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Assignment Evaluate Chase Sapphire Reserve using the five factors that influence innovation’s rate of adoption, often referred to as Rogers’ Five Factors for product diffusion: Relative Advantage Compatibility Complexity Divisibility (also called Trialability) Communicability (also called Observability) Limit your submission to 1.5 pages double-spaced. Use double-spacing with 1" margins and 12-pt Times New Roman font. Chase Sapphire: Creating a Millennial Cult Brand 9-518-024 R E V : N O V E M B E R 2 6 , 2 0 1 8 Professor Shelle Santana, Senior Lecturer Jill Avery, and Case Researcher Christine Snively (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Shelle Santana is a former employee of American Express. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. S H E L L E S A N T A N A J I L L A V E R Y C H R I S T I N E S N I V E L Y Chase Sapphire: Creating a Millennial Cult Brand One morning in July 2017, Pam Codispoti (HBS MBA ‘93), President of Chase Branded Cards, and Eileen Serra, Senior Advisor and former CEO of Chase Card Services for JPMorgan Chase, shook their heads in astonishment. They had launched the Chase Sapphire Reserve Card in August 2016, and the card exceeded its 12-month sales target in two weeks. Half of the new customers were under 35 years old, building on the strong millennial cohort that was initially attracted to the Sapphire brand. These millennial consumers were proudly posting photos of their new Chase Sapphire Reserve cards on social media. Some were uploading “unboxing” videos on YouTube when they received their Reserve card. #SapphireReserve was trending on Twitter. One customer, initially denied the card because she had opened too many new credit card accounts, wore a handmade Chase Sapphire Reserve costume for Halloween in a social media-fueled attempt to persuade the company to approve her application. The product’s pièce de résistance that drove social media and word of mouth surrounding the launch was its 100,000-point sign-on bonus. The size of the bonus was unprecedented for Chase, and had garnered the attention of prominent bloggers and affiliates such as Brian Kelly, aka The Points Guy, who declared the Chase Sapphire Reserve “the must-have card of 2016, if not the most appealing card ever.”1 It also captured the attention of competitors, who saw it as a shot across the bow in the arms race of reward programs. While Codispoti and Serra were pleased with the progress to date, they knew that their hard work had just begun. As planned, the company had reduced the introductory 100,000-point bonus to 50,000 points in January 2017. Now they had to ensure that the flood of new customers became profitable to the firm. As the company approached the one-year anniversary of the Reserve launch, Codispoti and Serra wondered how many of their enthusiastic consumers would remain with the brand, renew their cards for another year, and pay the $450 annual fee now that their promotional inducement was gone. They had to assess how the drop to 50,000 bonus points would impact the rate of new customer acquisition— particularly given the enhanced richness of American Express’s and Citi’s rewards programs—and to design new features and benefits for the Chase Sapphire Reserve card to maintain its competitive differentiation. They also wanted to return their attention to the broader Sapphire portfolio, which included two other products—Sapphire and Sapphire Preferred. How should the products be differentiated to ensure they did not cannibalize each other? Were there other new products that could address the needs of new customer segments to capitalize on the momentum of the Reserve launch? For the exclusive use of F. Ande, 2021. This document is authorized for use only by Faissal Ande in MBA 6208 Fall 2021 taught by SCOTT DAVIS, University of Houston - Downtown from Oct 2021 to Apr 2022. 518-024 Chase Sapphire: Creating a Millennial Cult Brand 2 JPMorgan Chase: Consumer and Community Banking JPMorgan Chase operated four lines of business: Commercial Banking, Corporate & Investment Bank, Asset & Wealth Management, and Consumer & Community Banking (CCB). Under the leadership of CEO Gordon Smith, the CCB division served as the face of the company to the general public. In addition to credit cards, CCB also included merchant acquiring, payment processing, small business and consumer banking services (including Chase’s 5,200 retail bank branches), mortgages, and auto financing. In 2016, CCB counted nearly half of all U.S. households as customers and generated $44.9 billion in revenue, with net income of $9.7 billion. Chase was ranked #1 or #2 in credit card issuance, credit and debit payments volume, and merchant acquisitions. It boasted the highest-rated mobile banking app and the largest ATM network (with 18,000 