Case Study of ZERODHA

If the entire trading industry gets disrupted because of artificial intelligence, machine learning practice, if people start believing more in Bitcoins and alternate currencies, then Zerodha might be in for disruption, not because of Zerodha’s fault, but because of the fact that the nature of the industry might itself change entirely.

Meaning of word ‘ZERODHA’

Zerodha has a fascinating name. Zero means zero and rodha or rodh, in Sanskrit, essentially means obstacles. So Zerodha as a company has been obstacle-free in reaching that one billion dollar valuation without taking one single dollar in funding.

So in this article, I’m going to cover specific things about Zerodha, which would help you understand more about Zerodha’s business model and would help you gain a better perspective on how businesses should be built.

zerodha

First and foremost, I’ll help you understand the concept of Blue Ocean strategy and how companies like Zerodha and Cirque du Soleil have used the concept of Blue Ocean strategy to become massive companies in their space. Second, I’m going to talk about the rise of Zerodha as to what were the factors that contributed to becoming Zerodha a Unicorn in such a short span of time. And what were some of the key advantages and attributes that Zerodha incorporated and its business model? Third, and finally, I’m going to cover whether Zerodha can actually fall from the epitome of success that it is currently witnessing. So let’s get this case study started.

Blue Ocean Strategy

BLUE OCEAN STRATEGY VS RED OCEAN STRATEGY
BLUE OCEAN STRATEGY VS RED OCEAN STRATEGY

In order to understand that why is Zerodha became such a big company? It is important to understand the basics of blue ocean strategy and how it pans out in the business world. For this, I’ll tell you a fascinating story about a circus called Cirque du Soleil. Now, this is a Europe-based circus and it has had a fascinating journey so far.

You might ask me that what is the similarity between a circus and a zero brokerage firm? Well, it turns out that there are a lot of similarities. So let me explain the fascinating case of Cirque du Soleil and let me take you to the world of circus.

Blue Ocean Strategy : Recipe of success for Cirque du Soleil

In the past, there have been giant circuses like Ringling Brothers and Barnum and Bailey. Now, these have been more than a hundred-year-old organization and they have continued existing in this space like a dinosaur waiting to be disrupted. They use the same philosophy, using live animals for the show, clowns for the show, and a bunch of different features that we are all aware of it that we primarily associate with any circus. As you might know, that circus these days is not a very popular thing. Kids are playing video games. They are watching YouTube videos. They are rarely interested in going to a circus. Then enters Cirque du Soleil, it really disrupted the circus industry.

Now, why do I say that it disrupted the circus industry? The reason is very, very simple. In terms of revenues Cirque du Soleil achieved in 20 years what it took Ringling Brothers more than a hundred years to achieve. Now, this is a massive finding.

If you ask me that, hey, what was the business secret here? According to my, there were three specific reasons why Cirque du Soleil was able to become what it became today. First reason Cirque du Soleil had no wild animals in their show. It reduces the cost massively. And there were also fewer logistical challenges in managing the circus if there were no live animals present. They also did not have to spend any money in terms of training, hiring trainers, etc. So that was a massive cost-cutting initiative from Cirque du Soleil.

The second reason why Cirque du Soleil grew so much was that it was not even looking to compete with established circuses. It projected itself as a theater rather than projecting itself as a mere circus. It had great lighting, great shows, great sound, great choreography, and it projected itself as a big theater show. So the point being that it was not even trying to compete head-on with established players in the industry, and this proved to be an important recipe for their success. And finally, Cirque du Soleil found an entirely new customer base. Instead of appealing and catering their shows to children, they were competing to get the attention of adults. So the majority of their customer base is actually adults now who go to the circus to watch well-crafted shows.

Now, here is a very important recipe for success for Cirque du Soleil that adopted something called the Blue Ocean. Blue Ocean literally means you are in a space where you’re not competing with anyone. You are in a league of your own. A red ocean, on the other hand, would be what is going between Zomato and Swiggy, that both are cutting down and giving more and more discounts. Both are trying to win a similar customer base. Both are offering the same tech play in terms of their platform.

