Co-Opetition - Adam M. Brandenburger [93]
Targeted Rebates The GM Card is obviously a big deal, but how has it changed the game of selling cars? To see the effect, let’s run through a simplified numerical example of how this kind of rebate program changes pricing dynamics. Suppose that GM and Ford are both initially charging $20,000 for their cars. Since prices are equal, the market divides on the basis of people’s natural preference for GM or Ford.
Now suppose GM finds a way to direct a $2,000 rebate to its natural customer base and, at the same time, raises its list price to $21,000. At this point, GM is effectively charging two different prices: $19,000 to its own customer base and $21,000 to people who prefer Fords. Step into Ford’s shoes. It can respond by lowering price to something under $19,000, in an attempt to steal GM’s customers. Or it can go up to something close to $21,000, without danger of losing any of its natural customer base to GM. Ford will likely find the second option the more attractive. And if Ford does, in fact, go up to $21,000, that gives GM some breathing room. Now GM can raise price to something close to $23,000—a net price of around $21,000 to rebate holders—without losing any of its customer base. At this point, GM and Ford are both ahead of the status quo. Ford might even raise price again, and then GM might, too, and so on.
The rebate program creates a win-win pricing dynamic between GM and Ford. How far could this process go? In practice, only so far. For one thing, there are other car manufacturers who might not have raised price. At some point, consumers might switch to them. In any case, the main benefit to GM is that Ford, or any other carmaker for that matter, is much less likely to start a price war.
The key to the effectiveness of the rebate program is that the rebates are targeted. It works only if the people who get rebates on GM cars are predominantly prospective GM buyers, and not prospective Ford buyers. Thus, a big practical challenge in implementing such a program is getting rebates to as many of your prospective customers as possible, without them also ending up in the hands of your rivals’ prospective customers.
The GM Card solved this problem brilliantly. Recognizing that it’s hard to go out and find all your prospective customers, GM turned the problem around. If it’s hard to find your prospective customers, then let them find you. The people who are willing to build up a rebate via the GM Card are the ones who are planning to buy a GM car. People who intend to buy a Ford are much less likely than GM loyalists to use the GM Card. That’s how a credit-card program helps you solve the problem of targeting rebates to your natural customer base.
Healthy Imitation II If the GM Card is as good as it sounds, then it was sure to get copied. And it was.
In February 1993, five months after the launch of the GM Card, Ford joined forces with Citibank, the largest bank-card issuer, to offer the Ford-Citibank Card under both the MasterCard and Visa umbrellas. The program allowed cardholders to accumulate up to $700 per year in rebates, with a cap of $3,500 over five years.
The Ford-Citibank Card was launched with a direct-mail solicitation to Citibank’s 30 million existing cardholders as well as to owners of Ford cars. Promotional materials and applications were placed in five thousand Ford dealerships. Through the first nine months of 1993, a total of $4.6 million was spent advertising the Ford-Citibank Card. By April 1994 industry analysts were variously estimating the number of active Ford-Citibank cardholders at 1.3 million to 5 million. Some twenty thousand Ford customers redeemed Ford-Citibank card rebates in the first year of the program.
The GM Card was copied again in June 1994, when Volkswagen of America joined with MBNA Corporation, the leader in co-branded cards, to launch a credit-card rebate program. (Notable by its absence is Chrysler, which, as of early 1996, still didn’t have a card program.)
Does all this imitation put a dent in the GM program? Not