Transcript PRICING STRATIGIES

PRICING STRATEGIES OF THE
AUTOMOBILE INDUSTRY
PRESENTED TO AEM 4160
EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX WOLOSHIN, HENRI WUILLOUD
Why Research The US Automobile
Industry?

Cars are used everyday, but they are a major purchase for the average
consumer.

Because of the size of the investment and the plethora of choices
available, it is important for consumers to consider the different factors
that go into the price of a vehicle.

It is interesting to see the effect a brand’s image has on a consumer’s
willingness to pay and the price of a vehicle.
Industry Structure
Manufacturing
Process
Distribution and
Sales Channels

Manufacturing process is labor and
capital intensive

Channels: private v. independent

US industry is heavily regulated

Sales of cars

Manufacturing

Emissions

Fuel economy standards

Safety
Herfindahl-Hirschman Index
Hyundai-Kia
8.7%
Honda 9.2%
Volkswagen
3.7%
Nissan 9.3%
Chrysler
11.5%
Mazda 2.4%
Subaru 2.3%
Toyota 14.1%
BMW 2.2%
MercedesBenz 1.9%
Ford 15.5%
HHI
1158
General
Motors 17.5%
Competitive Landscape
Market
concentration is
medium
Competition is
medium and
increasing
Barriers to entry are
high and steady
Globalization high
and increasing
Company/Brand Differentiation

Aside from price, companies differentiate their brands by:

Engine

Level of luxury

Design

Status

Independent company attributes
US Auto Industry- By the Numbers

Total US Car Sales 2010: 11.5 Million

Total US Car Sales 2011: 12.72 million leading
to total dealership revenue of 609 billion.
US AUTO SALES HAVE BEEN
STEADILY INCREASING SINCE THE
END OF THE RECESSION
18

Total US Car sales 2012: 14.5 million cars


13 percent growth from 2011
Projected US Car Sales 2013: Projected to be
15.5 million

Would return US car sales to pre-recession levels
CAR SALES (IN MILLIONS)
16
14
12
10
8
6
4
2
0
2010
2011
2012
2013 (Projected)
SOURCE:WSJ
Top Selling Automakers in United States
TOP 5 AUTOMAKERS IN US BY
MARKET SHARE
THE TOP 5 AUTOMAKERS IN US
COMPRISE 68% OF THE MARKET
Top 5
GM
18%
Other
32%
32%
Ford
16%
Honda
9%
Toyota
14%
GM
Ford
Other
Chrysler
Chrysler
11%
Toyota
Honda
68%
Other
General Motors



Largest automaker by vehicle sales in the
US

Sales: 2.6 Million cars

Revenue: $152.3 Billion (Global)
Extensive brand portfolio in US that
includes:

Buick

Cadillac

Chevrolet

GMC
One year stock price increase of 4.8%
CHEVROLET WAS RESPONSIBLE FOR
NEARLY 3/4 OF GM’S SALES IN 2012
Buick
Cadillac
16%
Chevrolet
7%
6%
71%
GMC
Ford



Second Largest automaker in US

Sales: 2.3 Million cars

Revenue: $134.3 Billion (Global)
US Brands:

Ford

Lincoln
FORD WAS RESPONSIBLE FOR OVER
95% OF COMPANY SALES IN 2012
Ford
Lincoln
4%
One year stock price increase of 8.5%
96%
Toyota



Company Numbers

Sales: 2.1 Million cars

Revenue: $225.85 Billion (Global)
US Brands

Toyota

Lexus

Scion
TOYOTA WAS RESPONSIBLE FOR
OVER 3/4 OF THE COMPANY'S SALES
Toyota
Lexus
Scion
3%
12%
One year stock price increase of 29.24%
85%
Chrysler



Company Numbers

Sales: 1.7 million cars

Revenue: $65.78 Billion (Global)
DODGE WAS RESPONSIBLE FOR 1/3
OF CHRYSLER'S SALES IN 2012
Chrysler
US Brands:

Chrysler

Dodge

Jeep

Ram
Privately held corporation
19%
29%
Dodge
Jeep
Ram
19%
33%
Honda

Company Numbers

Sales: 1.42 million cars

Revenue: $47.32 Billion (2011)
HONDA ACCOUNTS FOR NEARLY
90% OF THE COMPANY'S SALES
Honda
Acura
11%


US Brands

Honda

Acura
One year stock price increase of 2.82%
89%
Pricing Strategies

Industry Wide Agreements

Manufacturer/Brand Level: Specials

Manufacturer Level: Premium Pricing

Brand Level: Bundling of Add-Ons

Dealership Level: Competition Pricing

Used Car Pricing
Industry-Wide Norm: Types of
Agreements

Second Degree Price Discrimination – Versioning

There are different versions of agreements. Consumers can choose between buying
or leasing a car.
Buying a car is the more expensive option.
Leasing a car involves lower monthly payments.

