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In this newsletter we’ve looked at the costs of running a prop a bunch of times before.
The key point to keep in mind is that payouts tend to equal about 30% to 50% of the challenge fees.
As challenge fees also tend to be their only source of revenue, this means a prop is paying out upwards of half its overall revenues back to traders.
This obviously puts a degree of pressure on the rest of the business. It means you have to fund all of your operations with the funds that remain after payouts.
When you then factor in technology costs, payment fees, marketing expenses, and staff costs, you see margins getting squeezed more and more.
Consequently some of the super high affiliate deals that you see in the broker space would, in theory, be harder to do in the prop space.
So it was with a sigh and raising of the eyebrows that we hear a number of prop firms are now offering rebates of 50% to affiliate partners.
Three prop firms that TradeInformer has spoken to have noted this trend, with their own partners now tending to prioritise these companies over them.
Is this viable though?
The immediate response would be no and it almost feels too obvious to explain why that’s the case.
If I sell something for $100, then have to give back $40 AND give the person that referred that sale to me $50 then I have $10 left.
Scaled up, that is just not enough to pay my tech fees, payment providers, and other operational expenses.
So if someone is doing that then we can probably assume the only cost they’re reducing is payouts.
You can see where this is going and why that would be a bad thing to do…
On the other hand, what props may be doing is not that different to what a lot of brokers started doing post-2018.
Prior to that, you could offer IB agreements in Europe and the UK, which meant an affiliate could continue to generate revenue based on the lifetime value of the client.
When that stopped, a lot of brokers started offering large up front payments for client referrals.
These can seem completely illogical on the face of it. For example, if you refer a client to Plus500, you can earn an $800 fee from a client depositing and only making them $40 in spreads and commissions.
The underlying logic of that is obviously that, at scale and averaging out, those people will make the broker a lot more than the $800 fee the affiliate is receiving. Consequently what seems like a weirdly high fee for low revenue is not in reality.
If we go back to the prop space, then what you may have is actually more of a marketing tool aimed at affiliates.
Right now you can pay a prop affiliate on an IB basis. They make revenue over the lifetime of the client.
As that implies, a client has a value beyond the initial purchase they make.
From what we hear, the average number of account repurchases is 3. Sometimes people will say it’s 2 and other times it’s higher.
The bottom line is that on an aggregate level, people average more than one challenge purchase. That takes us back to the marketing tool point.
Let’s say someone buys 3x $100 challenges. You pay a 50% rebate on the first purchase.
So rather than paying a 50% commission, you’ve actually paid $50 for $300 in revenue – or ~16.7%. This is not that out of line with the 15% to 20% rebates you see as standard.
All you have done is reframed how you sold the partnership to your affiliate. ‘Hey bro, want to get 50% of a challenge sale?” sounds more enticing than “hey bro, want to make 15% of the LTV of any traders you refer?”
Of course, all of that assumes there is a LTV and the props aren’t just doing stuff (or ‘stuff’ I should say) to reduce payouts.
As one exec working in the Thai broker market once wrote…
“Sometimes, we have to accept doing dirty work to achieve long-term goals. This world has samurais who proudly embrace honor, but it also has brave ninjas lurking in the shadows to ensure success.”
I would not be surprised if there are a lot of brave ninjas out there in the prop space.
