case background:
You are advising a credit card company that wants to market a prepaid phone card to its customers. Is this a good idea?
Whoa! Better find out more about this prepaid phone card first before you even begin to think about recommending the phone card.
You: What is the role of our company? Do we simply market the card or must we create them ourselves? Are we expected to provide the telephone services?
Interviewer: This card will be co-marketed with an outside phone company. We do not need to perform telecommunications functions.
You: What are our expenses connected with the card?
Interviewer: We must pay 15 cents for every minute we sell. We also have to pay $1.00 as a start-up cost for the card and card systems.
You: What are our marketing expenses?
Interviewer: We normally use slips of paper that are attached to the backs of our credit card payment envelopes. We sometimes also send customers a direct mailing - in a separate envelope. Or we can have telemarketers call selected customers.
You: What's the cost of each of these marketing techniques, and what is their response rate?
Interviewer: Telemarketers have a 2 percent response rate and cost $1.00 per call. Direct mailings cost us 40 cents per mailing and have a 0.50 percent rate of response. Our payment attachments have a 0.25 percent rate of response, but only cost us 5 cents each.
You: I'm going to assume we will sell one-hour phone cards. That will cost us $9.00 for the minutes and a dollar per card - so each card costs us $10.
Interviewer: Okay, that sounds reasonable.
You: And what is our expected revenue on a one-hour phone card? What is the current market rate for a 60-minute phone card?
Interviewer: Assume it's 50 cents a minute.
You: So if we sell the cards for $30, we have a $20 profit, minus our expenditures on marketing.
Interviewer: What's our cost structure look like?
You: Okay, let's figure this out. To sell 1,000 cards through telemarketing, we would need to contact 50,000 people. That would cost us $50,000. To use direct mail, we would have to contact 200,000 thousand people, which, at 40 cents per mailing, costs us $80,000. Since the envelope inserts aren't very reliable, we will need to contact 800,000 people using that method. But at 5 cents each, it costs only $20,000 to sell 1,000 cards.
We make $20 profit on each card. But even using the cheapest promotional vehicle, at $20 profit, we would only break even, because our profits on 1,000 cards would be $20,000. We shouldn't market this card, unless we can further cut our marketing costs or increase the price of the card. If we could slice the cost of the envelope attachments a penny or so, or sell the card for $35, or convince our co-marketer to reduce our costs, it might be worth selling.
Interviewer: What are some other issues you might want to consider? (Notice how the interviewer is nudging you to add to your analysis.)
You: We should also consider the competitive landscape for this business. Is the per-minute rate for calling card minutes expected to fall? If so, and our costs are held constant, we may lose money. Of course, we can learn more from marketing these cards. It could be that the people likely to buy these cards might be frequent travelers and could be targeted for other promotions.