Key Constraint: The cheaper option cannot be so attractive that consumers with a
higher WTP choose it.
Those who can afford to buy a car will benefit when purchasing the car because
they will build equity.
Manufacturer/Brand Level: Specials

Third Degree Price Discrimination – Prices/terms vary for different consumer segments.

Sometimes manufacturers offer specials to certain consumer segments.

Example: Special financing option for students or recent graduates (GM, BMW).

Students/recent graduates have a higher elasticity of demand, which means they
should be offered a more attractive financing plan if you want to make a sale.
Does making it easier for lower-income people to purchase a car hurt the brand
image?
Premium Pricing

Raw Data Analysis

Collected MSRP car prices by hand for Honda, Ford, Toyota, and Chevrolet

Compared a premium brand model and a base brand model for each
manufacturer

Used a similar sedan model for all eight car models as a control base


Honda Civic and Acura ILX

Ford Taurus and Lincoln MKS

Toyota Avalon and Lexus ES350

Chevrolet Impala and Cadillac XTS
Calculated the percent markup in order to equalize the price levels and get a
more clear picture of the premium pricing trends
Premium Pricing Results
An Automaker's Premium Brand Has a Higher
Price than its Base Brand
50000
45000
MSRP CAR PRCE ($)
40000
35000
30000
25000
20000
15000
10000
5000
0
Honda Civic and
Acura ILX
Ford Taurus and
Lincoln MKS
Toyota Avalon and
Lexus ES350
BRAND AND MODEL OF CAR
Base Brand
Premium Brand
Chevrolet Impala
and Cadillac XTS
Premium Pricing Results
Premium Markup Comparisons (%)
70
65
61
BASE TO PREMIUM MARKUP (%)
60
50
42
40
30
20
17
10
0
Honda Civic and
Acura ILX
Ford Taurus and
Lincoln MKS
Toyota Avalon and Chevrolet Impala and
Lexus ES350
Cadillac XTS
BRAND AND MODEL OF CAR
Survey Results
PEOPLE'S ASSUMPTION OF BIGGEST PRICE
DIFFERENCE (%)
Chevrolet and Cadillac Have the Largest
Difference in Perceived Brand Image
40
37
35
30
26
25
20
21
16
15
10
5
0
Honda Civic and
Acura ILX
Ford Taurus and
Lincoln MKS
Toyota Avalon and
Lexus ES350
BRAND AND MODEL OF CAR
Chevrolet Impala
and Cadillac XTS
Premium Markup Comparisons (%)
70
65
PEOPLE'S ASSUMPTION OF BIGGEST PRICE
DIFFERENCE (%)
BASE TO PREMIUM MARKUP (%)
61
60
50
42
40
30
20
Chevrolet and Cadillac Have the
Largest Difference in Perceived
Brand Image
17
10
0
Honda Civic and Ford Taurus and Toyota Avalon
Acura ILX
Lincoln MKS and Lexus ES350
BRAND AND MODEL OF CAR
Chevrolet
Impala and
Cadillac XTS
40
37
35
30
26
25
20
21
16
15
10
5
0
Honda Civic
and Acura ILX
Ford Taurus
and Lincoln
MKS
Toyota Avalon
and Lexus
ES350
BRAND AND MODEL OF CAR
Chevrolet
Impala and
Cadillac XTS
Bundling

Automakers offer several versions of the same car

Raw Data Analysis

Collected MSRP for all different versions of the Ford Taurus, Honda Civic, Toyota Avalon, Acura
ILX, and Lincoln MKS

Compared bundled prices to menu prices

Many options can be purchased separately from the bundle

Premium brands always have

Better Sound System

Better interior materials (leather…)

Better safety features (fog lights, back camera…)

