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  • Vince Cheung

Bad News on the “Free Lunch” Search

Credit Card Teaser Rates Aren’t Always Right for the Menu

As customer marketing and CX practitioners, we have long argued that shifting our thinking from immediate profitability to customer lifetime value (CLTV) is not just game-changing for enterprise value, but also challenging for organizations. The credit card industry offers perhaps the best illustration of this challenge.

On one hand, the acquisition marketing landscape for credit card issuers is extremely competitive, often fueled by aggressive bonus rewards or highly promotional “teaser rates” (i.e. lower-than-normal, sometimes even at 0% APR, for a short, introductory period). On the other hand, longstanding research has shown that the CLTV of a credit card customer is highly correlated with their Net Promoter Score (NPS). Said another way, short-term promotional tactics like teaser rates may be counter-productive to fostering the right long-term relationship, if marketers don’t pay attention to managing these relationships at key points in the lifecycle.

To be clear, we are not making the case against aggressive acquisition offers. Teaser rates have been a staple of credit card marketing for over 20 years – the first US consumer protection legislation covering them was published in 1988. Their persistence suggests that they must work in converting desirable consumers to become new cardholders. That said, our collective experiences with credit card issuers in lifecycle marketing and NPS performance both suggest that the outcomes are not as clear cut. A lot depends on the way in which these two groups of customers behave over their lifetimes: Newly acquired customers via these promotions; and existing customers who didn’t. In this post, we’ll discuss the why, what, and how to mitigate.

The setup

A special deal for new customers is not only a practice of the credit card industry, it’s prevalent in telecommunications, mortgages and other industries. Interestingly, we have seen similar NPS results in telecoms, so it’s not unreasonable to assume that any industry experiences similar customer behavior once they promote an aggressive promotion, like a “teaser rate” as a boost to acquiring subscribers. Like any promotional discount in an industry with some price elasticity, this attracts new customers and the subscriber numbers rise. In particular, credit card teaser rates are often a targeted offer aimed at the most desirable prospects (e.g. those with high credit score and/or show high utilization, which further drives up the credit score).

In many ways, this is the first problem, not the solution. A company that doesn’t focus on CLTV often measures growth in terms of subscriber numbers, so, on the surface, they already have a winning strategy. Worse, to maintain subscriber growth, the company will now be pretty much obliged to continue the practice or risk a decline in the rate of new additions. It’s a gateway drug for marketing, as giving away anything at a reduced price tends to be.

For this practice to be successful from a CLTV perspective, several things need to work out.

First, the new customers must survive the transition from the promotion period to the post-promotion, or full-priced service relationship. Like trial customers, customers on a teaser rate promotion are either loss-making, or at the very least sub-performing in terms of profitability. The CLTV calculation is entirely dependent on what happens to the customer at the real, delayed, purchase point: When teaser rates end.

Tracking the NPS performance of the customer through this period is a useful technique to understand the likely long-term value. In the particular client study conducted, the behavior of the customer went like this:

  • On initial consumption, they are a promoter! Who doesn’t like a good deal?

  • On conversion to “full price” interest rate, NPS drops, in this instance dramatically, amongst customers who stay. Those who unsubscribe were not even measured. The overall NPS of the brand is therefore inflated as a result of the promotion, as long as we keep buying customer happiness with free things, and unhappy customers leave.

At some point, as you can imagine, this starts to degrade. In the worst case, it’s like an NPS Ponzi scheme. By the way, it’s not a foregone conclusion that leavers are detractors, it may simply be the case they were happy with their free lunch but didn’t fancy the check.

For customers who do stay, the NPS was lower than the “control group” – other customers who never took part in the promotion. In parallel, issuers typically also observe a dramatic drop-off in their utilization; in other words, many of their once most desired new customers were never fully onboarded, and their card was relegated to secondary or even tertiary status in the wallet as spend goes dormant. Consequently, their CLTV was lower; they tended to carry lower balances, had a shorter subscription lifespan (they ultimately left sooner than the control group) and, of course, they had lower word of mouth impact (maybe negative).

With friends like these, it wasn’t at all clear that the promotion was successful.

However, the story isn’t finished. Customers who didn’t take part in the promotion, saw a downtick in NPS when the promotion was launched; their response to being treated “worse than a new customer.” As these customers are the profit pool in this story, it doesn’t take much of a loss to damage the long-term corporate financial performance. American Express famously marketed that “membership has its privileges” – in this instance, membership has its penalties. And this year’s “promotion lottery winners” are next year’s unhappy, established customers.

