2IntroductionCitibank’s branch banking business conducted operations in 15 countries throughout Asia Pacific and the Middle East in 1989Citibank’s branch banking business was projected as a prestigious, consumer-oriented international bank and the undisputed leader in the marketplaceFinancial services were targeted to affluent upper and middle income market segmentCitibank’s Asia Pacific branch banking business was challenged with increasing earnings from $69.7MM to $100MM by 1990
3Citibank’s Challenges Increase earnings in Citibank’s Asia Pacific bank business through the launch of a credit card productObstacles:Mixed opinion from the Asia-Pacific country managers that a successful credit card launch was possibleQuestions abound regarding Citibank’s ability to adopt mass-market positioning to acquire credit card customer and maintain its up-market positioning with its current upscale branch banking customersDiffering customer attitudes and usage patters across the Asia Pacific regionHigh level of market uncertainty across the region with regulations, branch limitations, talent, poor infrastructure, etc.
4SWOT Analysis Strengths Weakness Opportunities Threats Market LeaderBrandingCredit card considered a status symbolTargeted countries include booming,growing economies (Philippines, India)and affluent, Westernized countries(Australia, Singapore), diversifying riskStrong economies of scale in dataprocessingHong Kong presence provides valuabledata to estimate revenue impact and pricecredit cards accordinglyWeaknessConsumer attitudes and usage varies across countriesAustralia & Singapore are saturated marketsCountry managers are unconvinced/no buy-in.Credit card offering adds complexity to organizational compensation structureCannibalization of current servicesBrand dilutionCollections process is undefinedCentralized data processing costs, politicsLearning curve on demand side & cost sideOpportunitiesPenetration leader in new marketsTarget growing middle and upper classPortfolio allows for customization inmarketsAdditional revenues from cross-selling andarbitrageThreatsFraudDefaultsLaws and regulationsAMEX and Diner’s Club are earlyentrants with brand cachetCompetitors offer discounts
5Break Even - Sensitivity Analysis Acquisition CostsUnit CostProspectsRRQualifyCardsCard CustomersAcq Cost/CardDirect Mail1.5300,0000.020.670.83216139.93Direct Sales225,00030,0000.5804027.99Take One0.252,000,0000.0150.334801662.38Bind In0.153,000,0000.0156.14Break Even AnalysisScenarioTarget NoFixed CostsVCTotal CostsRev/CustBreak Even #AcquisitionAdvertisingSupport($25/card)I250,0007,857,0002,000,00035,000,0006,250,00051,107,000180283,928II500,00016,574,0004,000,00050,000,00012,500,00083,074,000461,522III750,00027,228,0006,500,00060,000,00018,750,000112,478,000624,878IV1,000,00040,026,0009,000,00070,000,00025,000,000144,026,000800,144Break Even - Sensitivity AnalysisDirect mail is expensive and may be inappropriate in some emerging markets where current directories may not be available and/ormail service is unreliable.Bind ins are relatively expensive, have a low response rate, and in part also depend on mail service.Direct sales unit cost is determined by assuming 200 working days per year, 10 calls per sales person, and $18,000 cost/yr per sales person.Break Even analysis acquisition fixed costs were calculated using a combination of direct sales and take-one techniques.The BE analysis started with a 90/10 Direct Sales : Take One for 250,000 target customers, and was scaled down to 65/35 mixfor 1,000,000 targets inasmuch as it may become progressively difficult to procure larger and larger numbers of qualified sales people and in order toavoid building too large a sales force from a compensation perspective. Also, as the number of target customers increases, we assume that moreblanket type of solicitation will be necessary which may be better achieved more quickly through methods other than direct sales.Some economies of scale are presumed for the support component of fixed costs.Revenue per customer in the BE analysis was derived by using Citi’s historical experience in Hong Kong as provided for in Table B.BE analysis was done for Singapore, using a weighted average of revenues per customer based on annual income. Since the annualper capita in Hong Kong and Singapore is very similar, this approach should be reasonable.Additional revenues from cross-selling or foreign exchange arbitrage opportunities ARE NOT considered in net revenue per customer.Break even in Singapore can be reached with 461,522 customers.- Sensitivity analysis demonstrates that with a $150 level of customer revenue, it would take Citi 749,853 to break even, whileif they can generate revenues of $210 or higher through membership/annual fee considerations and cross selling, break even can be reachedwith about half the number of customers.It must be noted that just because an analysis may show a negative NPV or that Citi cannot reach breakeven fast enough, or generateprofit by 1990, that does not necessarily mean the project is not worth undertaking as the analysis does not take into considerationfuture considerations.Each market entered requires its own acquisition cost analysis and marketing strategy.There is a steep learning curve for elements of this business which Citibank will benefit from.Breakeven and long run profitability will depend on repeat customer business, and therefore, sellers of the product should be incentivized.Note: the acquisition costs and equipment/systems component of the support costs are not recurring charges. This will likely positivelyeffect the project’s future revenue stream.Revenue Per Customer120150180210240Scenario I425,892340,713283,928243,367212,946II692,283553,827461,522395,590346,142III937,317749,853624,878535,610468,658IV1,200,217960,173800,144685,838600,1085
