Why MFs should bet on the D2C Channel?

Going by the current trends - we can only expect the growth rate of new SIP accounts to sustain in the years to come. The question is - who will grab the pie?

Jul 06, 2020 08:07 IST India Infoline News Service

Mutual Funds
Declining bank interest rates, uncertainty clouding the real estate market and failure of gold to consistently yield returns has forced Indians more than ever to adopt SIP based Mutual Fund investment for building wealth. Despite COVID playing the role of a speed-breaker, in May 2020, the total inflow through SIPs stood at Rs. 8,123 Cr. Not too long ago, in 2016, the total inflow was a mere Rs. 3,189 Cr. In other words, it has more than doubled in 5 years. (Data provided by AMFI) 
 
Going by the current trends - we can only expect the growth rate of new SIP accounts to sustain in the years to come. The question is - who will grab the pie?
 
D2C marketing is gaining popularity because 
 
Traditionally mutual funds were sold by offline brokers. Today, with increased digitization in the industry, a significant number of new accounts are being signed up by digital brokers such as Fundsindia, Scripbox, Groww etc. 

The market has changed, as well. Mutual Funds are no longer products that need to be pushed by brokers. Instead, end investors are themselves hunting for the best funds for them (fuelled by increased awareness about the asset class). This awareness is a consequence of top-line marketing efforts by AMFI and other players. 
 
The D2C economics for MFs, key points
 
SEBI regulations bar funds from paying upfront commissions to distributors. This change in reward structure prevents distributors or brokers from actually "selling" particular funds. The role of distributors is limited to logistics only, and it does not matter to them, which fund ends up being chosen.

In such a situation, Funds have no choice but to tell their own story. This change in market dynamics is the primary cause that is driving funds to invest in the D2C channel. 
 
The D2C economics works well for Funds for the following reasons:
 
-     Lower lifetime cost in-comparison to broker led Channels (both online & offline)
Acquiring new clients through digital channels require an upfront cost per acquisition for the funds. On the hand, broker led channels require commission on investment amount throughout the lifetime of the client. 
 
To understand economics better, let us consider a hypothetical example:

Going by the current trends - we can only expect the growth rate of new SIP accounts to sustain in the years to come. The question is - who will grab the pie?

Consider a Fund acquires a new customer directly through digital marketing. The customer invests Rs. 10,000 and the cost of acquisition work out to be Rs. 500. If the same customer was acquired via a broker, the cost would be 1% or Rs. 100. In other words, going purely by the first-time investment value – digital D2C channels seem expensive. 

However, the story does not end with a single investment. Now imagine a new client ends up investing Rs. 5,00,000 over the lifetime. How does the math work-out? In the case of Digital acquisition, there is no further cost involved. In case of broker—led acquisition, it would be 1% of the total investment value, i.e. Rs. 5,000. In other words, the Digital channel proves to be 10X more economical! 
 
-     Customers are becoming extremely cost-sensitive
 
Mutual funds are mainstream today. As more investors, come within the fold - we can expect intense "expense sensitivity". The rise in popularity of direct funds and index funds point in that direction too. While SEBI has been capping expenses- investors are still looking for avenues to cut costs. Direct mutual funds eliminate the need to pay brokerage and lead to much higher returns for investors without any additional risk. By marketing to Investors, Funds can educate the latter on the benefits of going direct. Having a strong subscriber base for direct plans would help funds ensure a more robust future by helping them stay competitive. 
 
Implications for digital experience and marketing:
 
For maximizing returns, funds need to lower the cost of acquisition and boost the LTV of potential acquisitions. The D2C acquisition strategy thus needs to be orchestrated to lead-up to these goals. Currently, for D2C to become reliable digital channels, there are three major investments that a firm needs to do:  
 
1. Increase Customer traffic to Website: Traffic could be brought to the company site either organically or via paid channels. When it comes to organic traffic, the most reliable source happens to be Organic Search. To ensure that share of traffic from Organic Search is high, firms need to invest in a structured SEO (Search Engine Optimization) program. Such an investment would help them rank high for relevant search queries and eventually create a great channel for free incremental business. In case of paid ads, fund houses could evaluate a channel mix split between Paid Search, Social & Display.
 
2. Building an improved online buying experience: Currently, fund houses lag behind online brokers when it comes to providing a seamless online buying experience. The following sub-factors impact the online experience of visitors:
a. Time is taken for the page to be interactive
b. Ease of navigation to key action points
c. Security and ease of subscription 
      
A powerful way to bring down acquisition cost is to ensure that more visitors to the site end up converting. This is because in most cases, we need to pay ad platforms on a per click basis. High conversion rate helps us drive the best return from ad spends. 
 
3. Investing in enhanced customer experience for investors: 
Fund-houses need to ensure higher LTV per customer to ensure highest returns on marketing spends. That can happen when customers buy new products or invest more in existing products. Gifting customers a great post-login experience is a key to boosting LTV. Making use of historical data points for predicting the most effective solutions for cross-selling and engaging the customers with valuable content and resources are some ways to drive increased investments. 
 
Our recommendations for scaling D2C business through digital marketing:
 
For best results it would make sense for a Fund-house to adopt a data-driven strategy for digital marketing. Some interesting solutions that could be effective are:
 
1. Precision Targeting for Paid ads: Using a blend of 1st party and 3rd party data to define target groups that are more likely to contain high LTV clients and target these groups via cross -channel strategy
 
2. Cross Channel Strategy from Awareness to Purchase:  Using multiple channels effectively in combination to communicate with the customer at every funnel stage in a custom way. 
 
3. Lowering Paid Search costs through quality score enhancement: While the search is the most effective paid channel – it's the most expensive too. Using Quality score enhancements techniques effectively can reduce search CPCs substantially.

This article is co-authored by: Mr Aditya Saxena, Senior Vice President – APAC, iQUANTI & Mr Anirban Sengupta, Senior Account Manager - India, Australia & ME, iQUANTI

Published as Received
The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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