- Robinhood filed paperwork with the SEC to go public on Thursday.
- The mobile brokerage detailed in the filing how much it costs to acquire new customers.
- Robinhood’s customer acquisition cost has fallen by 72% since 2019 as it refocuses marketing.
- See more stories on Insider’s business page.
Customer acquisition cost, or CAC, is crucial for consumer-facing startups relying on scale to grow their business. The higher the CAC, the more a company spends to attract new people to its service.
It’s a particularly salient issue for fintechs. Brokerage Robinhood, whose business model is dependent upon the volume its customers trade, is no exception.
Roughly 75% of Robinhood’s revenues in 2020, for example, came from selling its customers orders to market makers and transaction rebates.
Robinhood, which filed to go public with the SEC on Thursday, recently detailed how much it spends to bring on new customers. The startup counts more than 17.7 million monthly active users as of the first quarter of this year, a 107% year-over-year increase.
And while Robinhood has seen significant growth over the years, it’s not come as a result of rising a CAC.
In 2019, Robinhood spent, on average, $53 to acquire each new funded account. In 2020, that figure fell to $20. And in the first quarter of 2021 — during the retail trading frenzy over so-called meme stocks — its CAC was $15, according to the S-1 document.
Organic marketing and an adjusted referral program helped lower CAC
In the filing, Robinhood attributed the sharp drop in customer acquisition costs to a few things.
For one, the company has broadly tried to refocus its marketing efforts towards more efficient channels and away from broad-scale advertising, although it said it still sees paid advertising as an effective tool.
The result is that more than 80% of its new funded accounts in 2020 joined either organically (where a customer’s sign-up can’t be attributed to a paid marketing campaign) or through the company’s stock referral program, in which Robinhood provides one free share to referring and referred customers.
Organic marketing and stock referrals “generally have lower direct expense rates as compared to other marketing methods such as paid digital and broad-scale advertising, helping to maintain low average customer acquisition costs and rapid payback,” the filing said.
While customers have the chance to get a stock share valued as high as $225 via the referral program, roughly 98% of users receive a stock reward worth between $2.50 and $10, according to the filing.
The brokerage also tweaked its stock referral program, which has helped lower CAC cost.
Robinhood used to provide all users who signed up on the app with a free share. It now only awards stock referrals to customers who have actually linked a bank account to the Robinhood app.
The result is the “average revenue payback” — or the time it takes to for revenues generated by new users to equal or exceed the marketing expense required to bring them on — has decreased from roughly 13 months to less than five.
“Changing our program to award shares to new users after they initially link their bank accounts to their Robinhood accounts, instead of the prior practice of awarding shares upon completion of the account approval process, allowed us to award shares only to customers with higher intent to use the platform and lowered the cost to acquire a new Funded Account,” the filing said.
Robinhood’s marketing expenses aren’t decreasing, though. From 2019 to 2020 marketing spend rose by more than $60 million to $186 million in 2020.
But the brokerage’s budget has evolved. In 2019, Robinhood spent three times as much on marketing versus operations. Its marketing budget is now about a third more than ops.
Leave a Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