locations), and was the most visited banking portal. Over 50% of affluent U.S. households lived within two miles of a Chase branch or ATM. The U.S. Consumer Credit Card Market There were five primary players in the credit card industry. Issuers were banks that issued credit cards to consumers and businesses, extended loans in the form of credit lines, and absorbed the resulting credit risk. Cardholders repaid charges made on their cards, often in monthly installments, paying interest on the unpaid portion. Merchant Acquirers signed up and managed relationships with Merchants so that merchants could accept credit cards as a form of payment. Network Providers (e.g., MasterCard and Visa) processed payments between consumers and merchants. Under the “open-loop” system operated by MasterCard and Visa, an issuer, such as JPMorgan Chase, marketed and issued cards to consumers and businesses, MasterCard or Visa processed the transactions, and a merchant acquirer enrolled merchants to accept issuers’ cards running on the network provider’s system.2 In contrast, American Express (Amex) and Discover served as their own network providers and merchant acquirers in a “closed-loop” system. Each of the partners received a small percentage of the value of each customer’s purchase (i.e., “transaction”). (See Exhibit 1 for a summary.) In 2016, the U.S. general purpose credit card industry sales totaled ~$3 trillion.3 In Q4 2016, the market was dominated by six issuers that accounted for 78% of industry sales. JPMorgan Chase led in market share (21.7%), followed by Amex (19.9%), Citigroup (11.5%), Capital One (11.0%), Bank of America (8.9%), and Discover (4.7%).4 The industry experienced 1.1% annual revenue growth between 2011 and 2016, and was expected to grow 4.5% annually between 2016 and 2021.5 Industry profit margins had dropped from 31% in 2011 to 25% in 2016 due to lower interest rates, increased competition, greater regulation, and security/technology costs.6 Customer acquisition in the industry was competitive and expensive. Costs to acquire a new cardholder ranged from $250 to $500.7 American consumers held 636 million credit cards8 and 38% of households carried credit card revolving debt, which averaged roughly $11,000.9 On average, people carried 2.35 credit cards in their wallets (14% held seven or more cards)10 but generally only used one on a regular basis. Thus, issuers strove to make their cards the preferred choice, or “top of wallet.” Generally speaking, Amex network cardholders charged $1,687 per month on their cards, while Visa cardholders charged $843.11 Issuers had three main sources of revenue: cardholder fees, interest paid by consumers on unpaid card balances, and interchange fees, which were paid by merchants as a percentage of each transaction amount. The contribution of each revenue source varied greatly from one issuer to another. For example, Amex, which required its charge card customers to pay all purchases in full each month, earned 21% of its revenue from interest payments and 79% from cardholder and interchange fees,12 For the exclusive use of F. Ande, 2021. This document is authorized for use only by Faissal Ande in MBA 6208 Fall 2021 taught by SCOTT DAVIS, University of Houston - Downtown from Oct 2021 to Apr 2022. Chase Sapphire: Creating a Millennial Cult Brand 518-024 3 while JPMorgan Chase earned an estimated 70% of its revenue from interest payments and 30% from cardholder and interchange fees.13 Across the industry, about 30% of all customers were transactors (those who paid their balances off in full each month to avoid paying interest fees), 43% were revolvers (those who did not pay off their balances in full each month), and 28% were dormant (those who carried, but did not use their cards frequently).14 Market Segmentation Issuers segmented the market in different ways in order to identify different types of consumers. Common segmentation strategies included demographic, behavioral, and psychographic methods. Demographic segmentation separated consumers based on their life stage, assets, or credit score. • Life Stage: Young adults (ages 18–26) accounted for 15% of industry revenue.15 The 26–60 age group accounted for 59% and tended to be more loyal.16 Senior citizens accounted for 15%, and the remainder (11%) was derived from business accounts.17 • Assets/Credit: The wealthy segment consisted of households with $500,000 to $1 million in assets, the affluent segment $100,000 to $500,000, and the emerging affluent segment consisted of those not yet affluent, but likely to be so within five to ten years.18 Affluent and wealthy consumers preferred to put most of their spending on credit cards and were a little less likely to carry revolving debt than the average consumer. Behavioral/attitudinal segmentation provided insight into how consumers used their cards and