CASE STUDY

 

2-1                                  CITIBANK CREDIT CARDS

 

In 1994 Citibank’s Global Consumer Banking division (GCB) decided to introduce the credit card in Pakistan. Initially GCB had started with a drive for opening foreign currency – mainly dollar based --  accounts. Having been hugely successful in that effort, they started marketing consumer credit for purchasing cars and motorbikes on installments to the general public. At this time no bank in Pakistan was offering credit to the public for buying personal items. But Citibank’s longer term strategy was to develop the market through a comprehensive personal loan program for consumer durables. Later they could enter with credit cards.

 

Citibank’s main competitor in giving consumer credit was ORIX Leasing, a joint venture between the Japanese ORIX corporation and a local business group. As market leader, ORIX Leasing’s Consumer Finance Services (CFS) was way ahead of Citibank in consumer durables and had managed to capture several captive segments of markets long eyed by the bank. However ORIX was neither doing credit cards nor had much experience either locally or internationally in cards. It was therefore safe to bet that there would be relatively little competition for a Citibank card.

 

MARKET LEADERS

	ORIX     Consumer durable loans: cars, motorbikes, Televisions, VCR s etc

 

 

 

 

 

 

                                                                       

 

 

 

 

 

 

Figure 2-1 The two market leaders in Consumer finance

 

In 1993 bad news had come from their consumer banking operation next door, in neighboring India. Although seemingly a success, the consumer credit program there had had large defaults and collection problems. Although Citibank was recognized in that country as a market leader in the consumer-banking field, problems still abounded. Armed with this knowledge of a similar kind of customer, Citibank Pakistan took a step back and opted for introducing credit cards instead. Personal loans would have to wait till cards had become established. In September 1994 the bank launched the Citibank VISA card for the first time to the Pakistani mass market. The launch was a success and after the initial customers had been signed on, the bank started using direct mail to increase and broaden its market penetration.

 

The following example demonstrates how direct mail is used to market Citibank cards. It assumes that the card has already been launched while the denominations have been kept small to aid understanding.  Citibank is at this time the large single issuer of credit cards in the country, despite facing many local banks with much substantially larger customer bases. The example also shows how direct marketing is viewed as a long term, strategic tool.

 

 

Citibank decided to spend Rs100,000 in attracting 2,000 new customers. This sum would include the cost of mailing, the cost of reproducing 2,000 identical letter, with envelopes, application forms and related materials. So the cost per mailing each individual customer would be:

 

Rs100,000 / 2,000 specific customers = Rs50 as the cost per customer mail shot

 

Citibank carries out mail shots to mid level employees of various established firms and asks them to sign up for a VISA card. This is the first time a VISA credit card has come to Pakistan and Citibank is the only one marketing it. However of the 2,000 customers mailed only 5% – or 100 persons -- sign up but each one then pays a “Special Introductory offer” of Rs700 instead of Rs2,000 which is the standard rate:

 

YEAR 1

2,000 customers x 5% response rate = 100 customers x Rs700 = Rs70,000

 

Gross revenue for the cards is Rs70,000, but because the whole campaign cost Rs100,000, the Direct mail campaign carries a loss:

 

The campaign cost Rs100,000; it earned Rs70,000, so it lost Rs30,000:

 

Rs100,000 Cost – Rs70,000 revenue = (Rs30,000) loss

 

What the Direct Marketer at Citibank now needs to evaluate is whether this loss of Rs30,000 is to be classified a failure? If this were either an advertising or a sales promotion campaign, then the answer would be YES. But because Direct Marketing is a long term, strategic tool, its impact is measured over the longer term and not in limited, one time terms.

 

WHY?

 

Because in the next year – which is Year 2 -- Citibank spends no money. However 90% of those responding the first time sign up for the card again. In other words the Retention rate is 90%. These customers no longer pay the introductory rate, but have to sign up on the standard annual fees of Rs2,000.

 

YEAR 1

2,000 customers x 5% = 100 customers x Rs700 “Special Offer fees” = Rs70,000

 

YEAR 2

100 customers x 90% = 90 customers x Rs2,000 “Standard Annual fees” = Rs180,000

 

So the total taken over 2 YEARS is this:

 

YEAR 1                      YEAR 2

Rs70,000       +          Rs180,000     =          Rs250,000

 

 

Now assume that we had an additional operational cost Rs25,000 per year in keeping this scheme alive. In the first year the total expense was Rs100,000 as cost of the campaign plus Rs25,000 operational cost:

 

Year 1             Rs100,000 Campaign cost + Rs25,000 operational cost = Rs125,000 Expenses

 

In the second year there is no campaign cost and the operational cost remains Rs25,000. Thus the revenue and costs work out thus:

 

 

 

YEAR 1          Rs70,000                                           Rs125,000

 

 

 

And the Net Profit?               Rs260,000 – 150,000          = Rs100,000

 

 

Let us take the projection in the third year as well. At a 90% retention rate, 90% of the customers of year 2 sign up again. In other words 90% of 90 customers sign up. That is:

 

 

90 customers x 90% = 81 customers x Rs2,000 “Standard Annual fees”          = Rs162,000

 

 

Once again there are only operational costs involved in the third year. These operational costs might involve sending out a reminder to sign up again, making a phone call to enquire if the bank service were up to the mark or just a communication to say hello. The results are thus:

 

YEAR 1          Rs70,000                                           Rs125,000

 

YEAR 2          Rs180,000                                         Rs025,000

 

 

 

The Net Profit?                      Rs412,000 – 175,000          = Rs237,000

 

 

In 3years the initial Direct mailing campaign generates a net income of Rs237,000. Taken over 3years this comes to:

 

Rs237,000 / 3 years = Rs79,000 per year net revenue

 

And so what happens in YEAR 4?              Direct Marketing makes even more money!

 

 

As you can see, the campaign has more than managed to pay for itself. Direct Marketers realize that the impact of their efforts is not seen immediately. They also know that all they have to do is wait for the seed of response to grow and pay a return on their efforts. The point is that after they have completed one campaign they will go and work on another and so on. This will lead to several campaigns taking place and to a rise in future revenue.

 

It also has another effect, which neither advertising nor the other promotional tools have the ability to undertake. Direct Marketing allows for each successive campaign to make the next offering more personalized, better customized and to remain selective about its’ target in the process. Thus as Direct marketers learn more about the needs of the customer and each succeeding campaign includes this learning, the initial response starts to rise. Instead of 5% as the response rate for the initial mail campaign in Year 1, it will rise to maybe 20% or 30% for the succeeding campaigns taking place in Year 2 and Year 3. This ability to tailor each successive offer closer to the customer’s needs, is what makes Direct Marketing such a powerful and sought after tool in today’s highly competitive environment.