How is Zerodha profitable when most new-age startups aren't?
We get asked often how is Zerodha profitable when most new-age companies aren’t. The answer is simple: our cost of acquisition (CAC) is 0. If we had to spend heavily, we wouldn’t be. CAC at 0 is a philosophical decision, a bit like Dr K on hiring & building products. Philosophical because we aren’t in a hurry to grow or get to X valuation. We believe that if you can build products with the customers’ best interests at heart and enjoy the journey as a team, we’ll continue to do okay. The rest is anyways not in our control.
We run a referral & partner program, but we don’t pay any upfront charges but share a fixed % of revenue generated. The issue with having an upfront CAC is that you can be forced to think about how to recover it. That might mean doing something that’s not right for customers.
This is also why we don’t have any revenue & sales targets. In the business of money, it’s very easy to push customers into bad products. The issue with not doing what is right for customers is that organic growth stops & then you have to continue to spend on CAC forever.
The challenge for Indian B2C businesses is that while millions of users can be acquired by spending, the audience that can generate revenue to cover the CAC is small. For e.g., in broking, I don’t think more than 75lk users can generate revenue to even cover the CAC today.