Diminishing Marginal Returns: Case Study of Client Acquisition by Retail Trading Platforms

Over the last ten years, the retail trading industry has really changed a lot. Technology has improved, trading is easier for everyone to access, and trading platforms are competing with each other more than ever. One of the biggest trends is how platforms are trying harder to attract retail traders by offering bigger and better sign-up bonuses. These bonuses have grown by 20% every year, showing how valuable retail traders are to these platforms. At the same time, platforms are looking for ways to spend less on getting new clients while still making a lot of money. This article will look at two important economic ideas—price discrimination and diminishing marginal returns—to understand what’s going on in this competitive market.

The Fight for Retail Traders: Bigger Sign-Up Bonuses

Trading platforms are fighting to get more users by offering sign-up bonuses. These bonuses include things like cash rewards or free stocks, making it cheaper and easier for new traders to start. Every year, these bonuses grow by about 20%, which shows how hard platforms are competing to get traders to sign up, especially those who are just starting their investing journeys.

Retail traders are very valuable to these platforms. Once they join, they tend to stay loyal and make lots of trades. Even platforms that offer free trades still make money from other services like margin lending, payment for order flow, or premium accounts. Because of this, platforms are willing to spend a lot on bonuses, betting that they will make their money back in the long run. Sometimes, customers also consider other factors. For example, a Freedom24 review might influence them to choose a trusted platform over one offering a bigger bonus.

Understanding Price Discrimination

Price discrimination is an idea from economics where businesses charge different prices to different customers for the same product. In the case of trading platforms, they use this strategy with sign-up bonuses. For example, someone with a lot of money might get a bigger bonus to encourage them to deposit more, while a beginner investor might get a smaller reward just to get started.

This strategy helps platforms get the most out of every customer, but it’s not without its risks. If the bonuses are too big and the customers don’t stick around or spend enough, the platform could lose money. Still, this kind of tailoring helps platforms compete and grab more of the market.

The Problem of Diminishing Returns

Another important idea is diminishing marginal returns. This means that the more money platforms spend on getting new customers, the less they get back from each extra dollar. At first, spending on marketing and bonuses works really well because there are lots of people who haven’t started trading yet. But over time, as the market gets crowded, platforms have to spend more and more to get new users.

For example, platforms used to target young, tech-savvy people, but now they are focusing on older or less tech-savvy users. These groups might cost more to attract because they need more education about trading and might not trade as much right away. To deal with this, platforms are trying new ideas like referral programs, influencer partnerships, and gamification to attract users without spending as much.

Finding Cheaper Ways to Get Users

Platforms are making profit, but they still wish to reduce the cost of getting new users. The acquisition cost of new users, they argue, would decrease when platform becomes stronger with the number of subscribers for network effects. Features like social trading or a leaderboard make users feel like they are part of a community and therefore make them more willing to join. On the other hand, platforms began to also turn to AI and machine learning, so that actual marketing can be fine-tuned by spending only on ads that enjoy greater likelihood of success.

What’s Next?

The retail trading industry is at a turning point. New trading platforms are working hard to acquire and retain more users with a profit margin. More precise decisions can be made by using ideas like price discrimination and managing diminishing returns.

Sure, bonuses worth signing up are now in, but they will all come crashing down someday. Those platforms which will figure out how to spend less on marketing, make money in some other way, and keep the user base loyal will come out on top. For any of these changes, retailers in turn will have to be able to adapt, think differently-and be brighter about the way they succeed.