What Alternatives Did David Pottruck Have Just Before January 15, 1998? as David Pottruck, Would You Cut Prices on January 15, 1998?

What alternatives did David Pottruck have just before January 15, 1998? As David Pottruck, would you cut prices on January 15, 1998?

David Pottruck had become increasingly uncomfortable with the distinction in service that was created by eSchwab product, and wanted to do away with the distinction between eSchwab and regular Schwab customers, and offer all customers low priced internet trading with full complement of Schwab's customer service options (e.g. branches, telephone, online). Apart from not going for the internet trading option, Pottruck had the following 3 alternatives –

1. $19.95 – internet trading with full service. His main competitors in this price range would have been DLJdirect and E*Trade. But because of their superior customer service and product offerings, Schwab did not want to enter a price war with the bare-bone players offering the services at $8.
2. $29.95 – internet trading with full service. However, this approach might have cost the firm dearly. Their internal estimations projected a hit of $125 million in revenue. This would have meant less money to invest in marketing and advertising to build their brand to compete with their competitors.
3. $39.95 – start with this price initially and then reduce to $29.95, because $39.95 offered less price elasticity.

As David Pottruck, I would have recommended the price cut to offer internet trading at $29.95. Because of Schwab’s performance in the last 3 years, there was no financial pressure on them to take aggressive action in the internet trading market.

• No. of internet users worldwide has been continuously growing (14 million in 1995 to 69 million in 1997).
• Revenues were projected to be 2.3 billion, and projected net income was 270 million by end of 1997.
• Customer’s interest in comfort of “self directed” investment has been continuously growing.
• Customer accounts were projected to reach 4.8 million, up 20% from 1996.
• Customer response to Schwab’s internet trading capability was strong – in one year period prior to Dec 1997, Schwab’s online account had grown by 94%
• Schwab has been a pioneer in use of technology by launching many products that used latest available technologies (e.g. Telebroker, Voicebroker, Streetsmart etc.). They often felt pride in describing themselves as a technology company that happened to be in the financial services sector.

What were the key IT issues in front of Dawn Lepore?

From a technical standpoint, Schwab believed that it had the system capacity to handle the projected increase in online trading if it were to offer $29.95 internet trading to all of it’s customers. Even with the growth of it’s online business, Schwab’s system availability had remained constant at 99.2% over the past 2 years. However, the key IT issues that were in front of Dawn Lepore are –

• Schwab’s commission charging system was due for upgrade.
• Though this has met the company’s needs for over 20 years, but by 1997 Schwab’s needs for additional pricing flexibility had outstripped the system capabilities.
• Commission charging system’s main drawback was that it could handle only one type of pricing structure, and there were a limited number of pricing schedules it could handle within that structure.
• Though the company had developed a workaround, but it was growingly becoming difficult to stretch the system further.
• The company had started the upgrade process, but It was still several months away from completion.
• Their Windows based product was well received, but the customer service representatives had to spend a lot of time on helping the customers with their issues related to Windows operating system.
• Schwab was growing so fast, that they had to rely on hiring experienced staff from financial services firms rather than hiring fresh recruits and training them.

What is your opinion on their being a late entrant in the online trading services market? Did they do the right thing?

Overall, Schwab’s performance has been very good compared to their competitors –

• Revenues were projected to be 2.3 billion, and projected net income was 270 million by end of 1997.
• Customer accounts were projected to reach 4.8 million, up by 20% from 1996.
• Customer response to Schwab’s internet trading capability was strong – in one year period prior to Dec 1997, Schwab’s online account had grown by 94%.

Hence, in spite of them always being an innovator when it came to technology, I would consider them a late entrant in embracing the ever-growing market of online trading services. Because of this late entry they could not gain the advantage of setting the price standard while it was still growing.

However, they did the right thing by deciding to consider this option, as –