Zomato is using Zomato pro and Swiggy is using Swiggy super. So hardly there is any difference in terms of the operating model of these two giants. So if you look at the operating model of the Cirque du Soleil, it figured out an entirely new ocean and a new market for itself where it was not competing for the same set of customers and did not have the same operating model. Its value positioning was very, very different. Zerodha too is a fascinating case of blue ocean strategy, but the proudest part is that it comes from India.

Zerodha’s Rise to success

So building from the last section that Zerodha is a classic case of a blue ocean strategy. So the first key lesson that you can draw from Zerodha’s story is that Zerodha is not trying to compete with traditional brokerage firms. So essentially what happens is that you, as an investor, when you are trying to put your money in the stock market, you have to use a brokerage platform, that is mandatory. You need to have a Demat account with a broker. And from that account, you can sell and buy stocks. Now for every selling and buying, you need to pay a commission to your broker. This is how traditional brokerage houses like Motilal Oswal financial services still operate, that they charge a big brokerage, when you as an investor want to maintain a Demat account with them, and whenever you transact.

Zerodha flipped this game entirely. They were not trying to compete with traditional brokerage houses like Motilal Oswal financial services. What they said is that here that we are trying to do away with the entire brokerage, all equity delivery on Zerodha costs zero rupees. There is no brokerage charged on Zerodha at all for equity delivery. For intraday and F&O trade there is a little bit of brokerage that is charged.

Brokerage of Motilal oswal and Zerodha
Brokerage of Motilal oswal and Zerodha

For example, if you take a look at Motilal Oswal’s default plan, they charge an equity delivery brokerage fee of 0.5%. If you compare this with Zerodha, the equity delivery is free. So there are absolutely zero charges. If you take a look at the intraday and F&O series you will again find that Zerodha is much more inexpensive compared to traditional brokerage houses like Motilal Oswal financial services.

So the key point that I would want you to take away is that Zerodha was not even trying to compete with the traditional brokerage house. It removed the major barrier for the majority of the investors that hey, come and trade with us. And we will not charge you any brokerage. And that is how their marketing plan was built. Now, this gets us to the question that how is it that Zerodha is able to keep the prices so low? The reason is very simple that Zerodha does not spend any money on advertising. Instead, it relies on word-of-mouth advertising.

So the bottom line is that that is how I figured out about Zerodha. And many of you might figure out from my article that Zerodha is a good platform. Let me at least go and try it out. I’m genuinely sharing my product review with you about Zerodha. I enjoy it. Therefore, I’m recommending it to you. I will never recommend a product that I have personally not used. This brings us to part two of Zerodha’s story that how it ended up targeting an entirely new customer base. What you need to understand is that there are a lot of people sitting on the fringe. who is not completely sure that they should enter the stock market or not? Whether I have the requisite skillset or not? Will I be able to make successful trades or not? So there are a lot of people sitting on the fence for whom entering the stock market is a very difficult step.

Now, Zerodha, through its multi- ecosystem measures is able to cure that problem. For example, you might have heard that it has something called Zerodha Varsity through which you can read a lot about finance and build your basic concepts. That gives the courage to a retail new investor now I have a little bit of finance knowledge, let me just try their platform too. So building this ecosystem for Zerodha has been fascinating and it has been able to capture a lot of new customers.

So essentially when traditional brokerage houses like Motilal Oswal, were trying to go after established customers who have been trading in the stock market for years, Zerodha actually went after new retail customers who were sitting on the fringes. They offered them a lot of conveniences, for example, accessing finance knowledge via their Varsity platform, making the opening of the Demat account very, very simple. You can literally open up Zerodha’s account by going to their website and getting it activated in literally two to three days max. And this process can be done completely online. The third and final aspect of Zerodha’s business model, in my opinion, is the strong tech play.

So essentially, in my opinion, Zerodha is more of a tech company rather than a finance company in the sense that its platform is so beautifully designed and easy to use that new retail customer whom they are targeting, they are able to execute the trades very easily, able to analyze their portfolio and keep track of what is happening in their Demat account.

Now this convenience was not there with traditional brokers. For example, if you had a Demat account with Motilal Oswal, and then you might have a Demat account with some other company, then you had to aggregate all that. So because of the tech play that Zerodha has to be it in terms of leveraging tech to open your Demat account, from maintaining your Demat account, from getting the statements, etc, etc., there are so many tech features embedded in Zerodha’s platform, it becomes very seamless for users to use that.

