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Professor Shelle Santana, Senior Lecturer Jill Avery, and Case Researcher Christine Snively (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Shelle Santana is a former employee of American Express. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

S H E L L E S A N T A N A

J I L L A V E R Y

C H R I S T I N E S N I V E L Y

Chase Sapphire: Creating a Millennial Cult Brand One morning in July 2017, Pam Codispoti (HBS MBA ‘93), President of Chase Branded Cards, and

Eileen Serra, Senior Advisor and former CEO of Chase Card Services for JPMorgan Chase, shook their heads in astonishment. They had launched the Chase Sapphire Reserve Card in August 2016, and the card exceeded its 12-month sales target in two weeks. Half of the new customers were under 35 years old, building on the strong millennial cohort that was initially attracted to the Sapphire brand. These millennial consumers were proudly posting photos of their new Chase Sapphire Reserve cards on social media. Some were uploading “unboxing” videos on YouTube when they received their Reserve card. #SapphireReserve was trending on Twitter. One customer, initially denied the card because she had opened too many new credit card accounts, wore a handmade Chase Sapphire Reserve costume for Halloween in a social media-fueled attempt to persuade the company to approve her application.

The product’s pièce de résistance that drove social media and word of mouth surrounding the launch was its 100,000-point sign-on bonus. The size of the bonus was unprecedented for Chase, and had garnered the attention of prominent bloggers and affiliates such as Brian Kelly, aka The Points Guy, who declared the Chase Sapphire Reserve “the must-have card of 2016, if not the most appealing card ever.”1 It also captured the attention of competitors, who saw it as a shot across the bow in the arms race of reward programs.

While Codispoti and Serra were pleased with the progress to date, they knew that their hard work had just begun. As planned, the company had reduced the introductory 100,000-point bonus to 50,000 points in January 2017. Now they had to ensure that the flood of new customers became profitable to the firm.

As the company approached the one-year anniversary of the Reserve launch, Codispoti and Serra wondered how many of their enthusiastic consumers would remain with the brand, renew their cards for another year, and pay the $450 annual fee now that their promotional inducement was gone. They had to assess how the drop to 50,000 bonus points would impact the rate of new customer acquisition— particularly given the enhanced richness of American Express’s and Citi’s rewards programs—and to design new features and benefits for the Chase Sapphire Reserve card to maintain its competitive differentiation. They also wanted to return their attention to the broader Sapphire portfolio, which included two other products—Sapphire and Sapphire Preferred. How should the products be differentiated to ensure they did not cannibalize each other? Were there other new products that could address the needs of new customer segments to capitalize on the momentum of the Reserve launch?

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JPMorgan Chase: Consumer and Community Banking JPMorgan Chase operated four lines of business: Commercial Banking, Corporate & Investment

Bank, Asset & Wealth Management, and Consumer & Community Banking (CCB). Under the leadership of CEO Gordon Smith, the CCB division served as the face of the company to the general public. In addition to credit cards, CCB also included merchant acquiring, payment processing, small business and consumer banking services (including Chase’s 5,200 retail bank branches), mortgages, and auto financing.

In 2016, CCB counted nearly half of all U.S. households as customers and generated $44.9 billion in revenue, with net income of $9.7 billion. Chase was ranked #1 or #2 in credit card issuance, credit and debit payments volume, and merchant acquisitions. It boasted the highest-rated mobile banking app and the largest ATM network (with 18,000 locations), and was the most visited banking portal. Over 50% of affluent U.S. households lived within two miles of a Chase branch or ATM.

The U.S. Consumer Credit Card Market There were five primary players in the credit card industry. Issuers were banks that issued credit

cards to consumers and businesses, extended loans in the form of credit lines, and absorbed the resulting credit risk. Cardholders repaid charges made on their cards, often in monthly installments, paying interest on the unpaid portion. Merchant Acquirers signed up and managed relationships with Merchants so that merchants could accept credit cards as a form of payment. Network Providers (e.g., MasterCard and Visa) processed payments between consumers and merchants. Under the “open-loop” system operated by MasterCard and Visa, an issuer, such as JPMorgan Chase, marketed and issued cards to consumers and businesses, MasterCard or Visa processed the transactions, and a merchant acquirer enrolled merchants to accept issuers’ cards running on the network provider’s system. 2 In contrast, American Express (Amex) and Discover served as their own network providers and merchant acquirers in a “closed-loop” system. Each of the partners received a small percentage of the value of each customer’s purchase (i.e., “transaction”). (See Exhibit 1 for a summary.)

