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Capital One - CASE STUDIES

Last post 09-23-2006, 11:17 PM by Web User. 0 replies.
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  •  09-23-2006, 11:17 PM 140

    Capital One - CASE STUDIES

    Hello Junta
     those who r serious about Cap 1 .. here's the case study (sample)
    they will be giving to u at the time of Interviews ...

    Capital One: Careers at Capital One - Case Introduction

          You have just been appointed the manager of the Cross Sells team at
          Capital One, which evaluates opportunities to market non-credit card
          products to our credit card customers. These cross sells usually involve
          building relationships with outside vendors who sell us products that we,
          in turn, can sell to our customers at a premium.
          One potential cross sell opportunity that is sitting on your desk right
          now is the Prepaid Phone Card - a piece of plastic you can use to pay for
          long distance telephone calls. You use the card by calling in to a 1-800
          number, entering the card's PIN number, and then entering the destination
          telephone number. The minutes left on the card are kept track of by the
          outside vendor - your only responsibility is to market the product in a
          way that maximizes profit for Capital One.
          Take a few moments to consider some of the most important factors that
          will influence your decision on whether to pursue the Phone Card cross
          sell. When you've come up with some ideas, click here to continue.

          Below is a list of some of the
          most important questions you should consider. Please take a moment to
          compare your list with the one below. Hopefully, you'll find a few of your
          answers on the list, plus a few more that you hadn't thought of.

            How much does each Phone Card cost Capital One?
            Are there any other costs involved, such as a set-up fee?
            Are there any constraints on how many minutes each Phone Card has?
            Are there any constraints on how much we can sell the cards for?
            How much do competitors charge for the Phone Cards?
            How much do our cross sell products usually sell for?
            How many customers usually buy our cross sell products?
            What distribution channels are available for marketing the Phone Cards
            to our customers?
            How much would this marketing cost?

          Here are some other questions you might have thought of, but for
          simplicity's sake, we will not consider their implications during the
          remainder of the case.

            How does the Phone Card opportunity compare with other cross sells we
            are considering? Maybe the product is profitable, but there's another,
            even more profitable product we could offer instead.

            How do our customers feel about receiving cross sell offers? Are there
            any who have told us that they do not want to receive these offers? If
            so, our market size may be somewhat limited.

            Does offering a Phone Card to a credit card customer have any impact on
            their profitability as a credit card customer? If they buy the Phone
            Card, we will charge the fee to their Capital One credit card, and if
            they carry a balance (i.e. don't pay off their bill every month), then
            we can earn interest on the price of the Phone Card.

            If a customer purchases a Phone Card, might that purchase indicate
            something about the customer's credit risk that we wouldn't otherwise
            have known? Maybe the customers who would want to buy Phone Cards are
            the ones whose phones have recently been turned off for non-payment! If
            this is true, then offering this cross-sell would be even MORE
            attractive, since it would help us to identify these customers before
            they "charge off" (i.e. default on their credit card debt).

           Luckily, the vendor who wants to
          sell us the Phone Cards has already provided a lot of the information you
          need in an introductory e-mail. The e-mail has several key points:

            The card may be sold at any price, and other companies have sold the
            cards for up to $0.75 per minute.

            The card may be sold with any number of minutes on it.

            Capital One must pay $0.20 per minute sold.

            Capital One must pay $2.00 per card sold for account set-up, which
            includes card materials, the vendor's system programming, and postage.

            The vendor notes that the Phone Card could be a good addition to Capital
            One's cross sell program, which ordinarily offers products in the $5 to
            $30 price range.
          Let's assume that Capital One has decided to sell 60-minute Phone Cards at
          a price of $30 each. How much profit do we make on each card sold?

    Capital One's profit per card is
          $16. For your reference, the equation is shown below.

          X = Profit per card sold
          X = (Revenue per card) - (Expense per card)
          X = $30 - (($0.20*60) + $2.00)
          X = $16

          But does anything big seem missing from this equation? Click here when you
          think you know what we've left out.

    The thing that we haven't
          considered yet is marketing costs. (In reality, we haven't considered
          several things, but the lack of marketing expense has the biggest impact
          by far.) Basically, it will cost Capital One some money to tell our
          customers about the Phone Card offer, but we didn't include any of that
          expense in the equation on the previous page.
          But how should we market this product? There are several different
          distribution channels we could use.
           - Little slips of paper we put inside customers' monthly statements,
          which they return to us when they mail us their payments.
           - Slips of paper that are attached to the backs of the envelopes that
          customers use to mail in their payments. If they are interested in buying
          the product, they can rip off the stubs and put them inside the envelopes.
           - A line or two of text typed on the remittance stub of each statement
          (the part a customer rips off and mails back with the check). It might say
          something like, "Check this box if you would like to purchase a Capital
          One Phone Card, good for 60 minutes of long distance calling, for only
          $30!"
           - We could send our customers a letter - separate from their monthly
          statement - describing the Phone Cards in detail.
           - We could place telephone calls to our customers describing the cards
          and asking them if they would like to purchase one.
          Please take a few moments to think about the distribution channels above.
          How are they similar? How are they different?
          What factors would be most important in determining which distribution
          channel you should use? In other words, what additional information would
          you need to know about each channel to decide which is best? For the
          purposes of this case, you do not need to think about all the variables
          for every distribution channel - just try to think of the two main
          variables that apply to all of them.

