How Robinhood Declined Paid Marketing and Customer Acquisition Costs

  • Robinhood has relied on word-of-mouth marketing and its referral program to grow its user base.
  • The company has managed to grow its user base even as its average customer acquisition cost has gone down.
  • The Robinhood Referral Program has proven to be a key marketing driver for the company.

Robinhood has taken an unconventional route in terms of not only how it lets people trade, but also how companies typically tend to market themselves ahead of going public.

While companies like Peloton and Uber amped up their paid marketing spends on their way to going public, the popular retail investing app’s digital and paid marketing expenses actually declined 14% year-over-year from $90.3 million in 2019 to $77.7 million in 2020, according to its S-1 filed filed last week. 

The company has instead relied on word-of-mouth marketing to grow its user base, pumping the majority of its marketing dollars into its referral program leading up to filing to go public. 

The Robinhood Referral Program awards both existing users and the new users they refer with a stock reward. This has proven to be a reliable vehicle for Robinhood to grow its customer base because it generally has lower direct expense rates compared to other marketing methods, the company noted in the filing. 

A majority (80%) of new people that joined Robinhood in the three months ending on March 31, 2021 joined either organically or through its referral program, according to its S-1 filing.

Further, the company also said it reduced its revenue payback period, or the time it takes for new customers to become profitable, with the total revenues they generate equaling or exceeding the marketing expenses incurred to acquire them. 

According to its filing, Robinhood’s average revenue payback period improved from 12 months in 2019 to less than 5 months in the fiscal year 2020. It attributed this to more efficient marketing, including changing up the criteria of its referral program to award shares to people when they linked their bank accounts, as opposed to giving them the shares when their accounts were approved.

The company also said that it made its paid customer acquisition channels more effective, without giving more details, reducing the average cost to acquire a new customer more than 60% from $53 in fiscal 2019 to $20 in fiscal 2020. 

That’s not to say that the company has pulled back on its marketing spend. 

To be sure, Robinhood’s overall marketing spend increased, with the company spending $185.7 million in 2020, up 49% from $124.6 million in 2019; and $32.3 million in the three months ending on March 31, 2021, up 46% compared to the year prior. 

Overall, Robinhood has also benefited from the pandemic, with analysts saying that lockdowns and government stimulus checks have helped it attract legions of new users over the last year. That surge has continued with the frenzied trading around so-called meme stocks in 2021, even as it faces regulatory risk and its brand equity was threatened in January amid the short squeeze in GameStop.

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