One of the questions a lot of people have, particularly LPs, is whether funded trader companies actually place any real trades.
Recently Finance Magnates published an article looking at the launch of one prop, which has a lot of detail on the stats involved. The key points…
- 0.8% to 2% of all clients get a payout from a funded account
- The average payout was €4,473
From this you can start to work backwards. The company in question has 10 challenges, with fees that range from €99 to €2,699.
In reality, it’s likely that there is a Pareto distribution in challenge purchases, meaning 20% of the challenges are bought 80% of the time. My guess is that this skews to the lower cost packages.
Alternatively the distribution of purchases may be more like an inverted bell curve – ie. people buy either the expensive challenges or the cheap ones but not so much the mid-price. Also I could be wrong and it’s even. Only the props know.
Let’s assume for a second that it’s the first option and that the cheapest challenges are bought 80% of the time. The prop mentioned has 10 challenges on offer. So let’s pretend that the two cheapest challenges are bought 80% of the time and then, within that, the cheapest challenge is also bought 80% of the time. The remaining challenge purchases are evenly distributed.
If 1,000 people buy a challenge, that means the purchases look something like this…
| Challenge fee | No. of challenge purchases | Revenue (€) | |
| 99 | 640 | 63,360 | |
| 119 | 160 | 19,040 | |
| 149 | 25 | 3,725 | |
| 259 | 25 | 6,475 | |
| 299 | 25 | 7,475 | |
| 499 | 25 | 12,475 | |
| 519 | 25 | 12,975 | |
| 999 | 25 | 24,975 | |
| 1999 | 25 | 49,975 | |
| 2699 | 25 | 67,475 | |
| Total | 1000 | €267,950 |
If we assume that the distribution of challenge purchases is even, then the table looks like this.
| Challenge fee | No. of challenge purchases | Revenue (€) | |
| 99 | 100 | 9,900 | |
| 119 | 100 | 11,900 | |
| 149 | 100 | 14,900 | |
| 259 | 100 | 25,900 | |
| 299 | 100 | 29,900 | |
| 499 | 100 | 49,900 | |
| 519 | 100 | 51,900 | |
| 999 | 100 | 99,900 | |
| 1999 | 100 | 199,900 | |
| 2699 | 100 | 269,900 | |
| Total | 1,000 | €764,000 |
Now the thing to remember here is that between 0.8% to 2% of clients made money and the average payout was €4,473.
In our example that would mean a maximum of 20 people (0.02*1,000) got a payout and the total was €89,460 (20*4,473).
So in the first example, payouts would be 33% of challenge revenue. In the second example they would be 11.7%.
This leaves a lot of headroom for staff costs, marketing expenses and so on.
You then just need to control…
- Fixed assets (office, computers etc)
- Staff costs
- Average CAC
Simple, right? Why haven’t you started a prop already?
The main risk for props today seems to be that the CAC rises. Think of this in the same way that you do of say Google Ads for brokers. There you are in a bidding war and you will have people like Plus500 who are willing to pay hundreds of dollars for a client.
As we’ve written about before, this may indeed be happening because props are doing things like offering massive discounts or changing rules to make it very hard to get payouts. So you try to drive more money in and also stop money going out.
Whatever the case, we can also go back to our initial point, which is that props probably don’t hedge because they don’t have to. Done right, challenges are more than covering the cost.