Profiting From Deflation

For all the talk we hear about inflation, Charles Schwab (SCHW) has seen its profits explode even as it has cut its prices. Actually, the company hasn’t merely cut its prices, it has repeatedly hacked them. Still, Schwab will make more money this year than it did at the height of the tech bubble. Now Schwab has announced yet another round of price cuts:

The company’s comeback coincided with a decision two years ago to dismantle a maze of higher prices and new fees imposed to recoup some of the revenue that evaporated as investors made fewer stock trades.
The about-face has been orchestrated by founder Charles Schwab, who returned as the company’s chief executive in July 2004 after the board ousted his right-hand man, David Pottruck.
With its latest price decreases effective July 1, Schwab’s top commission for an online trade of up to 1,000 shares will fall by $7, or 35 percent, to $12.95 — still slightly above Internet rivals like TD Ameritrade Holding Corp. and Scottrade Inc.
Still, the new price is a far cry from two years ago when Schwab charged as much as $29.95 per online trade. The company also is reducing or dropping a bevy of other service fees.
“We are reasserting and protecting our value proposition,” Dodds said.
By cutting its fees, Schwab will temporarily relinquish some revenue in hopes of regaining it back — and then some — as the lower prices encourage customers to trade more stocks and keep more money in the company’s accounts.
The strategy has paid off so far. Schwab’s customers ended May with $1.27 billion in their accounts, up from $985 million before the price-cutting began two years ago. Meanwhile, the brokerage averaged 269,600 revenue generating-trades last month, a 59 percent increase from the previous year.
If the upcoming price cuts had been effect during this year’s first quarter, Schwab estimated its revenue for the period would have been trimmed by about $25 million, or 2 percent.
Schwab backtracked on its fees after realizing its higher prices had alienated many cost-conscious customers originally drawn to the brokerage as a moneysaving alternative to more traditional Wall Street firms.

Posted by Eddy Elfenbein on June 16th, 2006 at 3:58 pm

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