What do you think of the above ideas? Do you agree or disagree, and explain why? Are there any further issues/challenges and recommend other alternative solutions for the above case?
The most critical challenge for Chase in my opinion, was customer retention. My analysis of the value of the 100k points and point accumulation rate vs annual and merchant fees and interest suggested that Chase is actually spending most of the merchant fees on points (merchant fees are 1.5 to 2.2 cents/$, point accumulation is 1.5 cents/$) and $300 of the $450 annual fee on travel credit. I assumed that interest income would be small, just enough to cancel out administrative expenses, because affluent customers with plenty of money don't need to run balances and know how to manage their finances. At this rate, even with high spending customers, per customer annual margin will be about $400 so it could take between 3 and four years to pay off the initial investment in points alone (ignoring other customer acquisition costs, like advertising). Since retention rates are typically 60-90%, Chase could easily lose money if retention wasn't high.
I suggested that they offer a retention bonus to customers who attempt to cancel. Anything over $150, combined with the travel bonus, will cancel out the annual fee and so remove the incentive to cancel. I suggested $200 - $250 as this will be enough to give the customer a positive reason to keep the card, while still leaving Chase with some margin for the year. It is better to cut your margin (or push the break-even date further out) than it is to lose the customer and take a loss. Even if the customer keeps calling back and asking for the same bonus next year you are still better off giving it to them than losing them. This is a 'squeaky wheel gets the grease' solution; you only spend more money on the particular customers that you were actually going to lose so costs should be lower than any broader bonus scheme.
I considered erecting barriers to cancelation (like long hold times to cancel, must cancel in writing etc) but these will anger customers and make them dislike Chase. Sapphire Reserve is far from the only product that Chase would like to sell these people so generating ill will could really backfire. I didn't even put this in the case analysis, because I was treating it as a memo to management. I don't like to put ideas I really dislike in memos like that because there is a slight chance that they will disagree with your conclusions and take the wrong option.
I wrote this from the perspective of the time the case was written, so I didn't try to find what Chase actually did until I turned in the assignment. However, it appears that in late 2020 they started offering $100 to $250 to people who attempted to cancel. Although by that point they had raised the annual fee to $550 and nobody was flying if they could avoid it so their retention probably got a lot worse.
What do you think of the above ideas? Do you agree or disagree, and explain why? Are there any further issues/challenges and recommend other alternative solutions for the above case?
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