Speaking to senior figures that were at Plus500 during its initial period, the firm did not set out to become the efficient, automated firm for which it is renowned. Instead, it attempted the call center and client conversion model with no success, so changed its tack. Here is how and why.
Retail FX and CFD company Plsu500 has been the absolute vestige of success ever since its founders decided to tread a completely different path to most of the electronic brokerages that began to flock to the retail market in the early days of the empowerment of the small upstart following the launch of MetaTrader 4 last decade.
The giants of New York and London remained untroubled by the onslaught of competition, however the sudden influx to the retail market of several hundred white label licensees made for an extremely competitive ten year period as each strove to define their differences.
Plus500, however, stood out as a bastion of marketing and automation genius, and is revered by the entire industry with regard to its commercial efficiency which marks it out as a very small company with very few staff, yet has risen to become literally a one billion pound company.
Today, FinanceFeeds gathered information from certain key figures who were present during Plus500’s founding period, who have explained in great detail exactly how the company managed to create a solution that removes the entire need for a sales channel, and maximize its efficiency through a proprietary digital marketing system that nobody else has managed to emulate thus far.
Shaky beginning noticed quickly and turned around by very highly educated young professionals
Back in the mid 2000s, Israel had begun to carve its name out as a producer of young geniuses who would then leave the country to parade their innovative prowess in key areas of technological advancement, be it medical science, computer software technology or revolutionizing the way in which molecules are split so that previously life-threatening illnesses could be completely cured, or so that water could be desalinated with no drain on electrical resources.
Simply, the country’s universities were producing world class thinkers and people with abilities that outstripped the resources of the backgrounds from which they came.
According to research by FinanceFeeds, this is exactly the mindset that created Plus500’s current standpoint, however it was not the initial intention of the company to stand out and lead in this fashion.
It was explained by a previous senior employee who had been with the firm from the beginning that the company initially attempted to start its operations in the conventional fashion, employing a very small sales team in Israel’s northern city of Haifa, where the company’s origins lie and its head office still remains today.
The company, according to our sources, began by hiring sales people who could speak European languages, notably Spanish and Romanian, in order to call potential customers and convert them to live account holders.
This, however, was ineffective.
In keeping with very good commercial ethic, the company realized this very quickly and made a change to its model, this time outsourcing the entire sales operation to an Israeli call center outsourcing company called גב מערכות (pronounced Gav Maarechot which is Hebrew for “back systems”), which provided the company with a small dedicated sales team, however this also proved ineffective.
The company then realized that traditional sales methodology would not be the way of the future and that it had to consider a revolutionary approach.
Plus500’s management canned the call center idea altogether at that point, at which time it recruited young programmers and marketing experts from Haifa’s Technion university, also known officially as the Israel Institute of Technology, which has a worldwide reputation for producing lead developers in many industry sectors.
In terms of pedigree, On 19 December 2011, a bid by a consortium of Cornell University and Technion won a competition to establish a new high-tier applied science and engineering institution in New York City.
The competition was established by New York City Mayor Michael Bloomberg in order to increase entrepreneurship and job growth in the city’s technology sector. The winning bid consisted of a 2,100,000 square feet (200,000 m2) state-of-the-art tech campus being built on Roosevelt Island, which will have its first phase completed by 2017, with a temporary off-site campus opening in 2013 at the Google New York City headquarters building at 111 Eighth Avenue.
The new ‘School of Genius’ in New York City has been named the Jacobs Technion-Cornell Institute. Its Founding Director was Craig Gotsman, Technion’s Hewlett-Packard Professor of Computer Engineering, and most recently, AOL has announced an investment of $5 million in a video research project at the Institute.
Thus, the university was a prime recruitment ground. Plus500’s presence in Haifa, when almost all relevent positions to recent graduates of Technion were either in Tel Aviv, or further afield in New York or California’s Silicon Valley, created a very advantageous situation for the company in that it was able to hire geniuses, and, according to our sources, pay them very low salaries indeed for developing what has led Plus500 to absolute success.
Accident or not, this was the foundation cornerstone of today’s Plus500, which is listed on London Stock Exchange’s Alternative Investment Market and has a market capitalization of over £1 billion.
London’s Odey Asset Management owns a significant stake in the company, and it is feared by certain competitors, punctuated by a brush with the regulators two years ago which shaved half of the value from the company’s books, a drop that it has made back and even exceeded.
It has never been suggested until now that Plus500 made this change and started as a traditional firm, yet looking at the costs, it makes perfect sense.
Five years ago, E*TRADE spent $431 to obtain a new client. Today, the cost of acquisition ranges between $1,000 and $1,300, apart from Plus 500 which has managed to get it down to approximately $850, approximately double that of E*TRADE’s CPA just five years ago.
Meanwhile, back in 2011, many retail brokers still charged fixed spreads, however the increase in costs has come as a double-edged sword these days as spead is down to less than 0.3 pips on EURUSD in most cases, and partner remuneration is high.
Sales floors the white elephant of an online industry?
This leads on to one of the largest costs: maintaining a sales floor. This is without even looking at the regulatory capital requirements.
At first glance, the prospect of being a salesperson at a retail brokerage may appear to be an opportunity encased in gold, because turnover of clients is so high these days, however there is much more to consider.
The rental cost of office space is at an all time high in regions with a large and developed electronic trading industry, details of which can be viewed on the FinanceFeeds report on this which was published last year.
Why is a large office space needed? This is a moot point, largely because the majority of space which equates to several square meters having to be leased at between $50 and $70 per square meter, is necessary to accommodate large sales and retention desks.
When analyzing the cost of operating a sales-led brokerage model, the cost does not stop at the office space itself. Far more expensive is the continual need to recruit sales people and pay their commissions, and then find that they leave the company after a few months.
In order to dissect this cost, the remuneration packages being offered are usually around £25,000 in the form of a basic salary, plus a bonus which is based on either profit and loss, or more increasingly these days acquisition, trading volume and retention deposits.
Bonuses paid to salespeople and account managers in telephone sales positions within London these days, according to major general employment agency Reed, can take the average salary of a sales person to between £35,000 to £60,000 depending on experience and targets provided in the contract of employment.
When bearing in mind that the turnover of sales and retention staff in brokerages in the retail sector is very high, the cost does not stop here.
British company Hunt4staff states that the cost of recruitment is indeed not cheap. As the salary increases, so does the percentage which is charged for recruitment. For roles up to £15,000 annual salary, companies will typically pay 13 to 15%. For salaries of up to £20,000, the fee is around the 17 to 18% mark, and in excess of £20,000, companies are likely to be charged 20% to 25% i.e. £4,000 upwards to recruit an employee, who may then leave and need replacing just a matter of month later.
The regulators also put a stop to the proposed acquisition of Plus500 by Teddy Sagi’s Playtech relatively recently, something that Plus500 can perhaps reflect on as a positive outcome.
Onwards and upwards, and the lesson here is that when something doesn’t work, change it very quickly and become a leader rather than attempt to refine an ailing methodology.
Featured image: Haifa, Israel