Profit innovation - How your business makes its money

Profit innovation deals with the question: how should your business make money or, to frame it from a different perspective, what are customers going to pay you for. 

Robinhood, the commission-free investing app, is a company working at the cutting edge of profit innovation. By removing commissions, Robinhood must generate revenue in a variety of other ways. Like other brokers, they earn interest on uninvested cash in customer accounts. They also pass through any regulatory fees that are incurred when a trade is placed. These are typically fractions of a cent, but the firm rounds those fees up to the nearest cent, which when scaled up nets a sizeable return. Robinhood also diversifies its services by charging for transactions made on the phone with the aid of a live broker, particularly relevant for foreign stock transactions. All the while keeping their base service commission-free to entice users to their service.

Robinhood since it opened in 2013 now has over 4 million users and has a reported market value of $5.6 billion.  It is a good example of how profit innovation can be used to effectively impact a company’s bottom line and move away from legacy profit models, while attracting a new customer base.

Additional profit models include the freemium framework. Spotify is a leader in this type of model, where it offers its service for free (supported by advertising). An interesting thing Spotify does is to offer features on the desktop version not available on mobile devices. This with the combination of advertisements is designed to encourage a user towards the premium paid subscription. They also augment their approach by offering varied subscription models. Beyond the basic paid service users can also subscribe as a family, which decreases the cost per person by as much to 75%. They have understood the psychology of their users well, it seems.

Personal Capital takes this freemium model and applies it to the financial services world. Personal Capital doesn’t make any money from its free financial app. Instead, their free financial app acts as a terrific lead generator for them to contact those users who they have identified as having more than $100,000 in investable assets. It’s a clever innovation to invest in an app that provides massive value to their target market, and then cross-sell paid services to those who would like to have their money professionally managed.