Betting on Growth: The Right Pricing Structure for Kalshi Custom Case Solution & Analysis

Case Evidence Brief

Financial Metrics

• Contract Structure: Binary outcomes paying 1 dollar for correct predictions and 0 dollars for incorrect ones.
• Trading Range: Contract prices fluctuate between 1 cent and 99 cents based on market probability.
• Transaction Fees: Initial model utilized a variable fee per contract, capped to ensure participants never pay more than the potential payout.
• Capital Position: Venture-backed startup requiring rapid scale to achieve break-even operations.
• Regulatory Status: Designated Contract Market (DCM) under the Commodity Futures Trading Commission (CFTC).

Operational Facts

• Product Offering: Event contracts covering economics, climate, politics, and entertainment.
• Clearinghouse: Kalshi operates its own clearinghouse to settle trades and manage collateral.
• Access: Direct-to-consumer model via web and mobile applications, bypassing traditional brokerage intermediaries.
• Market Mechanism: Central Limit Order Book (CLOB) where buyers and sellers are matched based on price and time priority.
• Geography: Headquartered in New York, focused primarily on the United States market due to CFTC licensing.

Stakeholder Positions

• Tarek Mansour and Luana Lopes Lara: Founders focused on democratizing access to financial hedging for real-world events.
• CFTC: Regulatory body requiring strict adherence to market integrity, consumer protection, and transparency standards.
• Retail Traders: Seeking low-friction entry and transparent pricing for speculative or hedging activities.
• Institutional Liquidity Providers: Require high-volume incentives and low latency to provide the necessary market depth.

Information Gaps

• Customer Acquisition Cost (CAC): The case does not provide specific dollar amounts for acquiring retail users.
• Churn Rates: Data regarding user retention following the initial trading period is absent.
• Competitor Margin Structure: Detailed fee breakdowns for unregulated offshore competitors are not fully disclosed.

Strategic Analysis

Core Strategic Question

• How should Kalshi structure its pricing to maximize liquidity and user growth while maintaining the high compliance costs associated with federal regulation?

Structural Analysis

The exchange industry is governed by network effects. Liquidity attracts liquidity. Kalshi faces a chicken-and-egg dilemma: retail users require tight spreads to trade, but market makers require high volume to justify narrow spreads. Unlike offshore competitors, Kalshi bears the cost of federal oversight, which creates a higher floor for operational expenses but offers a significant trust advantage.

The Jobs-to-be-Done for Kalshi users fall into two categories: hedging (protecting against a specific event) and speculation (profiting from an information advantage). High transaction fees act as a tax on information, discouraging the very activity that creates market efficiency.

Strategic Options

Option 1: Tiered Volume-Based Pricing

• Rationale: Incentivizes high-frequency trading and institutional participation by lowering marginal costs as volume increases.
• Trade-offs: Increases complexity in the fee schedule; may alienate small-scale retail users if the entry-level tier is too high.
• Resources: Requires an automated billing engine capable of real-time volume tracking.

Option 2: Subscription Model (Kalshi Plus)

• Rationale: Provides predictable recurring revenue while offering heavy users zero-commission trading for a flat monthly fee.
• Trade-offs: Risks adverse selection where only the most active (and costly) traders opt-in, potentially reducing net revenue per trade.
• Resources: Requires significant marketing spend to communicate the value proposition to the retail base.

Option 3: Maker-Taker Rebate Model

• Rationale: Pays liquidity providers (makers) to post orders, while charging those who consume liquidity (takers).
• Trade-offs: High risk of net-negative revenue if taker volume does not significantly outweigh maker rebates.
• Resources: Requires sophisticated market-monitoring tools to prevent wash trading and manipulation.

Preliminary Recommendation

Kalshi should adopt a hybrid model: Tiered Volume Pricing for all users, complemented by a Subscription tier for retail power users. This addresses the need for institutional liquidity while capping costs for the most active retail participants. Speed to liquidity is the primary metric for success; pricing must be secondary to market depth at this stage of the lifecycle.

Implementation Roadmap

Critical Path

• Month 1: Quantitative analysis of historical trade data to determine optimal price points for each volume tier.
• Month 2: Submit revised fee schedule to the CFTC for review and approval to ensure regulatory compliance.
• Month 3: Update the matching engine and user interface to reflect tiered pricing and subscription options.
• Month 4: Launch a 90-day pilot program with select institutional market makers to test the rebate structure.

Key Constraints

• Regulatory Approval: The CFTC may view aggressive rebate models or certain subscription structures as potentially distorting market fairness.
• Technical Debt: The current clearinghouse infrastructure must support complex, real-time fee calculations without increasing latency.
• Capital Runway: Transitioning to a lower-fee or rebate-heavy model will temporarily increase the burn rate before volume offsets the margin compression.

Risk-Adjusted Implementation Strategy

To mitigate the risk of revenue collapse, the transition should occur in phases. Start with the tiered volume model for institutional accounts first. Only after liquidity depth increases by 40 percent should the retail subscription model be introduced. This ensures that when retail users arrive for commission-free trading, they find a liquid market with narrow spreads, preventing immediate churn due to poor execution quality.

Executive Review and BLUF

Bottom Line Up Front

Kalshi must pivot from a per-trade transaction fee to a tiered volume-based model with a retail subscription option. The current structure penalizes the high-frequency activity necessary to build liquidity. In a regulated exchange environment, liquidity is the only defensible moat. Reducing friction for market makers is the priority. Accept short-term margin compression to secure the dominant position in the US event contract market before well-capitalized incumbents enter the space. Approved for leadership review.

Dangerous Assumption

The analysis assumes that trading volume is highly elastic relative to price. If user growth is actually constrained by product awareness or the complexity of event contracts rather than cost, lowering fees will only accelerate the burn rate without achieving the necessary network effects.

Unaddressed Risks

• Regulatory Freeze: The CFTC could delay fee changes indefinitely, leaving Kalshi with an uncompetitive pricing structure while offshore rivals capture the market.
• Predatory Liquidity: Institutional makers might use the rebate model to engage in latency arbitrage, extracting value from retail participants and degrading the user experience.

Unconsidered Alternative

The team did not evaluate a B2B API-first strategy. Instead of building a retail brand, Kalshi could act as the back-end utility for existing brokerages. By white-labeling the exchange functionality to platforms like Robinhood or Interactive Brokers, Kalshi could solve the liquidity problem instantly without the massive CAC associated with a direct-to-consumer model.

MECE Assessment

The proposed strategy addresses the three mutually exclusive and collectively exhaustive pillars of exchange growth: Liquidity Provision (Makers), User Participation (Takers), and Operational Sustainability (Revenue). Each pillar is mapped to a specific pricing lever, ensuring no overlap in strategic intent.