Consumers’ Willingness to Pay for Innovative Technology: Hybrid Vehicles

Evolution of the Vehicle

• Late 19th and early 20th century – Steam, electricity, and gasoline

• Problems?– Vibration and Friction– Weight – Power/Fuel/Distance

• Internal Combustion Engine emerged (early 1900s)

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Evolution of the Vehicle• Late 20th and early 21st century – Traditional gasoline engine receives criticism • Global warming• Fear of limited oil supply • Rising gasoline prices • Inefficiency

• Introduction of the hybrid – Combination of gas/electric engine– In late 2000 – Toyota releases the Prius (first mover)

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How Do Hybrid Cars Works?

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Evolution of the Vehicle

• Expansion of product assortment and growth

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Objectives of Analysis

• Consumers’ willingness to pay for:– New technologies – Vehicles -> Demographics

• Exploration through scenario analysis

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Innovation Adaption and the Hybrid

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Kotler (2008)

Innovation Adaption Diffusion Model

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(Rogers, 1962)

Conclusions from Kotler and Rogers

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Demographic Correlation Studies

• Economic Logit models– Whether or not to upgrade • Multinomial Logit and Nested Logit• Mixed Logits integrating combined and stated

preferences

• Demographic Correlation – “What kind of Person chooses a vehicle type”

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Putting the Theories Together

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Different Demographics

Environmental concern

Fuel Prices

Government incentives

Three Factors that Affect Consumers

• Government incentives– Government Tax Credit up to $3,500– Access to High-Occupancy Vehicle (HOV) lanes– Discount on insurance premiums

• Environmental Issues– More environmentally friendly than conventional counterpart– Emits less greenhouse gases and consumes less gas

• Cost-savings– High fuel efficiency cuts fuel costs– Due to the high premium, it takes years to recover the premium

in fuel cost savings

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Consumer Segments

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Early Bloomer• Government incentives are important– Purchase price is a significant factor in a lower income

bracket• Although they are environmentally conscious, they are

not willing to pay a high premium to drive a hybrid• Fuel Efficiency and Cost-Savings are important– Research finding showed that income has non-linear effect – High interest in hybrids to save fuel costs– However, due to a high premium the cost-saving is not

significant

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Consumer segments

Wealthy Elite• Government incentives are not as vital

– Purchasing price becomes less important– High disposable income

• Non-financial incentives may be more important– Access to HOV lanes can be a strong factor

• Environmentally conscious– More educated consumers are more environmentally conscious– Ownership of a hybrid goes beyond means of transportation, it’s

making a social statement• Long-term cost savings will less likely matter

– Only saves cost if driven for a long period of time

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Consumer segments

American Dream

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• Government Incentives – Lower disposable income– High-occupancy Vehicle Lane

• Environmental concern– Future for children

• Fuel cost – May be seen as an short term incentive for

saving

Consumer Segment Results

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Summary

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• Forecasts of hybrid electric vehicle sales is expected to increase worldwide in the future

• Adaption of such an innovation will occur as time passes since this technology will gain acceptance from the consumer

• Consumers’ willingness to purchase depends on their degree of importance on environmental concern, long-term cost savings, and government incentives

• The consumer segment is expected to shift as time passes

Discussion Questions

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1. What would you suggest to the government, in terms of offering incentives, to increase the demand for hybrid vehicles among the Early Bloomer consumer segment?

Early Bloomer:18-24 years old – single – high school education – income of less than $20,000

Discussion Questions

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2. What do you think the future is for pick up trucks and SUVs? Will car manufacturers be pressured to only create models that are environmentally friendly?