Those things which are too good to be true rarely last.
This week officials from Chase confirmed that the bank would reduce the Chase Sapphire Reserve’s legendary 100,000-point sign-up bonus to 50,000 points, putting it at the same level, points-wise, as the Chase Sapphire Preferred.
The reduction will affect all applications received online on Jan. 12 and after. Chase brick-and-mortar locations will offer the 100K bonus until March 11.
The History of the Sapphire Reserve
When the CSR, as it’s known, launched this past August, it was a true unicorn in the credit card world. It stormed onto the travel rewards scene with an unheard of 100,000-point sign-up bonus, $300 yearly travel credit, reimbursement of application fees for the Global Entry program and a 50% bonus on points traded for travel through the Chase Ultimate Rewards program.
There was no question that the card was the champion of travel rewards cards, comfortably striding past the American Express Platinum and Citi Prestige like Usain Bolt in the last 50 meters of a gold-medal sprint.
A Quick Background on the Chase Points System
As we said earlier, the 100K sign-up bonus with the Sapphire Reserve was an unbelievable deal. The New York Times called it a “very rare” occurrence in the history of credit cards. Estimates as to how much those points were worth ranged from $1,500 to $2,100, depending on how you used them.
If you aren’t familiar with Chase’s credit card points, they’re deposited in the Chase Ultimate Rewards (CUR) program, through which you can buy travel with your points or transfer them, 1:1, to travel partners like Hyatt’s Gold Passport, United’s MileagePlus and Southwest’s Rapid Rewards customer loyalty programs.
On top of that, travelers got the other travel benefits we mentioned, all of which, if you spent them on one trip, could total out to more than $2,500 in rewards.
December Numbers Say Chase Paid the Price for the Bonus Bonanza
The disparity between benefits and annual fees, however, cost Chase $200-$300 million in Q4 2016.
And lest you think that figure is just a fabricated corporate pity stat, Bloomberg reported in December that financial analysts predict JPMorgan Chase & Co’s investment in the Sapphire Reserve won’t pay off for 5 ½ years. That’s right; Chase will have to hold out almost six years to make a profit.
“I do think ($200-$300 million) is a good number, if not a conservative one,” said Ben Woolsey, founder of CreditCardForum.com. “That number represents the cost of the upfront reward bonus of 100,000 Ultimate Rewards points along with the $300 annual travel credit, which could potentially represent $1,800 per account in year one. These points don’t have a hard cost until they are redeemed, but that cost has to be recognized for accounting reasons since it represents a liability for the company.”
The Chase Sapphire Reserve Was Too Popular for its Own Good
Exactly why the Sapphire Reserve went viral is a curious question. It’s rewards were phenomenal, vaulting it to the top of the travel rewards world. And it certainly became a status symbol among Millennials, so much so that it led Inc. to headline an article, “Why Millennials Are Freaking Out Over a Credit Card With a $450 Annual Fee”.
“Just a little understanding of the Millennial mindset gives insight into why the credit card blew up on the internet (with one thread discussing the card on Reddit attracting 10,000 comments),” reporter Justin Bariso wrote. “So many Millennials love to travel. And they love finding bargains even more.”
Perhaps it was this unpredictable swell of support that burst the dams of Chase’s expectations for the CSR. Bariso went on to write that Chase received tens of thousands of applications the first few days the card was available. So great was the demand for the card that Chase ran out of the metal used to manufacture the Sapphire Reserve.
When you add in the fact that Chase’s advertising budget for the Reserve was practically non-existent, the unicorn aspect of this card becomes even more legendary, Ben Woolsey told us.
“By all indications, Chase grossly underestimated consumer response to this new card, especially given the lack of any advertising expenditure,” Ben said. “It was the viral nature of certain popular travel bloggers that created the buzz among reward seeking consumers that caused the demand to exceed expectations by over 500%.”
Did Travel Rewards Websites Lead to the Rise and Demise of the 100K Bonus?
As Ben pointed out, Chase allegedly spent no money marketing the card. All the hype was purely viral, most likely fostered by affiliate-driven rewards sites like The Points Guy.
While Chase may not have spent any money on advertising, one could count affiliate payouts as part of an advertising budget. “Affiliate marketing” is a concept where popular websites and influencers include sign-up links for products – in this case, credit cards – in their posts about the product, and when a consumer actually signs up with that link, the website or influencer gets paid a certain amount.
So, while Chase may not have had a traditional advertising budget for the Sapphire Reserve, it’s obvious they leveraged sites like The Points Guy to get the word out for a lot less than what they’d spend on a traditional advertising campaign. Ironically, that very strategy is what created the hype they, didn’t expect and could not sustain.
This is speculative, of course, as we don’t have any data on how much these travel rewards sites were paid per sign-up, but the relationship between Chase and these sites has long been evident, even more so when the bank chose to break the news of the points reduction through an exclusive interview with The Points Guy and not a news outlet.