6Market Entry – Game Theory CitibankAMEXThis analysis must be done for each country under consideration for market entry.If Citi decides not to enter a certain market, then clearly they do not benefit, and AMEX can either stay with its premium product orconsider doing its own real market research to test the validity of entering the mass market which could yield them additional revenue.IMPORTANT: Neither company has a dominant strategy!!!!GAME: (AMEX is the dominant player in the Asia Pacific credit card market with its premium card business)1. Citi chooses to enter or not. If it enters, it chooses to enter with premium card offerings or with mass market card offering.2. Citi does not know what AMEX response will be.3. AMEX, not knowing what Citi’s decision is, chooses either to stay with its premium card strategy, or expand to mass market cards.- The payoffs depend on the consumer’s reception of mass market credit cards and the actions of Citi and AMEX.Customer’s favorable response to mass market credit cards is 0.4There is no “correct” strategy for either firm and each is subject to forces beyond its control.The companies can see the payoffs and possible implications of their decisions rather than completely relying on hopefulmarket surveys under uncertain conditions.Whether entering a market new, or adjusting a strategy, each company needs to recognize the potential gains andpossible loss of revenue due to their action or loss of focus on the old market.Neither player should be able to easily choose a preferred strategy.Both should realize that in this scenario, its not in Citi’s interest “not to enter market”.So, AMEX only has to analyze the scenarios where Citi enters with premium or mass market offerings.No matter what Citi enters with, AMEX receives higher expected payoffs when they keep their premium product.If Citi realized this, they will also see that they should enter with a mass market strategy in order to capture a 50market share if the response is positive. This is their payoff maximizing strategy. But they also have to understandthat in this option, AMEX could also enter the mass market.If the firms collaborated, they would choose strategies that maximized the sum of their payoffs. This occurs when AMEXremains premium and Citi enters with a mass market product, or if they knew the response would be negative, not enter at all.- Players do not consistently maximize their payoffs due to the imperfect nature of information.Source: Demisch, McGarry, Mukhtar, Rajbansi; Feb 20086
7Conjoint Analysis Build ideal mix of product attributes Determine customer segmentationIdentify cannibalization & competitive responseJoining FeeAnnual FeeBrandServicesIncremental RevenueNoneCiti (Visa, MC)Card replacementCash advanceLowAmexLoss/misuse liabilityPre-paymentHighVisa/MCSpending limitAdvance ticket salesDiner’s ClubCash AdvanceProduct warranty extensionLocal BankYear-end summaryProduct/Travel insuranceUse Conjoint Analysis in potential launch markets to better understand opportunity and ideal positioning based on customer preferences.Sensitive to cannibalization of Citi-owned Diners Club as well as true competition.Chart shows sample list of product attributes to be explored.Note: Conjoint Analysis could be pushed even further in markets such as Taiwan where debt is not allowed. In this market, we may use Conjoint to explore other card options such as Charge or Debit AND/OR other revenue generating opportunities altogether from the rest of Citi’s product portfolio.
8Cross-Selling Success selling auto loans through car dealers Greater potential with Citi cardholdersOpportunity for cross-sell of products such as Auto Loans, Ready Credit, Deposits, MortgagesEnables virtual presence in countries restricting number of foreign bank branchesBundle with bank services for lower combined feesHow calculate cross-sell value?Take Hong Kong Citibank example where 6% of account holders also have Citi credit card and assume same opportunity in reverse…Cross-selling through auto dealers successful due to ideal targetingBundling – consider no origination and/annual fees with presence of account and/or minimum in account
9Cross-Sell Value Calculation Relative Year 1 (phased launch) AustraliaHong KongSingaporeTOTALTotal # cards10.5M2M630K13.1MProj. # Citi cards Yr 11M150K25K1.75MProj. Citi card customers588K88K15K691K# of Citibank customers85K130K18K233KNet Revenue from Fund$59M$67M$16M$142MNRFF per customer (exact figure)$694.12$515.38$888.89 N/ACard holders w/ 2nd product35.3K5.3K0.9K41.5KIncremental NRFF (cross-sell value)$24.5M$2.7M$784K$28MTotal Relative Yr 1 value for all 9 Asia markets would be $29MAssumes 1.7 cards per customer and 6% of card holders will purchase 2nd Citi product as result of cross-sell efforts. Percentage based on 6% of Hong Kong’s Citibank customers also owning Citi card.
