total jobs On EmploymentCrossing

1,474,712

new jobs this week On EmploymentCrossing

618

job type count

On 100KCrossing

General Motors Case Study: Give 'Em Credit

3 Views
( 1 vote, average: 5 out of 5)
What do you think about this article? Rate it using the stars above and let us know what you think in the comments below.
How GM's foray into the charge-card business revolutionized the way we spend.

It happens up to 30 times a month at Jim Muir Oldsmobile GMC, a dealership north of Detroit. A customer comes in, finds the car he wants, and haggles for the best price. Then he pulls out his GM MasterCard and earns an extra discount, worth as much as $3,500. Under the program, 5 percent of customers' card purchases are credited back to them (up to certain limits) as a discount on a GM vehicle. General Motors claims the program has been a wild success, and buyers and dealers alike sing its praises. "The GM Card has helped us," says Muir, who owns the dealership, where as much as 25 percent of monthly sales go to GM cardholders. "I'm convinced it brings in incremental business."

Whether or not the card has revved up auto sales, it certainly jump-started the credit card business. The GM Card may not sound very revolutionary. Indeed, today it's hard to find a business-whether it's airlines, long distance providers, or grocery stores-that doesn't have some sort of "loyalty program."



But in the early '90s, when GM launched the card, its offer was unique, and it became an overnight sensation. "It really was a watershed," says Robert D. Manning, author of Credit Card Nation and a professor at the Rochester Institute of Technology. Before the GM Card, consumers showed little interest in reward cards, had little incentive to use their cards for convenience purchases, and didn't participate heavily in balance transfer programs that help deliver banks' profits. Today, 40 percent of cardholders carry some type of reward card, many households routinely surf their balance between cards, and the average cardholding household has a balance exceeding $8,000. Experts say the GM Card played a big role in this transformation. "The GM deal was the first time we had a mass-appeal, co-branded card with a reward component," says Robert McKinley, an industry researcher at CardWeb.com. "It really opened the door."

While George Washington and Thomas Jefferson never had their John Hancock on an AmEx card, they still bought on credit. Jefferson charged shipments of French wine, and Washington ran up debts for fancy suits, notes Lendol Calder, author of Financing the American Dream. By the early twentieth century, Americans were financing cars and appliances, some with the first retail credit cards, issued by stores like Sears. The big growth came in the '80s, partly due to computerization, which made transactions quicker. But high interest rates, fueled by runaway inflation, let banks charge "revolvers" (who don't pay their full balance each month) 19 percent or more; even when inflation waned, banks kept interest rates high, turning credit card lending into a high-margin business.

By 1990, a few companies had tinkered with reward cards, with limited success. Discover touted itself as "The Card That Pays You Back" and advertised its program that gave up to 1 percent of dollars spent back to cardholders. But far fewer merchants accepted Discover than Visa or MasterCard, limiting its appeal. Airlines, which had pioneered the concept of loyalty marketing with their frequent-flier programs, teamed up with banks to offer mileage cards, which had some appeal to people who were already heavy users of frequent-flier programs. But since more than $20,000 in card spending was often required to receive a free ticket, only a small portion of cardholders had either the patience or the heavy spending patterns to find them appealing.

Sometime in 1989, someone at GM-his identity has been lost to history-began toying with the idea of an automotive reward card. At that time, GM's market share was in free-fall: From a high of 50 percent in the '50s, the automaker now had a market share of around 30 percent. "We needed a way to reignite people's willingness to at least consider our product and hopefully to hold onto it for the long term," recalls Jim Whiteford, director of automotive marketing for GM Card operations, who helped with the card's launch. A team of marketers convinced GM's top bosses to make a big bet on the card as a way to help stop defections.

The company figured a card that allowed consumers to win discounts on cars would be far more popular than airline cards. It would let cardholders realize rewards from the first dollar they charged instead of forcing them to accumulate points before they could receive a benefit. And for GM, the card would help it better connect with consumers. Every time customers pulled out the card to pay for a purchase, executives figured, they'd be reminded of GM.

