Notes

American Express® is facing stiff competition from a host of new credit cards that
have no annual fee and low interest rates. In response, American Express is
considering dropping its $50 annual fee. What are the economics of dropping the
$50 fee? (This is a popular case and one that has repeatedly turned up in
interviews.)
Nine out of ten students think this case is about competition. They focus their
answer on strategy and alternatives to dropping the fee. The first part of this
39
question is not relevant. The real question is “What are the economics of dropping
the $50 fee?”
In order to answer this question, you need to ask three questions:
• How many card members does Amex have?
• What is the average amount that each card member spends annually?
• What are Amex’s revenue streams?
Amex has 10 million card members. Amex card members average $2,000 a year in
purchases. Amex makes 2 percent from each purchase.
Amex Revenues: 10 million customers paying a $50 annual fee equals $500
million. Each member spends $2,000 x 2 percent = $40 a year x 10 million
customers = $400 million. Total revenues then = $900 million, with 55 percent of
that figure coming from fees.
Would card members spend more money if they didn’t have to pay the annual fee?
Amex card members would have to more than double their purchases to make up
for the loss in fee revenues. It seems unlikely that they would go from spending
$2,000 a year to spending $4,000 a year because of a dropped $50 fee. Even a
modest bump in new members couldn’t make up the difference.
How many new customers would Amex have to secure in order to make up the
$500 million difference? Amex would have to more than double its card members
from 10 million to about 25 million in a short period – say, two years. Is that
feasible? It took Amex 25 years to reach the 10 million customer base it currently
has. So doubling it in two years seems unrealistic.
My advice to Amex is to keep its fee in place.
That’s it. That’s the answer. The interviewer doesn’t want to hear about reducing
the fee to $25 or turning Amex into a credit card. This is a straightforward question.
Listen to the question.