10Arbitrage Opportunities Sample Exchange RatesUS $1 = HK $1.13US $1 = Australian $1.33HK $1 = Australian $1.18Buy HK $11.3M with US $10MBuy Aus $13.334M with HK $11.3MBuy US $10.025M with Aus $13.334MJust one example of arbitrage strategy Citibank can take advantage of to make money from currency exchange rates between their markets. Can also be used to minimize impact of economic downturns in single markets.Rates are estimated for late 1980’s. Obviously!Note: Assumes cards/accounts are in local currency for each market. If not, arbitrage can still occur but limited to the available currencies.Triangle arbitrage (also known as triangular arbitrage) refers to taking advantage of a state of imbalance between three markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices.Triangular arbitrage offers a risk-free profit (in theory), so opportunities for triangular arbitrage usually disappear quickly, as many people are looking for them.Note this is just one round of exchanges!Triangular Arbitrage Example = US $25K Profit!Across Citibank’s Asia-Pacific customer accounts = $1.5M+ per turn.10
11Market SegmentationMarket segmentation using different income and population segments.First graph is per capita adjusted for urban populationA linear trendline is drawn across the graph which shows Aus, India, Singapore and Taiwan above the line.The second graph is per Exhibit 8 in case study, also with trendlines drawn for each income segment.11
12Market SegmentationLow Risk, Safe Return Australia, Singapore, TaiwanModerate Risk, Moderate Return- Thailand, MalaysiaHigh Risk, High Return - India, Indonesia, PhilippinesUsed the criteria in left hand column and performed weighted average scoring given the assigned weights in the second column.Priority markets indicated by red numbers at the bottom of chart were determined by grouping countries by their respective scores.Based on the criteria used and weighting, the priority order corresponds with the level of risk and expected returns in each country.Need to take other considerations into account such as cultural bias (e.g. Taiwanese traditionally are debt averse), countries risk may be worth takingin view of the upside potential in an underserviced market (such as India)- Entering several countries at once may provide a competitive advantage by discouraging other firms from entering as well.12
13Customer Lifetime Value (CLV) Value of Purchase Profit perAcquired CustomerItem 1Item 2Item 3Year 1150.0060.0015.0037.509.001.50Year 215.301.45Year 3171.7415.6132.631.19Year 469.4615.926.330.97Year 5196.6216.2423.910.79Net Present Value65.9511.454.13Total NPV81.53AssumptionsYears of Customer Life5Annual Discount Rate15%Item 1Item 2Item 3Initial Purchase Price$150.00$$Annual Product Inflation7%5%2%Margin per Product25%10%Retention Rate Year 195%Retention Rate Later Yrs.80%Years between Purchase20.60.25Discount Rate(%)5101520$101.60$90.57$81.53$74.03Customer7$117.58$102.12$90.00$80.33Life Years$127.91$108.88$94.51$83.39$140.63$116.01$98.63$85.83Harvard Business Review Model: tool designed to let the user estimate the cost of acquiring a customer and the NPV of that customer’s business during his useful economic life. The more complex model allows the user to examine multiple products with distinct customer loyalty and repurchase characteristics.Multi item model assuming 5 yr customer life and 15% discount rate (risky market).Chose variety of items with different prices, margins and product inflation to mimic potential consumer usage.The sensitivity table demonstrates the effect of varying discount rates and customer life years on Total NPV.In a medium risk market/country with moderate consumer life , if Citibank were to grow its credit card business to 250,000 customers,this would have a NPV of $25.53 Million.In Australia, where there are over 4 million people in upper income levels without credit cards, if Citibank could build a customer baseof 250,000, because of low risk the NPV could range from $25.4 Million to $35.1 Million (without additional cross selling opportunities).Source: CLV Calculator- HBR