Additionally, it’s always given that whenever people are investing in stock markets, they would also at the same time explore the mutual fund space. So they ended up creating a platform called Coin by Zerodha. This entire ecosystem play and the convenience to use tech to open up your Demat and maintain your Demat and explore these different options via mutual funds, small case, etc., made the user experience really, really fruitful.

Now, all these conveniences lead to something called a low attrition rate in terms of your customers. So, customers who actually join you or who actually end up signing up for the services, have a very low attrition rate from that perspective. Once they start using Zerodha, it is very unlikely that they will move to some other platform because of all these conveniences, that ecosystem in the tech play that has been incorporated.

So in summary, Zerodha ended up building a business model that was a completely blue ocean. It was not trying to compete with traditional established brokerage houses. It was trying to win new customers in the market and it offered technological conveniences that nowhere offered before Zerodha came into existence. And that’s precisely the reason why I feel that Zerodha, in India is the number one company which can represent India in the blue ocean strategy.

Potential Threats to Zerodha

Now, let me move on to part three of the article where I’ll explain what are some of the potential threats for Zerodha and how is Zerodha actually trying to balance these threats. The first threat for Zerodha might come online, for example, there are several players, for example, Paytm. They too have entered into brokerage trading space.

Now, a lot of us use Paytm so it might be a convenient way for us to just really use one app for all solutions. This is also the weakness of Paytm in my opinion, since Zerodha is a very highly focused app, there is a lot more customer awareness around it than if someone wants to start trading or investing in stock markets, then they will go to Zerodha because it has a very clear answer. So the market positioning is very clear for Zerodha. But on the flip side, an argument can be made that Paytm, it’s a very big player and it offers conveniences. Everyone has Paytm on their phone. So if it decides to ramp up its brokerage services, Zerodha might be in for a competition.

The second challenge looks more prominent to me, and this will come from the offline space. For example, a majority of the banks for years have been trying to develop their brokerage services. Zerodha, despite its technological prowess, does not have that personal relationship. A customer, for example, I can’t go to Zerodha’s office and meet people or meet Zerodha’s representative at the time of opening my account. Now, if banks can figure out a model and keep their costs low and integrate that into the banking services very effectively, then banks can come out as a market leader in the brokerage space. But since so far they have not been able to do it, I don’t know what the exact resistance are. This might be a great topic for another case study. So do comment if you would want me to make a specific types of case studies. I will definitely take a look and give it a go.

Now third and final challenge that I think that Zerodha would face would be the evolvement of the technology itself. For example, if the entire trading industry gets disrupted because of artificial intelligence, machine learning practice, if people start believing more in bitcoins and alternate currencies, then Zerodha might be in for disruption, not because of Zerodha’s fault, but because of the fact that the nature of the industry might itself change entirely. So how is Zerodha trying to fight this change? In my opinion, Zerodha has actually started capturing a lot about the finance space. It has started investing in small finance-oriented startups and it is trying to build that financial knowledge and finance acumen in investors. So that is number one. Number two, Zerodha still adopts that niche place strategy. Niche place strategy means that if you go to Zerodha, Zerodha is a brokerage platform. If you go to something like Varsity, Varsity is a platform for financial education.

Similarly, Zerodha can actually become a massive player in the entire fintech industry. It can actually become one of the leading voices in terms of how financial education is created and delivered, in a practical sense. It can literally become like an MBA school where people can come study from Varsity and start executing those practical experiences via Zerodha’s platform. Zerodha is also investing in a multitude of different FinTech players, so depending on what their business strategy is, they might end up creating these small, small blue oceans and start specializing in certain niches.

Conclusion

So in conclusion, I feel that the way things are shaping up for Zerodha has not raised any money from external audiences. It gives them the freedom to experiment, go acquire new companies, go build new businesses, With the level of flexibility and freedom it has and the cash-rich business it has been able to build, it might become one of the leading voices, not just in India but across the world. So I hope you enjoyed this case study. If you have any suggestions, please do give them and a comment would really appreciate it. And thanks so much for acknowledging my work.

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