In 2016, the U.S. general purpose credit card industry sales totaled ~$3 trillion. 3 In Q4 2016, the market was dominated by six issuers that accounted for 78% of industry sales. JPMorgan Chase led in market share (21.7%), followed by Amex (19.9%), Citigroup (11.5%), Capital One (11.0%), Bank of America (8.9%), and Discover (4.7%).4 The industry experienced 1.1% annual revenue growth between 2011 and 2016, and was expected to grow 4.5% annually between 2016 and 2021.5 Industry profit margins had dropped from 31% in 2011 to 25% in 2016 due to lower interest rates, increased competition, greater regulation, and security/technology costs. 6 Customer acquisition in the industry was competitive and expensive. Costs to acquire a new cardholder ranged from $250 to $500.7

American consumers held 636 million credit cards8 and 38% of households carried credit card revolving debt, which averaged roughly $11,000.9 On average, people carried 2.35 credit cards in their wallets (14% held seven or more cards)10 but generally only used one on a regular basis. Thus, issuers strove to make their cards the preferred choice, or “top of wallet.” Generally speaking, Amex network cardholders charged $1,687 per month on their cards, while Visa cardholders charged $843.11

Issuers had three main sources of revenue: cardholder fees, interest paid by consumers on unpaid card balances, and interchange fees, which were paid by merchants as a percentage of each transaction amount. The contribution of each revenue source varied greatly from one issuer to another. For example, Amex, which required its charge card customers to pay all purchases in full each month, earned 21% of its revenue from interest payments and 79% from cardholder and interchange fees,12

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while JPMorgan Chase earned an estimated 70% of its revenue from interest payments and 30% from cardholder and interchange fees.13 Across the industry, about 30% of all customers were transactors (those who paid their balances off in full each month to avoid paying interest fees), 43% were revolvers (those who did not pay off their balances in full each month), and 28% were dormant (those who carried, but did not use their cards frequently).14

Market Segmentation

Issuers segmented the market in different ways in order to identify different types of consumers. Common segmentation strategies included demographic, behavioral, and psychographic methods.

Demographic segmentation separated consumers based on their life stage, assets, or credit score.

• Life Stage: Young adults (ages 18–26) accounted for 15% of industry revenue. 15 The 26–60 age group accounted for 59% and tended to be more loyal.16 Senior citizens accounted for 15%, and the remainder (11%) was derived from business accounts.17

• Assets/Credit: The wealthy segment consisted of households with $500,000 to $1 million in assets, the affluent segment $100,000 to $500,000, and the emerging affluent segment consisted of those not yet affluent, but likely to be so within five to ten years.18 Affluent and wealthy consumers preferred to put most of their spending on credit cards and were a little less likely to carry revolving debt than the average consumer.

Behavioral/attitudinal segmentation provided insight into how consumers used their cards and how much they valued rewards and/or what types of rewards they preferred (cash back, miles, points), as well as their channel preferences. For example:

• Annual Fee: While most consumers did not pay an annual fee for credit cards, some issuers offered cards with annual fees of $25–$550 to attract consumers that valued rich rewards and benefits.

• Rewards: Rewards were one of the key features consumers considered when selecting and using a credit card. There were currently three types of rewards cards in the market:

– Cash Back on Purchases: Cards that offered cash back attracted consumers who didn’t want to spend time planning for and redeeming reward points. Some products offered higher percentages of cash back on spending in particular categories.

– Proprietary Rewards on Purchases: Issuers offered rewards in the form of points accumulated based on spending; point multiples varied for different categories of purchases. Points could be redeemed for travel benefits, merchandise, or other perks.

– Cobranded Rewards on Purchases: Issuers partnered with particular hotels, airlines, retailers, and other merchants to offer cobranded cards that offered rewards affiliated with that partner. Points earned would typically be transferred to the cobrand partner’s loyalty program. These cards carried both the partner and the issuer brands.

Recently, some issuers had increased their level of rewards and cobrand partner remuneration to a point where the costs of the rewards were approaching the interchange fee the issuer earned on the purchase.

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• Interest Rates or APR: Low interest rates appealed to consumers who wanted the option to extend payment on card purchases over time. Average interest rates varied by card type and could range from 12.88% to over 20%.19

• Credit Lines: Some heavy spenders were drawn to cards with high credit lines that allowed them to access credit for big-ticket purchases in categories such as travel and home improvement.