    The two most important factors you
          need to consider are cost and response rate.
           It is easy to see that cost will vary a lot depending on what
          distribution channel you decide to use. For example, with outbound
          telemarketing, you have to pay the salary of the telemarketer plus the
          cost of the call (or outsource the job to a professional telemarketing
          firm, which isn't cheap, either). If you decide to use direct mail, you
          will need to pay the cost of printing the letter and other marketing
          materials, plus the envelope, plus the postage. On the other extreme, if
          you decide to go with statement questions, then it costs us nothing - we
          already print statements anyway, and we have automated scanners to capture
          the responses.
           The percent of customers you solicit who decide to purchase the Phone
          Card - will vary considerably as well. And as you might suspect, cost and
          response rate are often inversely related - the more a marketing effort
          costs, the more people respond to it, and vice versa. For example, a lot
          of people might respond to a direct mail solicitation, but far fewer would
          respond to the statement question. After all, it's hard to miss a letter
          in your mailbox, but you could easily overlook a line or two at the bottom
          of your statement. Plus, if we send out a letter, we have a lot of room to
          include persuasive text and beautiful photos discussing the benefits of
          the Phone Card, but if we decide to go with a statement question, we have
          only two short lines of text to make the sale. Having more space and
          flexibility to promote the product would have a big impact on what percent
          of people choose to buy it.
          There are lots of other factors you might have thought of that also
          deserve consideration. A few are outlined briefly below:
           It takes a lot more time to use some of these channels than others. If we
          thought a lot of other companies were going to increase their marketing of
          Phone Cards in the near future, we might decide to use a channel that gets
          us to market fastest.
           Going with one channel might take a few hours of a single person's time,
          whereas another channel might require us to mobilize an entire department
          for a week. Although this sort of implication can be included in the
          "cost" consideration above, it is also valuable to consider it separately.
           Some customers don't like receiving telemarketing calls from us, so we
          need to consider this when formulating our marketing campaigns.
          The decision of which distribution channel to use is a very interesting
          one, but it is too lengthy to consider here. Let's assume that you decide
          to use the statement insert channel. Each insert will cost you $0.04,
          which includes everything - all the way from the graphic designer's time
          to the cost of printing them to the cost of stuffing them in the
          envelopes. And don't worry - our postage costs won't go up. We already
          send all of our customers statements anyway, and since we are very careful
          to make the inserts extremely lightweight, we won't incur any incremental
          postage costs from marketing this product.
          Assuming that we must sell 60-minute cards for $30, what response rate
          would be required to break even on the insert? Click here when you think
          you know the answer.
          Show me the assumptions page again.
          Hint: "Breaking even" means that you neither gain money nor lose money on
          a project - your total profit is $0. The break-even point for a given
          variable is a very useful figure in business, since it tells you the point
          when you start making (or losing!) money.

    There are a number of different
          ways you could have chosen to solve this problem, but the answer is the
          same no matter which way you do it.

          Assume that you mail 100 inserts, and then determine how many people would
          have to respond for the profit to equal zero.

          Let R = the number of responders
          (Revenue per card sold) - (Expense per card sold) = 0
          $30R - [($0.20*60)R + $2.00R + (100*$0.04)] =0
          30R - 12R -2R - 4 = 0
          16R = 4
          R = 0.25 people per hundred
          R = 0.25%

          Same as method 1, except you don't assume a certain number of customers.

          Let R = response rate
          (Revenue per card sold) - (Expense per card sold) = 0
          $30 - [($0.20*60) + $2 + ($0.04/R)] = 0
          30 - 12 - 2 - (0.04/R) = 0
          (0.04/R) = 16
          16R = 0.04
          R = 0.25%

          Break even occurs when (Profit per piece mailed) - (Marketing cost per
          piece mailed) = 0

          Response rate R = (# of cards sold / # of pieces mailed)
          You can multiply any expression by (1/R)*R, or (# pieces mailed/# cards
          sold)*(# cards sold/# pieces mailed), since this expression is equal to 1
          Recall from assumptions that marketing cost per piece mailed = $0.04
          (Profit/piece mailed)*(# pieces mailed/# cards sold)*(# cards sold / #
          pieces mailed) - $0.04 = 0.
          After you cancel out "pieces mailed" from the first two elements of the
          equation above, you get the following equation.
          (Profit / card sold) * (# cards sold / # pieces mailed) - $0.04 = 0
          This evaluates to (Profit / card sold) * R - $0.04 =0, since R = (# cards
          sold/# pieces mailed)
          Recall from earlier in the case that the profit per card (without
          marketing expense) is $16.
          Therefore, $16R - $0.04 = 0
          R = 0.25%

          Any way you look at it, the answer is the same - if more than 0.25%
          customers who receive the Phone Card offer decide to purchase a card, than
          we will make a profit. If fewer than 0.25% of customers respond, then we
          will lose money.

          Does 0.25% sound like a reasonable expectation? Although it's impossible
          to tell in advance what the actual response rate would be, 0.25% sounds
          achievable, so the Phone Card cross sell is definitely worth testing.

          Congratulations! You've finished Capital One's online case. But please
          click here for some final remarks on our case interview process.

          We hope that you have found this practice case interesting and
          informative. Now for a few final words . . .
          Actual case interviews are dynamic, one-on-one interactions with an
          interviewer - not just some problems laid out on paper. You are encouraged
          to ask intelligent questions and engage in discussion around the problem.
          We're not just looking for great analytical skills -- communication
          counts, too.
          All candidates who interview with us through on campus recruiting should
          expect several case interviews during the course of their interview
          process. However, the number of these interviews, and the mathematical
          difficulty of each case, will vary depending on the position.
          You may find that Capital One's case interviews have a more quantitative
          focus than the cases given by other firms. This is intentional -- our
          cases are examples of the sort of work people do at Capital One every day.
          By discussing actual problems taken from our work, our candidates get a
          taste of what working at Capital One is really like.

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