Harvard Case - Betting on Growth: The Right Pricing Structure for Kalshi
"Betting on Growth: The Right Pricing Structure for Kalshi" Harvard business case study is written by Peter Stuttgen. It deals with the challenges in the field of Entrepreneurship. The case study is 10 page(s) long and it was first published on : Aug 2, 2023
At Fern Fort University, we recommend that Kalshi implement a hybrid pricing structure combining transaction fees with subscription tiers to optimize revenue generation, cater to diverse user needs, and foster sustainable growth. This strategy leverages the strengths of both models, addressing the challenges of attracting a broad user base while ensuring profitability.
2. Background
Kalshi is a prediction market platform that allows users to trade contracts based on the outcome of future events. Founded by a team of experienced entrepreneurs, Kalshi aims to disrupt the traditional market research and forecasting industry by leveraging the collective wisdom of its user base. The case study focuses on Kalshi?s need to develop a sustainable pricing structure that balances attracting new users with generating sufficient revenue.
The main protagonists of the case study are:
- The Kalshi team: Led by CEO and founder, they are tasked with developing a pricing strategy that will ensure the platform?s success.
- Potential users: These include individuals, businesses, and institutions interested in accessing Kalshi?s prediction market platform.
- Investors: Kalshi seeks to attract investors to support its growth and expansion.
3. Analysis of the Case Study
This case study presents a classic dilemma faced by many startups: balancing user acquisition with revenue generation. To analyze Kalshi?s situation, we can utilize the Business Model Canvas framework:
Key Partners: Kalshi needs to partner with data providers, technology companies, and potentially regulatory bodies to ensure the accuracy and reliability of its platform.Key Activities: Kalshi?s core activities involve platform development, user acquisition, market research, and data analysis.Value Propositions: Kalshi offers users a platform to participate in prediction markets, access real-time data, and potentially gain insights into future events.Customer Relationships: Kalshi needs to build strong relationships with its user base through user-friendly interfaces, educational resources, and responsive customer support.Channels: Kalshi can leverage online marketing, social media, and partnerships with relevant organizations to reach potential users.Customer Segments: Kalshi can target various customer segments, including individual investors, businesses seeking market insights, and even government agencies.Cost Structure: Kalshi?s cost structure includes platform development and maintenance, data acquisition, marketing expenses, and personnel costs.Revenue Streams: Kalshi needs to explore various revenue streams, including transaction fees, subscription tiers, and potentially data licensing.
4. Recommendations
Kalshi should implement a hybrid pricing structure combining transaction fees with subscription tiers. This approach offers the following benefits:
- Attracting a broader user base: Free or low-cost access with transaction fees allows Kalshi to attract a wider range of users, including casual participants and those seeking to explore the platform.
- Generating revenue from active users: Transaction fees incentivize active trading and generate revenue proportional to user engagement.
- Catering to diverse needs: Subscription tiers can offer premium features and benefits, such as advanced analytics, data insights, and priority customer support, catering to more serious users and businesses.
- Sustainable revenue model: Subscription tiers provide a predictable and recurring revenue stream, ensuring long-term financial stability.
Implementation:
- Free Tier: Offer a free tier with limited functionality, allowing users to explore the platform and participate in basic trading activities.
- Transaction Fees: Implement a tiered transaction fee structure based on trade volume, with lower fees for smaller trades and higher fees for larger trades.
- Subscription Tiers: Introduce two or three subscription tiers with increasing features and benefits. The basic tier could offer access to all features with a limited number of trades per month. The premium tier could offer unlimited trades, advanced analytics, and priority customer support.
- Promotional Offers: Offer introductory discounts and free trials to incentivize users to upgrade to paid tiers.
- Data Insights: Leverage data analytics to understand user behavior and optimize pricing strategies.
5. Basis of Recommendations
This recommendation considers the following factors:
- Core competencies and consistency with mission: The hybrid pricing structure aligns with Kalshi?s mission to democratize access to prediction markets and generate revenue from user engagement.
- External customers and internal clients: This approach caters to both casual users and more serious investors, maximizing user acquisition and revenue generation.
- Competitors: By offering a free tier and transaction fees, Kalshi can compete with other prediction market platforms while also differentiating itself with premium subscription tiers.
- Attractiveness: The hybrid pricing structure offers a balance between accessibility and profitability, potentially leading to higher user engagement and revenue growth.
6. Conclusion
By implementing a hybrid pricing structure, Kalshi can effectively balance user acquisition with revenue generation. This approach will allow Kalshi to attract a diverse user base, generate sustainable revenue, and position itself for long-term growth in the rapidly evolving prediction market space.
7. Discussion
Other alternatives not selected include:
- Pure transaction fee model: This could lead to lower user acquisition but might not be sustainable for casual users.
- Pure subscription model: This could limit user acquisition and potentially alienate casual users.
Risks and key assumptions:
- User adoption: The success of the hybrid model hinges on user adoption and engagement.
- Competition: Kalshi needs to monitor competitors and adapt its pricing strategy accordingly.
- Data security and privacy: Kalshi must prioritize data security and privacy to maintain user trust.
8. Next Steps
- Develop a detailed pricing model: Define specific transaction fees, subscription tiers, and promotional offers.
- Conduct market research: Gauge user interest and preferences for different pricing options.
- Implement the hybrid pricing structure: Launch the new pricing model with clear communication to users.
- Monitor performance: Track user engagement, revenue generation, and competitor activity.
- Continuously optimize: Adjust pricing strategies based on data insights and market dynamics.
By taking these steps, Kalshi can successfully implement a hybrid pricing structure that fosters sustainable growth and positions the company as a leading player in the prediction market industry.
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Case Description
It is September 2021, and Kalshi is a new, Commodity Futures Trading Commission (CFTC)-approved trading platform for event contracts. Kalshi went online just a few months earlier, after a successful round of Series A funding. Sumer Sao, the first (and at the time the only) member of Kalshi's growth team, realizes that the key to the company's sustained success is to quickly grow the number of daily active users to increase liquidity on the trading platform. To achieve that, Kalshi needs to find the right pricing structure that can potentially attract different target segments while also encouraging trading.
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