Finally, it’s important to recognize that promotions, like all marketing discount programs, attract a different segment of customers. While it’s a generally good practice to customize experience design for different segments, it’s not generally the case that customization should just be discounting. Customers who value a different equation (i.e. other card benefits or rewards) likely won’t respond to the discount offer. And specifically in terms of credit cards, they may not carry a balance. So, this isn’t an apples to apples comparison of customer behavior in any case.

Tracking the NPS performance of the customer through this period is a useful technique to understand the likely long-term value. In the particular client study conducted, the behavior of the customer went like this:

Does it work?

Purely from an acquisition standpoint, absolutely. This tactic appears to be quite successful in bringing the right target prospects to the portfolio, starting them off at high utilization, and brought instant gratification to the customer experience, as discussed above on new customer NPS. Viewed from another angle, however, the results of the analysis also showed a “fake” increase in NPS in the short term, buoyed by continuous influx of new, happy, promotional recruits, followed by a poor set of CLTV economics. As long as enough people join and unhappy recruits leave after promotional periods (but are not surveyed), NPS was sustained. It was just the profitability that suffered.

What should marketers do? Four Lifecycle Marketing Tactics to Consider

1. Don’t take this segment of newly acquired cardholders for granted by treating them just like any other new customer in your onboarding touchpoints. Everything from the welcome email to the card carrier package should not only celebrate the new relationship, but also set the right expectations on the teaser rate promotion. For example, messaging in the first 30 days should be explicit in the issuer’s desire to help the new customer make the most of their promotion, and that includes being radically transparent about important terms such as timeliness of paying minimum balance, exactly which transactions qualify for the teaser rate, and explicit reminders on when the promotional period ends. In other words, demonstrate that you are an earnest, responsible advocate early on this journey, and that you are doing everything you can to set your new customer up for success.

2. Issuers should be extra vigilant in their Early Month on Book (EMOB) strategy. Rather than being satisfied with an initial high balance, largely driven by large purchases or balance transfers likely fueled by the teaser rate, issuers need to work even harder in driving “regular” usage velocity during the first 1-2 statement cycles. For example, issuers should consider deploying additional reminders or incentives for assigning recurring billings to the card. A well-crafted and holistic EMOB communications strategy is critical to increasing the CLTV of these customers.

3. Reinforce the value of the card around and after the end of the teaser rate promotional period. Help your new customers pivot their focus and perception of “value” from the teaser rate onto all the other card benefits they are entitled to, such as car rental or travel insurance coverage, targeted discount offers, and concierge service.

4. Don’t forget about your “control group” of existing customers, many of whom are reminded everyday that new cardholders are showered by teaser rates and other promotions and that they did not get an invite to the party. During periods where teaser rates are widely offered in acquisition channels, consider “surprise and delight” benefits that can enhance your value to existing customers who fall outside of promotional offers. In recent months, we have seen a rise in value-added subscription partnerships pursued by banks, mobile providers, and even some credit cards. These partnerships range from online shipping memberships like Shoprunner, to priority rideshare and food delivery memberships such Lyft Pink and Doordash’s DashPass, as well as streaming providers like Hulu and Netflix. These partnerships also offer an added benefit of creating additional “stickiness” in stemming attrition.

For additional practical, “no-free-lunch” insights on the research and insights we shared above, our teams at OCX Cognition and Pragmatic, respectively, would love to hear from you! Leave us a comment or contact us with your questions.


About the authors: Vincent Cheung & Richard Owen

About Pragmatic Pragmatic is a digital and direct CRM marketing agency committed to solving our clients’ marketing problems. We do that by finding the shortest path from problem to solution. From strategy through execution, we deliver real-world solutions designed to deliver real results. All while acting with a great sense of urgency.

Learn more about our capabilities, our differentiators, and our team.

About OCX Cognition OCX Cognition™ delivers the future of NPS. The company implements CX programs that result in financial value through its revolutionary NPS Outcome Engineering approach. Drawing on more than 15 years of CX expertise and 1000+ CX initiatives, OCX Cognition™ ensures customer experience success with a combination of technology and data science powered by machine learning, programmatic consulting, and research-based CX insights and education.

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