PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX...
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Transcript of PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX...
PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY
EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX WOLOSHIN, HENRI WUILLOUDPRESENTED TO AEM 4160
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
Distribution and Sales Channels
Manufacturing Process
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
HHI 115
8
Mercedes-Benz 1.9%
BMW 2.2%
Subaru 2.3%
Mazda 2.4%
Volkswagen 3.7%
Hyundai-Kia 8.7%
Honda 9.2%
Nissan 9.3%
Chrysler 11.5%
Toyota 14.1%
Ford 15.5%
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.
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 levels2010 2011 2012 2013 (Projected)
0
2
4
6
8
10
12
14
16
18
US AUTO SALES HAVE BEEN STEADILY INCREASING
SINCE THE END OF THE RE-CESSION
Source:WSJC
ar
Sale
s (
In M
illions)
Top Selling Automakers in United States
68%
32%
The top 5 automakers in us comprise 68% of the market
Top 5 OtherGM 18%
Ford 16%
Chrysler 12%Toyota
14%
Honda9%
Other32%
TOP 5 AUTOMAKERS IN US BY MARKET SHARE
GM Ford Chrysler Toyota Honda 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%
7%6%
71%
16%
CHEVROLET was responsible for nearly 3/4 of GM’s Sales in
2012
Buick Cadillac Chevrolet GMC
Ford
Second Largest automaker in US Sales: 2.3 Million cars
Revenue: $134.3 Billion (Global)
US Brands: Ford
Lincoln
One year stock price increase of 8.5%
96%
4%
Ford was responsible for over 95% of Company sales in 2012
Ford Lincoln
Toyota
Company Numbers Sales: 2.1 Million cars
Revenue: $225.85 Billion (Global)
US Brands Toyota
Lexus
Scion
One year stock price increase of 29.24%85%
12%4%
Toyota was responsible for over 3/4 of the company's
Sales
Toyota Lexus Scion
Chrysler
Company Numbers Sales: 1.7 million cars
Revenue: $65.78 Billion (Global)
US Brands: Chrysler
Dodge
Jeep
Ram
Privately held corporation
19%
33%29%
19%
Dodge was responsible for 1/3 of Chrysler's sales in 2012
Chrysler Dodge Jeep Ram
Honda
Company Numbers Sales: 1.42 million cars
Revenue: $47.32 Billion (2011)
US Brands Honda
Acura
One year stock price increase of 2.82%
89%
11%
Honda Accounts for nearly 90% of the company's sales
Honda Acura
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
Honda Civic and Acura ILX
Ford Taurus and Lincoln MKS
Toyota Avalon and Lexus ES350
Chevrolet Impala and Cadillac XTS
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
An Automaker's Premium Brand Has a Higher Price than its Base Brand
Base Brand Premium Brand
Brand and Model of Car
MSR
P Ca
r Prc
e ($
)
Premium Pricing Results
Honda Civic and Acura ILX
Ford Taurus and Lincoln MKS
Toyota Avalon and Lexus ES350
Chevrolet Impala and Cadillac XTS
0
10
20
30
40
50
60
70
42
61
17
65
Premium Markup Comparisons (%)
Brand and Model of Car
Base
to P
rem
ium
Mar
kup
(%)
Survey Results
Honda Civic and Acura ILX
Ford Taurus and Lincoln MKS
Toyota Avalon and Lexus ES350
Chevrolet Impala and Cadillac XTS
0
5
10
15
20
25
30
35
40
16
21
26
37
Chevrolet and Cadillac Have the Largest Difference in Perceived Brand Image
Brand and Model of Car
Peop
le's
Ass
umpti
on o
f Big
gest
Pri
ce D
iffer
ence
(%)
Honda Civic and Acu
ra ILX
Ford Tauru
s and Li
ncoln M
KS
Toyota Avalon and Lexus E
S350
Chevrolet Im
pala and Cadillac X
TS0
10203040506070
42
61
17
65
Premium Markup Comparisons (%)
Brand and Model of Car
Base
to P
rem
ium
Mar
kup
(%)
Honda Civic and Acu
ra ILX
Ford Tauru
s and Li
ncoln M
KS
Toyota Avalon and Lexus E
S350
Chevrolet Im
pala and Cadillac X
TS0
10
20
30
40
1621
26
37
Chevrolet and Cadillac Have the Largest Difference in Perceived
Brand Image
Brand and Model of CarPe
ople
's A
ssum
ption
of B
igge
st P
rice
Diff
eren
ce (%
)
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
ATLANTA LOS ANGELES -
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
IF AN AUTOMAKER ADVERTISES HEAVILY IN A GEOGRAPHIC AREA THE COMPETI-TOR WILL ADVERTISE AN EQUIVALENT
AMOUNT
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
*Besides a small difference in price level, the Ford Fusion had a very similar chart.
2012 2011 2010$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
Certified Pre-Owned Honda Accord Prices
Ithaca, NY (+150 Miles) Los Angeles, CA (+30 Miles)Manhattan, NY (+30 Miles) Tallahassee, FL (+150 Miles)
BMW 328i Certified Pre-Owned Pricing
2012 2011 2010$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
$35,000.00
$40,000.00
$45,000.00
Certified Pre-Owned BMW 328i Prices
Ithaca, NY (+150 Miles) Los Angeles, CA (+30 Miles)Manhattan, NY (+30 Miles) Tallahassee, FL (+150 Miles)
Scion tC Certified Pre-Owned Pricing
2012 2011 2010$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
Certified Pre-Owned Scion tC Prices
Ithaca, NY (+150 Miles) Los Angeles, CA (+30 Miles)Manhattan, NY (+30 Miles) Tallahassee, FL (N/A)
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.