How Does Zerodha Make Money? Business Model Explained

Zerodha is an Indian fintech company that provides online trading services. Here, you can trade on stocks, commodities, mutual funds, bonds, currencies, etc. The best part is its free equity delivery and free direct MF. You just need to pay INR 20.00 on intraday and F&O trades. Then, how does Zerodha make money? You may ask. Through its “Low margin and high volume model.” In this article, you will get a complete breakdown of the Business model of Zerodha. 

CEO of Zerodha- Nitin Kamath

Nitin Kamath is the founder & CEO of Zerodha. He worked for almost 12 brokerage businesses before founding Zerodha. He founded Zerodha on 15^th August 2010. At that time, NSE (National Stock Exchange) was offering free software to its members. So, five people including his brother Nikhil Kamath assisted him to establish the internet brokerage service. 

Working Strategy- “Low Margin Higher Volume”

As you have read above, Zerodha’s business strategy is based on “Low Margin Higher Volume.” Do you know why? Because the user base of Zerodha is so large, a minor transaction fee can convert into a lot of money for the company. This model was immensely successful. It is also called the “Discount Brokerage Model.” Eventually, Zerodha became a popular online discount brokerage firm in India.

It offers trading services in the following-

• Equities
• Commodities
• Currencies
• Derivatives
• Mutual Funds

Key working strategies of Zerodha are-

1. Discount or low-cost brokerage: A discount brokerage executes trades on orders at cheaper commission rates. Likewise, Zerodha charges a flat fee of ₹20 per trade, which is much lower than the traditional brokerage fee charged by other brokers. This low-cost strategy has helped Zerodha to attract a large number of retail investors, including first-time investors, and low-income or small-investor clients.
2. Technology-driven platform: Zerodha has built a robust and user-friendly trading platform. You can access it through mobile and web applications. It provides real-time market data, charting tools, and other features with which you can make informed trading decisions.
3. Education and Research: Zerodha provides free online education and research resources to its clients, including tutorials, webinars, and market analysis reports. This helps investors to enhance their knowledge and make informed investment decisions.
4. Focus on customer service: Zerodha places a strong emphasis on customer service and provides multiple channels for clients to reach out for support. You can contact them through email, phone, and chat to get solutions to your queries. Also, it has over 120 branches and partner offices across India. You can reach out there too based on your location.
5. Diversified revenue streams: Zerodha generates revenue from multiple sources, like brokerage fees, interest on funds, IPO funding, mutual fund commissions, and margin funding. This diversified revenue model enables the company to generate stable revenue streams and withstand market fluctuations. You will get a detailed breakdown of the same in the section “Revenue Sources.”

Thus, Zerodha’s working strategy focuses on providing low-cost, technology-driven, and customer-centric trading services to make wise investment decisions.

How does Zerodha make money? (Revenue Sources & Market Valuation)

Zerodha is growing its momentum in the current fiscal year 2022 through its various revenue sources. According to its consolidated annual financial statements with RoC, it earned a revenue of INR 4.964 crore. (Note: RoC refers to the Registrar of Companies). 

Revenue Sources

1. Brokerage fees: The primary source of revenue for Zerodha is through brokerage fees charged on trades executed on its platform. The company charges you a flat fee of INR 20.00 per trade, regardless of the size of the transaction. Seems quite beneficial. Right? This feature has created a large customer base. Therefore, instead of charging more per transaction, Zerodha relies on a high volume of transactions by attracting more clients.
2. Sale of premium tech products: It sells premium products like Kite Connect API, user onboarding collections, and exchange transaction charges on behalf of various securities exchanges.

Do you know the amount it collected from the fees and services? It earned INR 4,129 crore.

3. Interest on funds: Zerodha earns interest on the funds deposited by its clients in their trading accounts. It earns interest from the money you keep in your trading account before buying stock or funds. The company invests these funds in various financial instruments such as government securities, bonds, and other short-term instruments, and earns interest on them. The interest income of the company in the financial year 2022 is INR 614.5 crore.
4. Other sources: Zerodha also generates revenue from other sources such as IPO funding, Mutual funds, Margin funding, corporate actions, currency and commodity trading, and the sale of other financial products. Through these sources, it earned a revenue of INR 220.5 crore.