14Long Run Effects of Risk on Marketing Policies Expected Cash FlowPeriod 1Period 2DiscountRateNPV CalculationNPVLow Price Strategy$10M$14M15%(10)/(1+0.15)+(14)/(1+0.15)2$19.27MHigh PriceStrategy$6M$4M5%(6)/(1+0.05)+ (4)/(1+0.05)2$9.34MUsing Table 8: Hong Kong Revenue dataLow Price Strategy assumes waiving joining fee & higher annual fee to obtain recurring chargesLow Price Strategy assumes ~67K of card owners in the $6200-$12,400 income bracket and ~ $1M from higher brackets. Assume that higher income brackets will sign up in Period 2.High Price Strategy assumes joining fee and low annual feeHigh Price Strategy assumes all card owners in the >$23,000 income bracket and ~15K card owners in the $12,400-$23,200 income bracket. Assumes loss/defaults in Period 2.Assume a higher discount rate of 15% for the Low Price Strategy since it targets mass markets & involves repositioning. Assume a discount rate of 5% for the High Price Strategy.Coordinate finance & marketing functions to select appropriate discount rate, marketing policies and resource allocations after analyzing the risks and returns from different marketing policies.Reference: Sharan Jagpal (2008) “Fusion for Profit” pp 26
15EV of Entering a Test Market in Singapore Using Real Options Using a $70M - $100M profit trajectory in 2 years, assumes $85M in year 1Assumes Singapore is 10% of market. Expected incremental profit from Singapore market = 10% of $85MAssumes a discount rate of 5% for the Singapore test marketInvestment is $70M for ~1M card owners ($35M for 250K clients + ~ $12M for every additional 250K clients)Assumes $20M upfront test market costsConditional NPV calculations for an immediate launch assumes a 10% discount rate since it is more risky
16Country Managers Risk-averse and reluctant to handle card product Tie compensation to productCompensate for long term visionLocal currency (Jagpal, NB chapter 23)4 Component Parts of CompensationBase wageShare of NPV of after tax operating cash flowShare of NPV of tax shieldShare of real options of productAbove mix changes per country and per period!Use Conjoint Analysis in potential launch markets to better understand opportunity and ideal positioning based on customer preferences.Sensitive to cannibalization of Citi-owned Diners Club as well as true competition.Chart shows sample list of product attributes to be explored.
17Compensation - Period 1 Australia vs. India example NPV Operations NPV Tax ShieldReal OptionsCompensation RecommendationAustraliaHigh ($59M)HighLow25% Base Salary37.5% NPV Operations25% NPV Tax Shield12.5% Real OptionsIndiaLow ($6 M)50% Base Salary12.5% NPV Operations6.25% NPV Tax Shield31.25% Real Options- Australia real options are low due to the fact it is a saturated market, and the probability of success with the card is low or there will be low penetration – consumerslooking for more from their card like additional banking services. Need to continue to worry about bank operations with small component based on card success.India High real options because of low CC penetration, status symbol, brand mattered. Might be easier sell to get customers here with the Citi name. Still, you wish topenetrate more market overall and can possibly do that with card, so you base more salary on card profits
18Compensation - Period 2 Australia vs. India example NPV Operations NPV Tax ShieldReal OptionsCompensation RecommendationAustraliaHigh (>$59M)Highwithdraw50% Base Salary25% NPV Operations25% NPV Tax ShieldIndiaLow (>$6 M)Lowremain25% NPV Operations6.25% NPV Tax Shield18.75% Real OptionsAustralia loses compensation on card effects since company has withdrawn- India removes some of the card weight in order to have company manager focus on cross selling to card customers.
19RecommendationsUse a staged roll out plan introducing each of three groups at 6-9 month intervals (Australia, Singapore, Taiwan first).Opt for a test market initially, followed by multi-country entry.The presence of cost and demand dynamics must be considered when formulating pricing strategy, and Citibank may choose to learn from first movers errors.For uncertain marketplaces, use Real Option Valuation model.Build centralized data processing center before entering test market. (Citi absorbs initial $35 MM investment)Establish specific credit card business independent from other business units in each countryCharge country managers usage fee based on either computational usage, dollar usage, or user (per merchant/cardholder) & continue to charge until investment recoupedAllow country managers to set join fee
20Recommendations (cont’d) Features of credit card program should match the brand positioning and corporate image. Include gold features for premium clients and regular/base features for others.In saturated markets grow through acquisition, and use green field approach in emerging countries.Capitalize on cross-selling and foreign currency exchange arbitrage opportunities.Structure flexible country manager compensation to encourage elements of shared risk and long term focus on available marketing options.Compensate country managers in local currency.