Although the automaker would share the revenue stream-transaction charges and interest on balances-with Household, its banking partner, that revenue alone wasn't the goal. For GM, "the card was never designed to be profitable all by itself," Whiteford says. "The only reason GM is in the credit card business is to sell more cars and trucks, to retain the customers we currently have, and hopefully to acquire new customers." The program entailed risks that went beyond the estimated $100 million in marketing costs, a remarkable expenditure at a time when the company was bleeding cash. The trouble: No one knew how many customers would earn big rebates. To manage that risk, GM limited discounts to $3,500 per vehicle, and, until recently, $500 per year.

When the program launched on September 9, 1992, consumers signed on in droves. Within 27 days, the automaker had 1 million cardholders, an industry record. By the end of 1992, it had 3 million. GM was helped by an unprecedented marketing blitz. "Unless you lived under a rock, you knew about this product," says McKinley, the industry researcher. More important than the reach of that initial marketing was the message. The 5 percent payback was easy to understand. The card had no annual fee, a big attraction at the time. And by offering a low interest rate and a 5 percent rebate on balance transfers, the GM Card quickly signed up the most profitable customers: revolvers who run up big interest charges. After about four months, GM Card customers had tallied a $2 billion balance in receivables. "They hit all the right buttons-the timing was perfect," McKinley says.

Within weeks of the card's debut, the first customer-a little old lady from Atlanta who drove a Volvo-used her card rebate to save a few hundred bucks on the purchase of a new Oldsmobile. Savvy customers quickly became adept at maximizing rebates. "I keep track of how much I've charged on the card," says Bill Hochkammer, a Detroit attorney. "I know the maximum rebate I can get. So when the annual period begins, I do all of the charges I can on the GM Card until I've hit the limit." After maxing out the rebate, he switches to a Northwest Airlines card to ring up free mileage. Since signing up for the card in 1992, he's bought nine vehicles for himself, his wife, and his son. He figures he's saved a total of $4,500. But he admits that even without the big savings, he'd be buying GM cars. "I'm a GM buyer, and I've always been a GM buyer," he says.

His habits illustrate the biggest pitfall of GM's marketing innovation: The company may be giving discounts to many people who'd buy GM vehicles regardless. Indeed, while credit card industry experts laud the card's success at winning so many high-profit customers so quickly, automobile industry analysts aren't so cheery. "Throughout the period this credit card has been in effect, GM's market share has gone down," says Maryann Keller, an auto industry analyst and consultant. The only people likely to sign up, she says, are people who are already interested in buying a GM product. And unlike frequent-flier programs, in which airlines are giving away seats that would otherwise be empty (managed through blackout dates and other restrictions), GM's program could cut into revenue. Even fans like Muir admit it's hard to say how many of his GM Card users would buy even without the discount. It's also telling that Ford, which launched a copycat program within six months of GM's, killed it off a few years later because, industry experts say, research showed the company was giving discounts to people who'd have bought its cars anyway.

But GM has done its own research. Since the second year of the card's existence, executives say, they've conducted monthly surveys of buyers to find out what role the card played in their vehicle purchase. About 25 percent cite it as the primary reason they bought a GM car, which is enough proof to satisfy them that the program is working. Even if its market share has fallen, who's to say it wouldn't have fallen further without the card? To date, General Motors has sold more than four million vehicles to cardholders. And it remains the nation's most widely held reward credit card, according to CardWeb.com. Which means that even if the GM Card hasn't yet established itself in the auto-marketing hall of fame, its place in the history of the credit card business is assured.
If this article has helped you in some way, will you say thanks by sharing it through a share, like, a link, or an email to someone you think would appreciate the reference.



I found a new job! Thanks for your help.
Thomas B - ,
  • All we do is research jobs.
  • Our team of researchers, programmers, and analysts find you jobs from over 1,000 career pages and other sources
  • Our members get more interviews and jobs than people who use "public job boards"
Shoot for the moon. Even if you miss it, you will land among the stars.
100KCrossing - #1 Job Aggregation and Private Job-Opening Research Service — The Most Quality Jobs Anywhere
100KCrossing is the first job consolidation service in the employment industry to seek to include every job that exists in the world.
Copyright © 2024 100KCrossing - All rights reserved. 21