Conventional thinking says that Chase will recoup their projected losses through annual fees, interest payments and consumers who don’t use the full suite of travel benefits. Unfortunately, Ben said, the type of people who signed up for the CSR aren’t interested in missing out on free cash.
“I think the people that signed up for the card are the fairly hard-core reward seeking, frequent traveling urban professional crowd,” Ben said. “These are not people that carry balances or forgo potential rewards, especially given the high annual fee for CSR, so there’s probably not much hope of Chase recouping their costs from lax cardholders.”
Why Did Chase Take the Risk in the First Place?
We’ve been talking about why Chase decided to halve the Sapphire Reserve’s sign-up bonus, but an important question is why they offered the massive 100,000 bonus in the first place.
The credit-card market is a fierce one. Just take a look at your junk mail over the past two weeks – you’ve probably got at least four or five offers for sign-up bonuses from various card issuers.
Credit card companies have to offer rewards to get ahead, and, Ben Woolsey said, Chase felt like the Sapphire Reserve was their chance to hijack the luxury card market from American Express.
“I honestly believe Chase made this product too good to be true in an effort to steal market share from the American Express Platinum Card,” Ben said, “and I doubt they will keep the reward structure in place long term.”
Is the Card Still Worth It Even With Reduced Bonuses and Benefits?
The big question for those who’ve yet to sign up for the Chase Sapphire Reserve is whether or not the card is still worth the high annual fee. It’s a good question, because you’re getting the same amount of sign-up points (50K) as you would with the Sapphire Preferred. The only difference is the Preferred’s annual fee is $75, not $450.
Roman Shteyn, co-founder and CEO of credit-card rewards site RewardExpert, says the card still holds tremendous value, so much so that the points reduction doesn’t affect the Sapphire Reserve’s standing as the best travel rewards card on the market.
“In terms of sign-up bonuses and getting the most benefits for your 2017 travel,” Roman said, “the Sapphire Reserve provides a huge advantage for someone who is willing to pay $450 for a $300 travel credit and a $1,500 travel spend.”
Some consumers who signed up for the card to get the 100K points will most likely switch to another card when it comes time to pay the $450 annual fee again, Roman said. The main reason behind the predicted drop-off? Once the points run out, the card doesn’t have enough benefits to justify the $450 annual fee.
Travel experts will laugh at that last statement, but it’s true: The average American isn’t a travel expert. They aren’t hacking credit cards to rack up miles and points for travel. They make about $55,000 a year per household and spend, according to financial site Value Penguin, about $1,100 on travel, some of which is spent on gas and food, two expenses that wouldn’t qualify as travel purchases, according to the Sapphire Reserve’s fine print.
However, the tough part here is knowing what kind of consumer signed up for the card. We think, if anything, there’s an equal split between those who wanted the up-front bonus and those who wanted the long-term benefits.
Based on the experts with whom we spoke, CSR customers fall in one of three categories:
- The average American householder who wanted the sign-up bonus
- The Millennial who wanted the free points and the status symbol
- The luxury traveler who plans to take full advantage of the card
We’d say that the first group will deem this card “not worth it” when it comes time to pay their annual fee.
The second group is a toss-up, as Millennials are a hard group to pin down. Roman says he fully expects most of his friends to downgrade their Sapphire Reserve to a Sapphire Preferred.
The third group will most likely stick with the Sapphire Reserve, as they have the funds and lifestyle to cash in on all the travel bonuses.
What Can Banks and Consumers Learn From the Sapphire Reserve?
The fallout from the Sapphire Reserve saga is a very interesting one. Roman said his main concern is that competing cards won’t feel the need to sweeten their benefits now that CSR has come back to earth.
We think that is a legitimate concern considering, as Roman pointed out to us, the American Express Platinum increased their sign-up bonus from 40,000 points to 50,000 points after the Sapphire Reserve came out, something he said was pretty much unprecedented.
But what about the big picture? What did banks learn from this and how will it affect future credit card offers?
Ben Woolsey said he thinks card issuers have learned the power of social/viral marketing and will move forward one of two ways.
“Card issuers … will probably limit the number of available accounts or time window of application if ever launching such a lucrative new product in the future,” Ben said. “Or, they will simply choose to not approach the apparently magical bonus amount of 100,000 points or miles so lightly, as it seems to be a tipping point in terms of stoking consumer excitement and demand.”
This is disappointing for the consumer, particularly because we don’t often see offers from credit card companies that even come close to what the Sapphire Reserve gave us. The positive to this, though, is we are now aware that unicorn deals won’t last for long.
“Consumers can learn to watch for such offers and not expect them to be available for the long-term,” Ben said, “as they are expensive for the issuers.”
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