• IPO funding: Zerodha provides funding for its clients to apply for initial public offerings (IPOs) through its platform. The company charges a fee for this service, which adds to its revenue.
• Mutual funds: Zerodha offers mutual fund investments through its platform and earns a commission on the sales of mutual fund products. The company’s revenue from this source is a considerable percentage of the total value of the mutual fund investment.
• Margin funding: Zerodha provides margin funding to clients, which is the process of borrowing funds from the broker to invest in the stock market. The company earns interest on these loans, which adds to its revenue.

Market Valuation of Zerodha

In the current scenario, the market valuation of Zerodha is $2 billion i.e. INR 16,492 crore. It is a self-made unicorn without any external funding. The company handles 15-18% of India’s trading volume on its own. It has more than 10 million customers which makes it one of the largest online stock broking firms in India. 

Products

Before proceeding further, let’s have a brief look at the products of Zerodha.

1. Kite: It is the leading trading platform of Zerodha. Here you will get live market data, powerful bar and pie charts, an appealing and user-friendly interface, etc. It is available on both iOS and Android operating systems.
2. Console: This is the main dashboard of the customer’s DEMAT account in Zerodha. It provides detailed reports from which you will get an insight into your transactions and investments.
3. Coin: With coins, you can buy commission-free direct mutual funds online. You can deliver them directly to your demat account.
4. Kite Connect API: It is a web-based application of Zerodha. With this, you can create powerful trading systems. Also, you can build your investment app and demonstrate it.
5. Varsity Mobile: If you are new to the stock markets, the Varsity mobile is a perfect source to learn stock market analysis.
6. Sentinel: you can use it to create market notifications for stocks, futures, options, etc. in the cloud. And that too for free of cost.

Is Zerodha a profit-making company?

Yes! According to the company’s regulatory filings with the MCA (Ministry of Corporate Affairs), it is a profit-making company. In the financial year 2022, the net profit of Zerodha doubled to INR 2,094 crore due to an 86% rise in revenue. Its total expenditure soared to INR 2,164 crore whereas its revenue increased to INR 4.964 crore. We have already described a complete breakdown of the top 10 profitable Startups in India. And Zerodha is one of them! It earned good revenue by collecting smaller amounts of fees from a larger number of clients. Another key factor that aids in its high-profit structure is the “Online-only structure.” Although it has numerous partner offline offices. But still, it has low operational costs due to its online structure.

Marketing Strategies

Zerodha spends 0.02% of its revenue in marketing & advertising. It completely believes in the word-of-mouth as the founders consider it as the best marketing method. So, its marketing strategies are centered on the company’s mission. That is to make trading accessible and affordable for everyone in India. Here are some key elements of the brokerage firm’s marketing strategies are-

1. Referral program: Zerodha has a referral program that incentivizes existing clients to refer new clients to the platform. Under this program, you will receive a referral bonus if you bring a new client to Zerodha through personal relations. This has helped the company grow its customer base rapidly. For example- You can refer the platform to your friends and earn 10% of the brokerage they pay. Also, you can get 3000 reward points for each referral.
2. Educational initiatives: Zerodha provides educational resources such as Zerodha Varsity, an online trading education platform, to help you to learn about trading and investing. The company also conducts regular webinars and workshops to educate clients about its products and services.
3. Community building: Zerodha has built a strong community of traders and investors through initiatives such as trading forums, where clients can share ideas and strategies. The firm also hosts events such as investor meet-ups and trading competitions to bring its clients together.
4. Branding: Zerodha has built a strong brand in the Indian financial services industry through initiatives such as its “truly democratic” branding campaign, which emphasizes the company’s commitment to making trading accessible to everyone in India.

Thus, these initiatives have helped Zerodha grow rapidly and become one of the leading players in the Indian stock broking industry.

Conclusion

Zerodha is an Indian online discount brokerage firm that provides trading services in equities, commodities, currencies, derivatives, and mutual funds. Zerodha’s business model is based on a low-cost, high-volume strategy, where the company charges a low fee for its services and relies on a large number of clients to generate revenue.