• Creditworthiness: Consumers with low credit scores were attracted to cards that offered a high likelihood of approval. These cards often carried higher interest rates and/or annual fees to compensate for the higher level of risk the issuer incurred.

A segmentation approach based on consumer psychographics offered yet another way to group consumers. McKinsey & Company identified five prominent segments based on consumers’ beliefs about and attitudes toward credit (see Exhibit 2 for segment descriptions and Exhibit 3 for how consumer behavior differed by card type).20

A New Strategy for Chase Consumer Credit Cards In 2006, despite the size and profitability of Chase Card Services, JPMorgan Chase CEO James

“Jamie” Dimon (HBS MBA ’82) believed that more should be done to strengthen Chase’s proprietary products and to build a stronger presence for the company in the affluent market. In 2007, he hired Gordon Smith from Amex to become the CEO of Chase Card Services. Smith and Serra, who had also recently joined Chase, created a new strategy that rationalized the company’s product portfolio and identified the need to create new Chase proprietary products to compete in the affluent market.

Serra launched a substantial market research project. “It was clear we needed to deeply understand the various segments in the market, what features were attractive to those segments, and what kinds of products we wanted to build for those segments,” she explained. The research confirmed the attractiveness of the affluent/high net worth (AFF/HNW) customer segment. According to company research, this group represented ~15% of the ~200 million U.S. cardholders, generating ~50% of total spending on credit cards, of which Chase was capturing ~15% market share. Sixty percent of AFF/HNW individuals lived in the top 15 markets in the U.S. that were well-served by Chase branches.

Competition in the affluent space was formidable. Travel cobranded credit card products, such as those for United and Delta Air Lines, had always been strong in the affluent market, but competition for proprietary issuer cards had been dominated by Amex. In 1984, Amex had introduced its Platinum Card, initially available by invitation only, with a $250 annual fee. It offered 24-hour customer service, access to exclusive clubs, and special amenities at high-end hotels, resorts, and restaurants around the world. 21 In 2007, Amex increased the annual fee to $450, but its extensive slate of rewards and perks allowed savvy users to recoup most of this cost. 22 The Platinum Card’s value proposition included exclusivity, rewards, and access. Amex referred to its customers as “card members,” and all cards were embossed with a “member since” date, which for many served as a badge of honor that marked the arrival of financial success and stability. “For more than 30 years American Express has reaped enormous profits by telling its customers that they are successful, elite, the cream of the moneyed crop and . . . that there’s no better way to make certain everyone knows just how special you are than by pulling an Amex out of your wallet,” explained the New York Times. 23 However, after reviewing consumer insights from her research, Serra questioned just how relevant the Amex brand was to the younger, emerging affluent consumer. She felt confident that Chase could compete for these affluent consumers with the right product and positioning.

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Chase Sapphire: A New Sub-Brand Is Born In 2009, JPMorgan Chase consolidated its Chase proprietary card portfolio into five primary sub-

brands to address distinct market segments: JPMorgan (for private banking customers), Chase Sapphire (for affluent consumers interested in travel and dining), Chase Ink (for small business owners), Chase Freedom (for those consumers interested in cash back), and Chase Slate (for consumers interested in building financial responsibility). The Chase brand was used on all products as an endorser brand, which gave consumers a sense of trust, credibility, and security, according to Chief Brand Officer Susan Canavari, while each of the sub-brands carried its own unique meaning. Serra recounted the discussion: “There were people who felt that all of our products should just be called ‘Chase.’ That just didn’t make sense to me. The market is highly segmented. Sub-branding allows you to speak directly to each target segment. I think it strengthens the Chase brand, broadening it and making it more relevant to more segments of consumers.”

In August 2009, Chase launched Chase Sapphire, its first Chase proprietary card marketed to the affluent consumer. A company statement articulated the value proposition of this new offering: For today’s savvy affluent consumer, Chase Sapphire is the new, next generation rewards card that combines the premium service and travel benefits high-end consumers expect with practical features, so that they can always get more of what matters most. To enter the market, the team decided to offer a card with no annual fee. Consumers earned 1 point per dollar on general spend and 2 points per dollar on airline travel booked through Chase. Customers also received 10,000 bonus reward points after they spent $500 on the card during the first three months.

