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VA-TX Investment Corporation: Credit Card Division Christopher M. Keller, John F. Kros,
To cite this article: Christopher M. Keller, John F. Kros, (2004) VA-TX Investment Corporation: Credit Card Division. INFORMS Transactions on Education 4(2):36-44. http://dx.doi.org/10.1287/ited.4.2.36 Full terms and conditions of use: http://pubsonline.informs.org/page/terms-and-conditions This article may be used only for the purposes of research, teaching, and/or private study. Commercial use or systematic downloading (by robots or other automatic processes) is prohibited without explicit Publisher approval, unless otherwise noted. For more information, contact
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Vol. 4, No. 2, January 2004, pp. 36–44 ISSN 1532-0545 (online)
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I N F O R M S Transactions on Education
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Case Article
VA-TX Investment Corporation: Credit Card Division Christopher M. Keller Operations and Decision Technology Department, Kelley School of Business, Indiana University, 1309 East 10th Street, Bloomington, Indiana 47405,
[email protected]
John F. Kros Department of Decision Sciences, School of Business, East Carolina University, 3410 Bate Building, Greenville, North Carolina 27858,
[email protected]
T
he subject matter in the VA-TX case is credit cards. Since almost everyone is familiar with credit cards, the instructor can focus on discussing the included management problems rather than being sidetracked by the intricacies of, say, widget production. The VA-TX case is used to jumpstart basic quantitative business analysis skills. The case uses simple calculations of profits, revenues, and costs. These calculations require an understanding of only simple probabilities and some notion of averages. It also touches on the ideas of a basic definition of risk, tradeoffs, and defining optimality. This case is written for business students and is flexible enough to fit either into an introductory quantitative modeling course, including operations management. The case has been used at both the senior undergraduate level and at the MBA level. The case is particularly useful as a group presentation device and the Teaching Notes (available as supplemental material at http://dx.doi.org/10.1287/ited.4.2.0036) is addressed for instructor interaction with group presentations. Students report the case as challenging and “eye opening” to the concepts of “what if” analysis and the importance of modeling assumptions. A PowerPoint slide presentation of this case is provided, an Excel model with a sample “Starter” explanation in written form for that model, a writing guide for executive summary style writing, and a sample executive summary are also provided (available as supplemental material).
Background
found that few card holders defect (i.e., drop the VATX card for another). However, the credit card market was changing, and without an ad campaign Nicole knew that signing new card holders was virtually impossible. Nicole’s group estimated that 25% of card holders do not carry a balance from month to month, or the balances they carry are negligible. However, of those customers that hold balances, 95% hold between $100 and $300 a year. VA-TX charges a 15% APR on all credit card balances while their cost of capital is 5% APR. Data shows that default rates are currently about 0.01% for the current customer card base and credit limits are set at a maximum of $5,000 per customer.
Nicole Lee had just been given a perplexing problem to solve. How to increase the profitability of the Leon Division of the VA-TX Investment Corporation? The Leon division oversees the credit card business of the corporation. Nicole started working for the Leon division of the VA-TX Investment Corporation around one and a half years ago. The firm had hired her to collect and analyze customer credit card data. As of today, she and her team were challenged with using the customer data gathered to plan a strategy for improved credit card profits.
Current Operations Nicole’s Decision Problem
The division currently did not run any formal ad campaigns. Nonetheless, the Leon division had accumulated 100,000 credit card holders/customers since first issuing cards under the VA-TX name. Nicole has
Two methods of improving credit card profits are being considered. The first is to raise current customer credit limits. The second is to run an ad campaign 36
Keller and Kros: VA-TX Investment Corporation: Credit Card Division
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INFORMS Transactions on Education 4(2), pp. 36–44, © 2004 INFORMS
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aimed at attracting new customers. The two methods are considered exclusive of each other. In other words, Nicole must make a recommendation to accept method one, method two, or neither depending on her analysis.
Increasing Existing Customer’s Credit Limits The division wishes to increase the entire customer base credit limit in steps of $500 from $5,000 up to $7,500 in the hope of generating new profits. Customers are expected to increase their average yearly credit balances by 1%–2% for each step increase. However, as credit limits rise, the chance of customer default also rises. The default rate tends to be constant at 0.01% up to a limit of $5,000, but rises by 0.0025% for each $500 increase in the limit above $5,000.
Table 1.1
% Increase in Customer Base Due to Ad Outlays % expected increase in customer base (%)
Added advertising amount year 1 ($) 10,000 20,000 30,000 40,000 50,000
9.000–11.000 9.750–11.750 10.250–12.250 10.500–12.500 10.625–12.625
The ad firm has stated that on average the division could expect an 8%–10% increase in its customer base with the minimum budget outlay. They have also given Nicole the following information regarding additional budget outlays with regard to customer base increase. Table 1.1 contains this information. The ad company allows additional advertising expenditures in $10,000 increments. Supplemental Material Supplemental material to this paper is available at http://dx.doi.org/10.1287/ited.4.2.0036.
Advertising Campaign The Leon division is also contemplating a yearly advertising campaign aimed at obtaining and keeping new customers. A minimum budget of $75,000 per year with an additional $50,000 to spend if needed this year. The fixed cost of the ad campaign is $75,000.
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To reference this paper, Please use: Keller CM, Kros JF (2004) VA-TX investment corporation: Credit card division. INFORMS Transaction on Education 4(2): 36–44.
Editor’s Note: In this article, “VA-TX Investment Corporation: Credit Card Division” by Christopher M. Keller and John F. Kross (first published in January 2004, INFORMS Transactions on Education, DOI:10.1287/ited.4.2.36), the PowerPoint slide presentation, the Excel model, the executive summary, and a writing guide have been relocated to the supplement material of the paper at http://dx.doi.org/10.1287/ited.4.2.0036.
