have made a mistake by making that transactional. Just because our customers wanted it to be transactional didn't mean that it should have been transactional.
Before any of the regulations changed, we started pushing people to more of a compliance-oriented offering so that we could say, when this changes, if this changes, or if you have to refile, we will be able to be in a position to do it for you or to help you do that. All of a sudden, all the rules and regulations changed. We were, I'll say, lucky, not necessarily right, but we were there for our customers. As late as yesterday evening, I think Treasury came out with a new ruling on beneficial ownership saying that this might only be for international companies. What we want is to be spending those sleepless nights, Noel and I, trying to figure out exactly what is going to happen for our customers so that they can sleep well.
If they're having sleepless nights, they can focus on their businesses and not on the things that we do best. From my standpoint, all of this should be a subscription.
Just to remind you of the history in terms of our evolution toward subscription, five years ago, this was a large transactional. It was 60%+ transaction. We have been evolving over time and shifting toward subscription. Now we are approaching kind of 2/3 subscription revenue. That orientation has been something that we have been focused on and working closely against.
Another topic transition. Talk about Formation Nation. What does that unlock strategically? What does having a second brand allow LegalZoom to do with core LegalZoom brand?
Sure. Interestingly, it is a good transition because the first thing is it gives us the ability to replay what we've done, shifting LegalZoom over the last five, six years from transactional subscription. To Noel's point, LegalZoom looked like the rest of the market in many ways, where we were selling largely transactional products. We're not done in that evolution, but we've made far more progress than a lot of our competitors have. Formation Nation is largely transactional, which means we have a playbook that we can rerun to get them to par and in line with where we are, and then they can start to evolve alongside us. That's the first piece. There is an economic benefit for us to be doing this because we can leverage some of the learnings that we've had in subscription and apply that to Formation Nation.
More to the point, I think that there were two key areas that we're most excited about with Formation Nation. We largely got these for free because this deal is going to be created from an EBITDA standpoint. The first, which you mentioned, was the ability to have a second brand in a different category. One of the things that I think we did in hindsight that we could have done better was we launched a free product leveraging the LegalZoom brand. What that effectively did was it took the market leader and the market leading brand in terms of unaided awareness, and it devalued that brand. It effectively said, our products and services should be free. When we then stood up our free product against our pay products, customers, rightfully so, were confused.
If I can do it for free, why wouldn't I first try to do it for free? And then if it doesn't work, then I will go to your pay product. The problem with that is we waste a lot of those customers' time, energy, and we do waste their money. It is free in terms of us not charging them for our services, but they do still have to pay filing fees. Empty calories for us, real cost to these customers. Far better to have a separate brand. Now, us creating our own brand probably wouldn't have worked because it would have been transparently clear that that was just us playing games. Instead, we've now acquired in this Formation Nation business a brand called Inc Authority that was actually the first to have a free formation company. In this case, we copied. We were followers, not leaders.
We're not anymore. I can say that. I probably would have denied it two months ago. Now we're collectively the leaders. We have the first free formation company and the first online formation company. By leveraging their brand, it allows us to go, if you have competence and you've done this many times before, you should use Inc Authority. They're a great product. It is a great business. They will help you do what you need to do. If you need greater expertise, if you need the leader in the space, go to LegalZoom. You do get what you pay for. That will be a higher pay service. As we look towards quality share, we're going to be looking to bifurcate the market from the empty calorie customers that we probably don't want at all to the value-oriented customers.
These are customers who think they want to start small business but have not leaned in fully, but will still need a little handholding and will be willing to spend money as they see their businesses succeed and thrive. That will likely go to Inc Authority. The higher-end customers, these are customers who know they are going to succeed. They believe it in their hearts and minds, like Noel and I with LegalZoom. They should go to LegalZoom, or they should go to the very high-touch white glove product offering that Formation Nation has as well. The third piece, and this one is equally important, is the ability to cross-sell and upsell products. We have orthogonally been building out our own suite of answering products that we can now offer to Formation Nation customers. Formation Nation has answering products and partnerships that they can offer to us.
We have already started that cross-sell and upsell process. I could not be more excited about that.
Maybe it's not inherent in that, but it sounds like there could be a pricing kind of component to you guys moving more towards quality. Can you double-click on that? How do we think about pricing for the business over the next couple of years as you guys implement the strategy?
You want to take it or?
No, go ahead.
Yeah, I mean, without question. It's interesting. Pricing, packaging, promotion, product, technology, these all wrap into what your brand ethos is. First and foremost, we look at price as being relevant to how people think about LegalZoom as a brand. By us going down market, and we went down market in a number of products, we feel like we devalued our brand, our ethos, and the value of our products. What you will see us doing in some cases is actually just returning to original pricing. I mean, it's ironic, almost perverse that as we were entering into an inflationary market post-COVID, we dropped most of our prices. What you have seen already is our starting to reprice based on earlier pricing. We're just going back to our original pricing.
Over time, we'll start testing the inelasticity within our business and increasing price because we do think that we offer far more value than all of our competitors. We are uniquely positioned to both be a leading technology provider and a company that has thousands of lawyers, both through our owned and operated law firm and our network of lawyers and legal assistants who can provide real service. We have technology-augmented expertise. That commands a higher price. We're leveraging pricing, obviously, from a financial standpoint, but also to make very clear that we are the industry leader. We're going to take that position, and we're going to run with it.
Big kind of topic across this conference is going to be AI, right? Just tremendous S-curve that is just continuing to go straight up. Talk to me about AI as a threat as well as an opportunity for LegalZoom. How do you view those two various aspects?
Sure. I mean, any company that doesn't see AI as a threat is diluting themselves for the same reason that any company that didn't see technology as a threat or competitors as a threat is diluting themselves. We're in somewhat of a unique position, I think, to turn that threat, that challenge, into an opportunity and into a pretty unique opportunity. The first is, in this country at least, you cannot practice law without a legal degree. There's something called UPL or unauthorized practice of law that actually prevents technology and non-lawyers from giving legal advice. That gives us a bit of a competitive moat. Not completely, but a bit. More importantly, and we touched upon this briefly before, our model is not a purely technology-driven model. It is also clearly not a service model. It is technology-augmented.