Banks have always given away toasters to steal customers from rivals. In the cutthroat world of online brokers, the lure is cold, hard cash.
launched a new marketing campaign called "Switcher's Reserve," designed to poach customers away from rivals. The company has set aside $1 million to dole out to the first 20,000 customers who transfer their account from another brokerage. Each one will get $50 credited to their account to cover related transfer fees, as well as 30 free trades to use in the first month with Ameritrade.
"We went through our client research among active traders and heard they'd like to consolidate their account with Ameritrade, but were hesitant because of transfer fees," said Anne Nelson, chief marketing officer at Ameritrade. "One way we thought we could reach them is to set aside a reserve of a million dollars to reimburse them for switching in."
Competition has heated up in the consolidating online brokerage industry, with companies trying to add new clients and retain existing ones to hopefully drive rivals out of business.
To kick off the promotion, Ameritrade has launched a campaign that includes full-page spreads in
The New York Times
The Wall Street Journal
Investors Business Daily
. New commercials have already started running on
, with Ameritrade hotly gunning after
, which has been hyping its Power E*Trade service for the last three months.
On Oct. 2, E*Trade put the industry on notice with the announcement of its "power of 9" plan for Power E*Trade customers. Under the plan, traders who make more than nine trades a month receive a rate of $9.99 per trade and a guarantee that trades will execute in nine seconds or less. Prior to the announcement, traders needed to make 75 trades a month to receive that discounted rate.
The plan has proven extremely successful, with E*Trade boosting its active trader segment by 14% and increasing overall trading volumes by 11% in the fourth quarter of 2002.
"It's getting more competitive for the active trader," said Rich Repetto, analyst at Putnam Lovell. "The power of nine program from E*Trade last quarter had good results with trading volumes increasing, vs.
and Ameritrade's volume, which were relatively flat or down. It demonstrates that targeted advertisements to convert active traders had some success."
But unlike E*Trade, which has multiple revenue streams and derives a smaller percentage of earnings from trading, Ameritrade's business is trading-centric. While it leaves the company exposed to the vagaries of the market, it also enables it to gain more than rivals when trading increases. If Switcher's Reserve is a success, then Ameritrade would see an immediate impact on the top line, according to analyst reports.
On Wednesday, Raymond James analyst Michael Vinciquerra told investors that Ameritrade would earn an additional $15.4 million after taxes annually if the company increased trades by 10,000 a day. That's possible if Switcher's Reserve boosts trading volumes, currently at 140,700 trades a day, by 7.1%, which is a smaller percentage than the boost that E*Trade received.
That said, Ameritrade's promotional push comes with costs that need to be recouped.
"Number one, they're giving away free trades. Number two, we have no idea how many people will come over for this. And three, there's some cost to do the marketing for the program even if zero people come over," said Repetto.
Indeed, Ameritrade said it will spend between $300 and $350 in marketing for every new account that migrates over to their platform. As the table above shows, at $10.99 a trade, Ameritrade is still more expensive than rivals. And another factor that might work against the company is that smaller, cheaper rivals like
are quietly making inroads.
"We're opening 200 new accounts a day and 150 of those are transfers in. How many of those are Ameritrade, E*Trade or Schwab customers? We don't keep a record of that," said Ned Bennett, CEO of optionsXpress and former COO at eDreyfus. "But we did see a high influx of accounts from Datek after the merger, because A, they already had an Ameritrade account, or B, wanted more options coverage."
Ameritrade refused to reveal its expectations for the new program, but any success will obviously come at the expense of rivals. The fact that Ameritrade offers a flat fee of $10.99 per trade for both inactive and active traders, could put pressure on Charles Schwab, which has a more complicated -- and costly -- three-tiered approach. And with a quarterly inactivity fee of $15, Ameritrade is cheaper than E*Trade, Schwab and
covered the rise in inactivity fees in a separate story.)
To handicap the company's progress, Repetto advises investors to keep a close eye out for signs of increases in Ameritrade's monthly trading volumes and net account additions.
"There have always been promotion advertising where you get $50 to open an account," he said. "This is different because it's targeting only the transfer of accounts from competitors. But it's really competitive out there and it's anyone's guess how effective it will be."