To support all Chase proprietary products, including Sapphire, Chase launched Ultimate Rewards, a proprietary rewards program with a simple and transparent online portal where customers could manage their rewards, offers, and redemptions. It included a user-friendly landing page containing all of the information that a customer might need: point tracking, progress toward program goals, and redemption options with point conversions listed so that customers could easily see the value of their points. It was a clear differentiator, according to Canavari. “Over the course of time, if you use the product, you will fall in love with it. It’s not like other cards that offer you things and when you try to use them, you can’t actually redeem them. When you go to redeem your points with us, you’re going to be able to redeem them for great value at really great places.” Lisa Walker, General Manager of Chase Sapphire Branded Cards, added, “Consumers believe that we deliver significant value and they like the elevated experiences and the simple nature of our rewards program. It is easy to understand and easy to redeem: no gotchas, rewards are automatically credited to your account. You don’t have to do anything.” (See Exhibit 4 for images of the Ultimate Rewards website.)

All Chase Sapphire calls were answered by a live advisor. As Walker noted, “You don’t have to push any buttons. You don’t have to enter your credit card number. You simply call the number on the back of your card and someone answers the phone and says, ‘Thank you for calling Chase Sapphire. How can I help you?’ That is unique today in the credit card industry.” Chase staffed the lines with experienced, high-performing representatives to improve customer satisfaction. The teams had a goal of answering 85% of calls within 20 seconds and resolving customer issues within one call. “It’s certainly a more expensive way of servicing our customers . . . but there is a clear connection between the service experience improvements, net promotor score improvements, and customer retention,” said Tom Horne, Head of Credit Card Operations. “The savings you get from pulling back on your service levels to save a few dollars is not worth the risk of lower customer satisfaction, which always leads to higher attrition.” He continued, “Direct-to-advisor is attractive to many customers. These customers are very busy, and so their immediate reaction is ‘I’m going to get a quick answer to my question.’”

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The card had a minimalist design (see Figure 1), differentiating it from competitors’ cards, which were filled with numbers and graphics.

Figure 1 Chase Sapphire Credit Card

Source: Company documents.

The market response was promising. A customer survey at the end of 2009 revealed that 90% of cardholders reported overall satisfaction with the card, and 85% would recommend it to others.24

Expanding the Product Portfolio with Chase Sapphire Preferred

By 2011, the economy was showing signs of recovery. Although Sapphire had generated consumer excitement and was performing well, Serra was anxious to make stronger inroads into the AFF/HNW segment. The team decided to leverage the Chase Sapphire sub-brand and launched the Chase Sapphire Preferred card. It carried an annual fee of $95 and offered cardholders 50,000 points after they spent $4,000 during the first three months. The card also provided a 1.25% points-to-dollar conversion rate toward travel if points were redeemed on the Ultimate Rewards website (for example, when 50,000 points were redeemed, consumers would receive $625 in value against their travel purchases). Cardholders could earn 2x points on travel and dining, and received a 1:1 point transfer to frequent flier programs, such as United Mileage Plus. Preferred customers also had access to exclusive, curated Chase Experiences such as exclusive packages to the Sundance Film Festival, private dining series at acclaimed restaurants, and access to the Sapphire Lounge at New York City’s Madison Square Garden, where customers could meet athletes and talent before games and shows.

One of the card’s defining characteristics was its weight. Unlike molded plastic cards, Chase Sapphire Preferred had a metal core sandwiched between two pieces of plastic, giving it more heft. While a standard plastic card generally cost $1 to produce, this card cost significantly more. However, the team felt that the satisfying “thunk” it made as a consumer put it down for payment was an important quality signal. Remarked Walker, “When I look at my P&L, that’s a pretty big cost of goods number. But it has an intangible value. When I take my Chase Sapphire Preferred card out of my wallet and hand it to someone in a store, they make a comment about it. It isn’t showy, but it is a conversation piece.” A NerdWallet writer explained, “I have the Chase Sapphire Preferred, and virtually nothing gives me more pleasure when I pay and the cashier notices how gorgeous that card is. Chase has basically realized that the weight raises customers’ dopamine levels. Being able to get into my brain every single time I swipe a card—there’s literally nothing better a marketer could want.”25 A consumer noted, “They’ve managed to take something from being a stupid card you carry in your wallet to a part of your identity.” 26

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In 2014, Chase stopped actively acquiring customers and began throttling back marketing efforts on the no-fee product, focusing marketing on the Sapphire Preferred product instead. Some no-fee consumers migrated to Preferred, but others stayed with the no-fee card, moved to one of Chase’s other sub-branded cards, or left the company.

