pricing: sample case project case: online broker services pricing course topic: price level (chapter...

Pricing: Sample Case Project

Case: Online Broker Services PricingCourse Topic: Price Level (Chapter 6)

Company: Robinhood

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 1

Disclaimer:• All images such as logos, photos, etc. used in this presentation are the property of their respective copyright owners and are used here for educational purposes only• Some material adapted from: Nagle et al, “The Strategy and Tactics of Pricing,” 5th Edition

Mini-Case #6D: Forbes: “Forget $10 Trades, Meet Robinhood: New Brokerage Targets Millennials…”http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/

Team 13: Homer Simpson, Bart Simpson, Marge Simpson, Lisa Simpson, Charles Montgomery Burns

Company

Robinhood is an online stock trading platform charging $0 per trade

Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 2

SituationSuccess criteria and value: Metric being maximized or minimized: •Primary: Member growth: 2/2014: 150,000; 5/2014: 330,000+•Secondary: Provisioning speed (getting users up and running)

Source: GrowthHackers: 5/2014: https://growthhackers.com/slides/robinhood-300k-signups/

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 3

Situation

Overview of industry and its trends: Current events and direction

Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 4

•1.5M active traders who trade 10x/mo•Dominated by big competitors•Priced about $5-$10/trade •Cost about $0.03/trade•Trend: Dissatisfaction with finance co.

Situation

Overview of top 3+ competitors: Strengths and weaknesses of principals

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 5

Competitor Price Strength Weakness

E-Trade $7.99+ Strong brand $5,000 acct minimum

Schwab $8.95+ Large assets $1,000 acct minimum

Scottrade $7 A bit cheaper $32 for broker assist

TDAmeritrade $9.99 Investment platform $45 for broker assist

Source: Etrade.com: https://us.etrade.com/e/t/prospectestation/pricing?id=1206010000Source: Schwab.com: http://www.schwab.com/public/schwab/investing/pricing_services/fees_minimumsSource: Scottrade.com: https://www.scottrade.com/online-brokerage/trading-fees-commissions.htmlSource: TDAmeritrade: https://www.tdameritrade.com/pricing.page

Situation

Overview of company: Important background and recent developments

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 6

Source: Forbes, 2/2014: http://www.forbes.com/sites/halahtouryalai/2014/02/26/forget-10-trades-meet-robinhood-new-brokerage-targets-millennials-with-little-cash/Source: robinhood.com

•Free stock trading; No $10 fee•Encrypted for security•Financial Industry Regulatory Authority (FINRA)•Securities Investor Protection Corporation (SIPC)•Fast execution•Real-time quotes

Situation

Current pricing strategy/approach: Pricing methodology and consumer response

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 7

• $0 per trade• Less than competitors• Makes money through interest from margin accounts and cash

Source: Robinhood.com: https://robinhoodapp.zendesk.com/hc/en-us/articles/203579955-How-is-Robinhood-similar-to-other-online-brokerages-such-as-E-Trade-Schwab-and-Scottrade-Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/

“…Robinhood received overwhelming customer response…” Forbes, October 2014

Problem

Symptoms: Identification of symptoms present in the company and/or industry

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Millennials saving at -2%: Spending more than they have•60% of Millennials say they distrust financial markets (CapitalOne)•Comparison: Workers between 35-44 have savings rate of 3%

Source: CNN Moneyhttp://money.cnn.com/2014/11/10/pf/millennials-negative-savings/

-2%

Problem

Underlying problem: Identification of the underlying problem causing symptoms

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 9

Old Model• Trading on PC• Trust in finance• Baby-boomers driving economy• Competition: Banks, Brokerages

New Model• Trading on iPhone• Distrust in finance• Millennials driving economy• Competition:Robo-Advisors, ETFs

Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/

“Great” Recession: 2008 - on

Why are Millennials saving less?

Problem

Decision: Identification of type of decision that needs to be made: new service?

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 10

Obstacle Description

Relationship Interact with broker Interact with iPhone

Location Do trades at home Do trades while mobile

Balances Minimum balance of $5000+ Minimum balance of $0

Fees High fees Low fees or $0 fees

New service that addresses obstacles to saving

Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/

Analysis

Thought process: Support of thought process with research from previous sect.

