Which Customers Are Zero Commission And Other Pricing Strategies Targeting?

Forbes 2 weeks ago

In an effort to stay competitive, brokerages are rolling out new pricing models at a rapid pace. The most touted is the zero-commission pricing strategy, which is taking the financial services industry by storm.

The zero-commission trend began in early October 2019 with TD Ameritrade and E-Trade both announcing zero-commission strategies. And most recent to join the zero-commission game is Raymond James. However, zero commission isn't the only pricing model being used as a differentiator among brokerages. Cetera recently announced a new subscription-based pricing model. Subscription-based pricing is not a new strategy and has informed the offerings of other brokerages, with Charles Schwabb among them.

The reasoning behind the flurry of pricing model activity at brokerages, particularly as we are in the early stages of the fourth quarter, is easily decipherable. Brokerages are using bottom-dollar pricing as a means of gaining as many new clients and new assets as possible to bolster their bottom lines. It is a gamble that is working, at least for now. For instance, TD Ameritrade recently commented in media reports that they saw a 49% increase in new accounts across all income sectors after announcing the zero-commission model when compared to the September quarter. Further, TD Ameritrade has gone on to say that the initial financial hit zero commissions have dealt to their bottom line, to the tune of $220 to $240 million per quarter, is anticipated to be offset by customer growth initiatives it currently has in place or has strategized for in the future.

This leads us to the chicken-and-the-egg scenario, which the TD Ameritrade example perfectly illustrates. In a financial services business model, what comes first, the revenue or the customer? It's very easy for brokerages to give their bottom lines a quick hit by offering customers a price they can't refuse. However, with the way things are playing out, it appears many a brokerage is deciding to join the party. Understanding which customers these new pricing models are targeting and how to best serve those customers long-term will be key to the success of brokerages executing new pricing model strategies.

For instance, a zero-commission model has the broadest customer reach. It allows high-net-worth clients to save substantially on their portfolio and entices clients with more modest assets to consider their financial services options. There is a vast chasm between these two client types and zero commissions have the ability to target a myriad of client types in-between. This creates a bit of a quandary for brokerages employing this strategy. It is indisputable that today's leading financial services firms have a defined client demographic as part of their operational strategy. With zero commissions, laser-focused client targeting goes away. Rock-bottom-dollar pricing means everyone is rushing to the clearance sale. It remains to be seen how the brokerages will be able to implement cohesive client services over such a wide demographic base. Yet this will become operationally imperative if the zero-commission strategy is to be successful long-term.

In the case of the subscription-based pricing model, brokerages choosing to utilize this approach have expressed their definitive targeting of millennial and younger financial services clients. This demographic segment has a number of characteristics that make subscription-based pricing ideally suited. Among them are a propensity to do business online, a take-charge approach when it comes to all aspects of their life, and an affinity to highly researching and engaging with the products and services they use. A subscription pricing model checks all those boxes by primarily functioning as an online service that is highly driven by the client and their decisions. Additionally, the long-term and fixed pricing structure of subscription pricing models makes them attractive, from a budgeting perspective, to a client with an emerging asset base. Where the long-term challenge of the subscription pricing model comes in is scalability. With its emphasis on technology and online interactivity as its main source of client engagement, those brokerages utilizing subscription modeling will necessarily need to plan for and invest in frequent technology upgrades and routine technology maintenance in order to not just survive but thrive as a leader in this pricing sector.

Ultimately, financial services are no different than any other business that exists or has existed. Price-and-product is how capitalism works and it is the financial structure that has shaped our country and our culture since its foundation. As brokerages engage in the price wars we are seeing now, be it with the zero-commission, subscription-based or some other pricing strategy, it would behoove them to remember their business fundamentals. Supply and demand drive price, and customer loyalty drives long-term business success. These are business truths that will play out in the current financial services pricing game, the results of which we will wait for with much anticipation.


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