Co-Opetition - Adam M. Brandenburger [94]
But imitation also helps GM. As more card programs appear, car manufacturers are less tempted to cut price, because low prices are no longer as effective in attracting customers. People who have built up credits in someone else’s program won’t readily switch. Moreover, if a carmaker now raises price, it won’t lose as many customers as before, because its own cardholders won’t want to lose the rebate they’ve already earned. Carmakers now have more loyal customer bases. Overall, then, price cuts are less effective, and price rises less risky.16 Not only is this true for manufacturers with a rebate program, but manufacturers without rebate programs will also find price cuts less effective. So there is less incentive to compete on price. The end result: more price stability in the industry. It’s another case of healthy imitation.
Imitation has another positive effect: it gets customers off the sidelines. As more carmakers adopt rebate programs, it becomes more important for car buyers to choose sides. People who would not ordinarily display brand loyalty will recognize that they’ll be in a disadvantaged position if they don’t sign up for any of the programs. Even the more price-sensitive car buyers will have an incentive to lock themselves in. And the more customers that sign up for these programs, the greater the effect on pricing dynamics in the industry.
There’s going to be more imitation down the road. Following the success of their programs in the United States, GM and Ford have launched credit-card programs in Canada and the United Kingdom, and Toyota has introduced a credit-card rebate program in Japan.
More Winners In addition to changing the pricing dynamics in the car industry, the GM Card program has many other benefits. Every month, GM encloses marketing material in Household’s credit-card bill. It’s better than free postage. Unlike so much junk mail, this envelope can’t just be thrown away—there’s a bill inside that has to be paid. When people open the envelope, out pops GM’s insert.
GM also gets Household to share in the cost of the rebates, standard practice in the credit-card business. Issuers pay to offer rewards that make their cards more attractive. For example. First Chicago pays United Airlines roughly a penny per mile to give out frequent-flyer miles to its credit-card holders. Following the same principle, Household pays GM roughly 20 percent of the rebates, whether used or not.
What’s good for GM is also good for Household. As a result of GM’s marketing blitz, the 8-million-plus new accounts have propelled Household Bank from tenth to fifth place among credit-card issuers. The opportunity to earn a rebate on a GM car has helped lift annual charge volume on the GM Card to $5,200, two and a half times the national average. It’s the first card people pull out of their wallet. Over 70 percent of receivables revolve on the GM Card, as compared with an industry average of 66 percent. Churn and delinquency rates for the GM Card are below industry average. Churn is reduced because it takes time to build up rebate credits, and, in the meantime, people are less likely to switch to another card. Even delinquency is lower, since the rebate can’t be used if the credit-card account is past due.
Then there’s the effect on pricing dynamics in the credit-card business. Now that Household, Citibank, and MBNA all have more loyal customers, there’s less incentive for any credit-card issuer to compete on price. The result is greater price stability in the credit-card industry as well as the car industry.
If automakers and credit-card issuers are winners, does that mean that car buyers are losers? Not necessarily. Though they face higher prices, that’s not the whole picture. Let’s go back to the problem automakers faced in the early 1990s. Once a manufacturer