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

8Mercedes-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:WSJCa

r Sa

les

(In

Mill

ions

)

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

2012Buick 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

Assu

mpti

on o

f Big

gest

Pric

e Di

ffere

nce

(%)

Honda Civic

and Acu

ra ILX

Ford Ta

urus and Lin

coln M

KS

Toyota Avalon and Le

xus E

S350

Chevrolet Im

pala and Cadilla

c XTS

010203040506070

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 Ta

urus and Lin

coln M

KS

Toyota Avalo

n and Lexu

s ES350

Chevrolet Im

pala and Cadilla

c XTS

0

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 As

sum

ption

of B

igge

st P

rice

Diffe

renc

e (%

)

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 $4200Toyota Avalon $2205 $2305Honda Civic $2650 $1450Acura 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.