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 11

Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/07/25/td-ameritrade-q3-earnings-asset-based-revenues-make-up-for-low-trading-volumes/

Commission-based business Asset-based business Charge on purchases & sales Charge on assets under management“Commission” a bad word Reference value of 1% - 2% seems low

Screenshot from Forbes.com

Analysis

Approach Description and Examples

Commission Payment based on % of purchases & sales of equities: ETradeStrength: Only pay when changes are madeWeaknesses: Possible conflict of interestQuestion: What value is represented by the trade?

Online Internet-based purchases and sales of equitiesStrength: Cheaper than using brokerWeakness: Lacks insight of broker

Asset-based 1% - 3% fee on assets for ongoing management: RIA FirmsStrength: Reduced conflict of interestWeakness: Little accountability; No penalty if money lost

Obvious choices: Identification of typical approaches

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 12

Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/07/25/td-ameritrade-q3-earnings-asset-based-revenues-make-up-for-low-trading-volumes/

Analysis

Approach Description; Examples

Robo-Advisor Low-fee (0.15%) asset-based management: BettermentStrength: Benefits of ongoing management without high feesWeakness: Little/no human insight; Lose when market drops

Free Charge $0 for trades of equities: RobinhoodStrength: Breaks down obstacles to savingWeakness: Find way to monetize; Little/no human insight

Unexpected choices: Identification of other approaches

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 13

Recommendations

Strategies: General approach to address problem, based on analysis

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 14

Source: Robinhood.com: https://robinhoodapp.zendesk.com/hc/en-us/articles/203579955-How-is-Robinhood-similar-to-other-online-brokerages-such-as-E-Trade-Schwab-and-Scottrade-Source: Forbes: http://www.forbes.com/sites/greatspeculations/2014/10/15/can-zero-commission-trading-app-robinhood-challenge-large-brokerages/

Penetration Pricing Charge $0 for tradesCharge $0 for low account balanceCharge $0 for assets under management(except for interest on cash)

Recommendations

Element Description

Product/Service Efficient service; Remove humans; Remove storefrontsPrice Penetration pricingPlace Apple app store (see screenshot); Android coming soonPromotion Public relations and article placement in Forbes, etc.

Tactics: Specific actions to implement strategy: product, price, place, promotion

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 15

Source: iitunes.apple.com: https://itunes.apple.com/us/app/robinhood-$0-commission-stock/id938003185?ls=1&mt=8

Recommendations

Resource Description

Time In one year, amassed hundreds of thousands of users

Money Venture backed by Google Ventures, Andreessen Horowitz

Personnel Under-resourced provisioning teamHundreds of thousands of potential users in backlog

Resource impact: Time and money to execute strategy, eg redesign project

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 16

Recommendations

Criteria Description for Existing Industry

Users Number of users; Bring closer to existing competitors: ETrade: 2.9M accounts; $200B+ in customer assetsTDAmeritrade: 5.8M accounts; $470B in customer assetsSchwab: 8.8M accounts; $1.95T in customer assets

Age Typical age of investors for traditional vehicles: 35+

Success criteria: Expected change in success criteria, increase users by 20%

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 17

Source: nerdwallet.com: http://www.nerdwallet.com/blog/investing/2013/etrade-vs-td-ameritrade-schwab-compare-online-brokers/

Recommendations

Type Description for Robinhood

Users As of March 2015, 800,000 users on a waitlist

Age Average age: 26, as reported by Robinhood.com

Technology Current: iPhone mobile app; Android mobile app planned

Metric: Recommended metric to measure success, eg # new users

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 18

Source: nerdwallet.com: http://money.cnn.com/2015/03/12/investing/robinhood-app-free-trading-millennials/

Conclusion

Learnings Description

Strengths High user growthAverage age agrees with Millennial target market

Weaknesses Significant backlog; Poorly resourced?Possible source of dissatisfaction

Opportunities Pull market share away from competitors

Threats Fallout from next market correction

Learnings: Identify what you learned from the case; eg inelastic pricing

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 19

Conclusion

Applications: State how learnings can be applied to other similar situations

© Stephan Sorger 2015: www.stephansorger.com; Pricing: Sample Case Project; 20

Applications Description

Pricing Penetration pricing works!If you need to build a large user base in a hurry

Resources Penetration pricing will bring in many usersMust be ready to service users; Robinhood not ready

Business model Creative way to monetize usersAlternative to commission and asset-based business models

Contingencies Little evidence of contingency planningNot ready for users; Will they be ready for next recession?