Cool specs (heated front seats and moon roof)
Bundling Add-On Examples
Bundling Price Variance Among
Companies
CAR
MODEL
PRICE
DIFFERENCE
BETWEEN 1ST AND
2ND OPTION
PRICE
DIFFERENCE
BETWEEN 2ND AND
3RD OPTION
Ford Taurus
$2200
$4200
Toyota Avalon
$2205
$2305
Honda Civic
$2650
$1450
Acura ILX
$3310
$2200
Lincoln MKS
$2800
$4600
Is Bundling Worth It?
ADDITION
LX ($18,165)
EX ($20,815)
16-inch Alloy
Wheels
Option for $1634
Standard
5-Speed
Automatic
Transmission
Option for $1800
Standard
Moonroof, auto
climate control,
Better Audio
System
Not available
individually
Standard
 Value of additions: $1634 + 1800 + extra…= 3434 + extra
 3434 > difference between the two models ($2650)
Bundling Implications

Price of bundles are more elastic

Second Degree Price Discrimination is very important

Bundles are worth it
Competition Pricing Among
Dealerships

Maguire has a monopoly in Ithaca
No competition

Other cities have dealerships clustered together
Lots of competition
Dealership Advertising
IF AN AUTOMAKER ADVERTISES HEAVILY IN A
GEOGRAPHIC AREA THE COMPETITOR WILL
ADVERTISE AN EQUIVALENT AMOUNT
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
ATLANTA
LOS ANGELES
Audi
BMW
Dealership Advertising
These are ads from two dealerships (Toyota and Honda) that are both located
on Van Nuys Blvd. in Los Angeles, CA.
The most important factor in pricing a used
car is its depreciation in value.
Depreciation is a bad thing for new car
buyers and a good thing for used car
buyers.
Depreciation Example:
Let’s say you are purchasing a brand new Nissan 370z.
(Assuming 15,000 miles per year.)
Source: Edmunds.com - Infographic: How Fast Does My New Car Lose Value?
Depreciation

Driving off of the dealership’s lot causes an average 11%
decrease in value.

On average, a car will depreciate 15-25% each year for the
first five years.

The car will be worth 37% of its original value after those five
years.
Certified Pre-Owned Pricing

Disparities Across Geographic Locations


By looking at different pricing criteria in the certified pre-owned market
it is possible to see the differences in prices in different regions.
Criteria Used:

Four Models: BMW 328i, Scion tC, Ford Fusion, Honda Accord

Four Regions: Los Angeles, CA; Manhattan, NY; Ithaca, NY; Tallahassee, FL

Model years: 2010, 2011, 2012
Honda Accord Certified Pre-Owned
Pricing
Certified Pre-Owned Honda Accord Prices
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
2012
2011
Ithaca, NY (+150 Miles)
Los Angeles, CA (+30 Miles)
Manhattan, NY (+30 Miles)
Tallahassee, FL (+150 Miles)
2010
*Besides a small difference in price level, the Ford Fusion had a very similar chart.
BMW 328i Certified Pre-Owned Pricing
Certified Pre-Owned BMW 328i Prices
$45,000.00
$40,000.00
$35,000.00
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
2012
2011
Ithaca, NY (+150 Miles)
Los Angeles, CA (+30 Miles)
Manhattan, NY (+30 Miles)
Tallahassee, FL (+150 Miles)
2010
Scion tC Certified Pre-Owned Pricing
Certified Pre-Owned Scion tC Prices
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
2012
2011
Ithaca, NY (+150 Miles)
Los Angeles, CA (+30 Miles)
Manhattan, NY (+30 Miles)
Tallahassee, FL (N/A)
2010
Results and Other Observations

On average there is a slight increase in the price of certified pre-owned vehicles near
large metro areas.

The small difference in price could be for several reasons.


For example, some vehicles we looked at may have more features than others.
Larger cities had more luxury cars available (CPOs).
Lemons Problem

Prevalent in the used car industry since the birth of the automobile

In order to solve the problem automakers offer certified pre-owned vehicles


Gives customer confidence in the vehicle they are purchasing
Automaker goes through a rigorous certification process to ensure the quality of
the vehicle

Buyers pay a higher price for this luxury
•
Luxury Vehicles: $2,100 to $3,400 more than a typical used car
•
Non-Luxury Vehicles: $300 to $1,750 more than a typical used car
Recommendations for Consumers

Be informed!

Increase your bargaining power by showing that you know exactly what
your choices are and what you should be willing to pay for them.

Are the bundles worth it?

Are there any deals at the local dealerships?
Recommendations for Manufacturers

Get consumers when they are young and build their brand loyalty.

Differentiate yourself as much as possible.

Know what the perceived differences between your brands are and adjust
your mark-ups accordingly.
Recommendations for Dealerships

Be aware of competition.

Know the level of concentration in your geographic.

Cater to your local market. For example, offer a zero down-payment option
if you are located in a low-income area.

Become a household name in the area.