A New Idea: Targeting for Profits
Credit card marketers need to keep their eye on one overriding objective: the profitability of the card portfolio.
This apparent truism actually is a radical departure from the simple objectives of portfolio growth and new account acquisitions that continue to dominate how bank credit card marketers think about their jobs.
Unless cards are being used as a loss leader to facilitate the sale of another product or service - and the viability of such a strategy is highly suspect - portfolio growth is good only if it makes the portfolio more profitable.
Given the bonanza the card industry enjoyed during the 1980s, it is easy to see why portfolio growth became the basic objective. Credit card marketing was a nirvana for direct-response marketing.
There were large numbers of potentially profitable prospects that didn't have or weren't using a credit card.
The portion of households with at least one bank credit card grew some 50% during the decade, and the household with multiple card accounts - and card users - became the norm rather than the exception.
Direct sales were never so easy. A not-very-successful direct mail campaign still produced a 3% response, keeping account acquisition costs low.
The competition, moreover, was relatively tame, and risks seemed controllable. The economy was on the move, with consumer credit spiraling upward.
At the same time, the range of goods and services for which consumers could pay with credit cards was expanding. The return on assets was at record levels.
In short, it was inexpensive and easy to put plastic in the hands of millions of qualified households going on a buying binge. Credit card profits soared, and the larger the portfolio, the greater the profits seemed to be.
Now the industry has fallen prey to its own successes. Highly profitable industries with low barriers to entry inevitably attract new competitors. The competition has grown fierce both petition has grown fierce both from within the traditional industry players and from new entrants with lots of cash and marketing savvy.
More to the point, however, the best-qualified, easiest-to-find prospects all have been reached - over and over again.
The industry has reached the point of diminishing returns, where each additional new account costs more than the previous account sold. Response rates have fallen through the floor, sending account acquisition costs through the roof.
At the same time, the quality and creditworthiness of new accounts is deteriorating. The reality is that, given the current cost structure of the credit card business, virtually every desirable would-be prospect already has one or more credit cards.
The pursuit of new accounts has led many card companies to scour the fringes of the market-place and bring on marginal accounts that are less creditworthy, riskier, and unprofitable.
New card accounts continue to be sold: more than 10% of the almost 55,000 respondents with credit cards in the Claritas National Credit Card Profile indicate they opened at least one new card account the previous year.
Displacement Is Costly
The proliferation of cards in the wallet of every creditworthy household leads to other problems. To displace the cards the household already uses, one must have a marketing angle that differentiates the card being offered from the cards already used.
Whatever the differentiation, it inevitably costs more to the card issuer than an unadorned offering.
Success, moreover, is not attained merely by selling the account. The proliferation of cards has created a vast sea of inactive accounts that represent a net drag on profitability.
Confronted with intense competition, many card marketers have been spending more and more dollars to acquire accounts that are creditworthy but with little chance of activation or sufficient transaction activity to generate profits.
These problems are compounded by the current economic environment. The sale of less creditworthy accounts inevitably would have prompted a rise in delinquencies and chargeoffs.
The recession has fueled these problems. The kind of shopping sprees seen in the 1980s are over - or at least in temporary aveyance - and consumer spending is not expanding.
Given this scenario, the sale of each new account actually might lead to further deterioration in profitability. In the marketplace of the 1990s, card marketers need to focus on strategies that contribute to the goals of maintaining and growing a profitable portfolio.
The maintenance component focuses on the existing card base and maximizing the profitability of current card accounts. First and foremost, this means concentrating on account activation and account retention.
Inactive accounts represent a cost burden and missed opportunities. Accounts need to be either activated or purged.
The tenure of accounts has a direct affect on profitability: assuming the same fee structure and transaction activity, longer-term accounts are significantly more profitable than newer accounts. Retention, therefore, is critical to profits. In more traditional marketing terms, it is more expensive to sell another account than to retain an existing one.
Growth requires selective marketing to targeted segments. Mass marketing of credit cards is no longer economically viable. Customer data and data on cardholders overall need to be analyzed to identify the market segments card companies want to go after as well as those they don't want to pursue.
Taking Careful Aim
Target marketing is essential both to reduce account acquisition costs and maintain the quality of the portfolio. Targeted marketing efforts with Prizm, the Claritas lifestyle clustering system, have resulted in higher response rates and lower costs per new account.
Targeting also can be a boon for ongoing profitability. Targets should be identified to incorporate factors, such as:
* Maximizing the likelihood that account holders are revolvers rather than convenience users.
* Focusing on prospects more likely to generate larger charge volumes and carry higher balances.
* Minimizing the likelihood of delinquencies.
All of this requires discipline, avoiding the push for growth in favor of a push for profitability.
The industry still enjoys a degree of profitability that is the envy of the retail banking business and more potential entrants into the card business. Pressures on profits are going to intensify, not abate.
While an end to the recession will alleviate some of the problems, the underlying market forces and logic remain the same. The goal is a more profitable card portfolio, not necessarily a larger one.
The key to overall profitability is the quality of accounts and keeping account acquisition costs in balance with account profits. These conditions hinge on the astute identification of targets and strategies for selling to those targets.
Mr. Lax is director of financial services marketing for Claritas Corp., an Alexandria, Va.-based company specializing in marketing systems, research, and data bases.
