Charles Schwab Corporation

SUBJECT ISM II TERM III Prof. Sanjog Ray January 20, 2014 Submitted by, Group 13 Section D VIKRANT KATKE (2013PGP183) DEEPTI KAUSHAL (2013PGP121) SHNEHA (2013PGP379) NILANJAN MOHAN (2013PGP253) SHRINIVAS BHAKER (2013PGP098) SOUMEN MUKHERKEE (2013PGP398)

Problem statement

e.Schwab service curtailed the level of services to customers, for example, they were allowed only one free call per month. Schwabs employees could not service e.Schwab customer due to unavailability of account information Schwabs existing brand name was causing a confusion with e.Schwab amongst customers

Alternatives for Pottruck

Status Quo-Do nothing Heavy traders, who contributed to 80% of the revenues, migrating to deep discount online brokers From 92 to 97 Schwab was able to maintain its margins but this had been possible because of decreasing expenses on account of IT i.e. revenues per $100 of customer asset were actually decreasing Go ahead with uniform pricing $19.95- Not viable because This price would lead to a price war with the low price discount traders Existing cost structures did not allow for room for such a steep price cut since the range of services commanded at least a $10 and $20 premium on the price for mid sized firms and on the bare bone providers $39.95- Not viable because CSC already set a discount precedence by lowering the commission for e.Schwab from $39.95 to $29.95.This limited their scope to return to the original price Price elasticity was less at this price which meant limited opportunities to take on new customers $29.95-Viable option (Explained in next slide)

Go ahead with uniform pricing of $29.95

Advantages Existing price point which is acceptable to customers of all categories The prices were already facing downward pressure in the market so it made sense to introduce it at the existing low price More price elasticity giving them more scope of adding new customers and retaining the heavy traders by giving them low prices and quality service Offering the full range of services at this price point would mean a huge increase in the number of accounts and trades CSC is known as an innovative technology company and it has the capacity to leverage its IT capabilities for an expanded Internet offering Being a first mover in this field CSC can retain its edge over other competitors Disadvantages The revenue impact of taking up this price point is a $125 million hit in revenues and $100 million hit in profits due to cannibalization of its offline and full-service online business The reduced price would rapidly become an industry standard and it would be impossible to raise the prices The hit to the earnings would lead to a decrease in the marketing and advertising expenditure in such a highly contested category leading to resource constraint The Wall Street could react negatively to the earnings hit and stock price could crash Conclusion Strategy alignment- CSC founding principle was that customers shouldnt have to chose between services and cost. Hence it made sense to offer its full range of services at low price Despite the earnings hit in the short run, there is stupendous opportunity for increase in no. of accounts due to higher market sensitivity at this price point for the kind and range of services that Schwab was offering The lost revenues could be recouped via higher transaction volume

IT Implementation considerations

Uniform pricing for a standard online product should be adopted but after certain considerations

Due to its legacy commission charging system, there was no flexibility to charge multiple commission rates across businesses. Until this system was upgraded, the projected earnings shortfall from the new system could not be offset CSC should speed up its process of upgrading the system and only then should uniform pricing be adopted to offset the earnings hit by adjusting commission rates in other businesses The uniform pricing strategy will lead to an immense increase in no. of accounts which will require an increase in IT infrastructure and capabilities. Upgrading the system before such expansion is necessary to avoid

Merrill Lynch the late entrant in the online trading services market? Did they do the right thing?

As a financial services company, Merrill Lynch had a specific business strategy, catering to a different niche customer segment that had mature customers with high net worth who wanted better advisory and allied financial services. Hence, the target audience for online trading business was not the same as the bulk of customers being catered by Merrill Lynch The firm earns high customer loyalty by providing more personalized consulting and financial advisory services Profit margins are low in online service and given its high cost structure, online trading did not seem lucrative Online system/business could cannibalize existing businesses In the 1997-98s, the online trading medium was new and still developing. So, the target customer base was quite small compared to their existing base Given the brand equity and market position enjoyed by Merrill Lynch, there was no immediate need for it to venture into the online trading business. In such a scenario. It made more sense to wait out and prudently weigh all options