By 2016, Sapphire Preferred represented more than half of Sapphire total accounts and sales. The Sapphire Preferred card had also won several awards. Consumers were enthusiastic about the brand and eager to share it with their tribe. Said Canavari, “When you are passionate about something, you want to share it with your community and with like-minded people because that’s what makes you really proud to be part of a brand.”

By 2014, Citi had also entered the premium credit card segment with its Citi Prestige card. The Prestige card, marketed primarily to travelers, carried a $450 annual fee and access to Priority Pass airport lounges.27 Cardholders received an annual $250 air travel credit, automatically applied to flight- related expenses. They also received a free fourth night at a hotel in the form of a statement credit when booked through the Citi Prestige Concierge, 28 a sign-up bonus of 50,000 ThankYou points after spending $5,000 within three months of being issued the card, and three points per dollar spent on air travel and hotels, two points per dollar on dining and entertainment, and 1 point per dollar spent on other purchases.29

The Launch of the Chase Sapphire Reserve Card

Codispoti joined Chase in 2014, after more than 18 years at Amex. She quickly noticed that Sapphire Preferred customers were more affluent than the rest of Chase’s proprietary portfolio, and included a segment of “new affluents” that were 25–44 years old with incomes of $150,000+. They were authentic travelers and savvy about rewards, and they liked to make the most of every trip, whether it was around the corner or across the globe. The team believed there was an opportunity to build on the momentum and brand equity of Sapphire to create a line extension to compete in the ultra-premium, high-fee segment.

Product Design Strategy

Codispoti explained, “Launching a new credit card product is a complex series of trade-offs. We have to construct a value proposition comprised of the optimal mix of rewards, benefits, services, experience, interest rates, annual fees, and more. Throughout the new product development process we are constantly doing analysis to determine which set of features will deliver the most value for consumers, provide clear differentiation from competition, and yield the best returns for our company.”

Since the new offering would carry the Chase Sapphire brand, it needed to reflect the brand’s DNA: strong rewards, premium travel redemptions, and exceptional customer service. In addition, not only did it need to differentiate itself from other ultra-premium cards in the market, it also needed to be distinct from the Chase Sapphire Preferred card to generate incremental customers. (Refer to Exhibit 5 for a summary of each Sapphire product’s features.) Codispoti also knew she needed to account for and overcome two significant industry dynamics in developing a new product: millennial attitudes toward credit cards and churners.

First, by 2013, only 37% of Americans aged 35 and under carried credit card debt, the lowest level since 1989.30 Millennials, many of whom carried significant student loan debt, were wary of revolving credit and tended to use debit cards or pay off their full balance each month. Their spending habits

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differed from past generations, as they tended to favor collecting experiences instead of things, and much of their spending occurred in places that were not traditionally included in reward programs. However, while some had sworn off credit cards, others were attracted by rewards. The Wall Street Journal noted, “Credit cards, and the prizes they earn, are the hot new collectibles for millennials.”31 Millennials capitalized on rewards to stretch their finances, hacking the system to maximize the points they earned and the value at which they redeemed them.

Second, an increasing number of consumers were churning credit card offerings for large personal gains. This small subset of customers known as “churners” signed up for multiple credit cards to take advantage of acquisition sign-on bonuses, first-year free offers, or low introductory interest rates and then canceled the account or allowed the card to sit unused and became part of the dormant segment. Prominent bloggers offered ingenious methods for consumers to maximize the benefits of their credit cards. As Codispoti noted, “We work hard to deliver compelling ongoing benefits well beyond the sign-on bonus so our cards remain top of wallet for the long term.”

The new Chase Sapphire Reserve card was launched in August 2016 and carried a $450 annual fee. Cardholders earned 3 points per dollar spent on travel and dining, a 1.5% points-to-dollar conversion rate toward travel on Ultimate Rewards redemptions, a $300 annual travel credit, and access to the Chase Experiences platform. At launch, Chase Sapphire Reserve offered a market-leading 100,000- point sign-on bonus, which was earned after a customer spent $4,000 within their first three months. The bonus offer alone was worth $1,500 in travel redemption credits on the rewards site.

For Codispoti, what made the Sapphire brand so compelling was that it reflected what young, …

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Marketing Management

Module 5: Building Your Brand

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