Recently, I was at a Web 2.0 conference. I asked many companies a simple question: "So how do you charge for your service?"
In most cases, the answer was: "It's free."
Well, as I dug in some more, I realized the business model for these companies is usually an advertising play.
And that's the case with a New Age brokerage firm, Zecco. If you want to trade stocks on the site, you will pay no commissions (the company's name is a mesh of "zero commission online"). Instead, you must deal with Google ads.
That sounds like a pretty good deal. Hey, how many of you actually look at ads?
So, how good a deal is this for Zecco?
It's a tough call. In the brokerage business, the cost of acquiring a customer – and keeping a customer – is not cheap. But, if a firm offers free trading, this can be a great way to get lots of customers.
Although, there are likely other revenue models, such as making money from cash balances, margin loans and so on. This is a big reason that brokerage firms have been charging rock-bottom rates over the years.
What's more, Zecco has a super-cool Web 2.0 interface.
But, despite all this, I'm still willing to pay $10 or $20 a trade. Why? Because I know I'm dealing with a highly capitalized, branded brokerage firm.
The last thing I want is to have my brokerage firm suffer from financial problems. In other words, the minimal fees I already pay is giving me peace-of-mind.
Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.
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Reader Comments (Page 1 of 1)
11-28-2006 @ 4:14AM
Mr Wave Theory said...
Zecco - Is "Free" a Business Model?
The hot startups today all seem to have one thing in common today - they all have "FREE" as a business model. That is why when I read about Zecco.com, the free online stock trading site backed by the funder of Skype, my eyes rolled over. Have I heard this story before or what? Once and for all entrepreneurs, I would like to address the question that is on every Web 2.0 entrepreneur's mind: Is "FREE" a business model?
http://mrwavetheory.blogspot.com/2006/09/zecco-is-free-business-model.html
10-05-2006 @ 12:56PM
Gary E. Sattler said...
THEY HEARD ME! THEY HEARD ME!!!!
Blessings to Zecco!!!
Blessings to Google!!!
Hey, all you college kids, remember the name Rockefeller?
Now's your chance!
Gotta getcha some!
Do you like the alternate fuel agenda?
XSUNX ... your day in the sun.
10-05-2006 @ 2:07PM
Gordon said...
This is a harbinger of things to come. No commissions -sure, why not? It can be applied to all kinds of commission based businesses.The internet breaks through again.
10-05-2006 @ 2:42PM
Taz said...
I've been signed up with Zecco since last month.
They will be making most of their money off of interest. Only a bit from advertising.
However you need a min of $2500 to open an account.
Trading will start on the 9th of Oct, so let's see
how Zecco goes!
10-07-2006 @ 10:47AM
Soren Kenner said...
Hi. I am part of the Zecco team and saw your comment on 'free' business models. Let me explain how it works. Take E*Trade as an example. Last year they had approx $ 1.5 billion revenue ... roughly 1/3 from commissions, 1/3 from interest in accounts and 1/3 from interest on margin trading.
However they ended up spending $ 1,2 to run their business ... meaning that without the commissions they would be loosing around $ 200 million a year.
But when you dig into their cost you quickly realize two things. They spend a lot on marketing. And I do mean A LOT ... like $6 per transaction. Yes, every single trade on E*Trade requires a $6 worth marketing spend. Secondly ... it's a behemoth running on pretty legacy technology and with a lot of people employeed.
So here's the bet. Introduce Zero Cost Commissions. And depend on word of mouth to get the thing going. In essense we will be sacrifing about 1/3 of our potential revenue by giving op trading commissions. But we will still be able to turn a profit on the remaining 2/3'rds of revenue.
Now the reason this will work is equally simple. The one thing brokers do not like to tell you is that the trade they sell to you for $12 or more usually costs less than $2 to execute!
In conclusion ... the Zecco business model is quite sound and whatever income we may make from advertising is simply gravy on top of everything else.
BUT there is something about Zecco which I find way more interesting than constructing a profitable business model ... the fact that for the first time things like trading, blogging and social networking is being brought together in a single setting.
In reality this is way more important than zero-commission trades ... it is about the disintermediation of a informational middle-man that is no longer needed. As you will be aware there is no end to the number of professional analysts, cherry-pickers and broker recommendations out there. Some for free. Most for pay.
But if you sit down and run through the numbers you quickly realize that these recommendations are not all they are cranked up to be. As a matter of fact a bunch of monkeys throwing darts at the wall street journals equity section for picks usually over time does better.
What Zecco.com represents is a new way users, traders and people that are simply interested in finance and markets can interact and share ideas, opinions, thoughts and insights. You can blog, comment, participate ... or if you prefer you can simply visit and browse for inspiration and ideas.
BTW ... I like your blog very much. It is well written, focused and prolific. If you come and blog with us (or syndicate) we will share advertising revenue on your zecco.com pages with you 50/50.
Cheers
Soren Kenner