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PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY

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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. - PowerPoint PPT Presentation

Text of PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY

PRICING STRATIGIES

PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRYEmily Kowalchik, Sofia Steinberger, Karen Thiara, Alex Woloshin, Henri WuilloudPRESENTED TO AEM 4160Why 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 brands image has on a consumers willingness to pay and the price of a vehicle.

Industry StructureManufacturing process is labor and capital intensiveChannels: private v. independent US industry is heavily regulatedSales of carsManufacturingEmissionsFuel economy standardsSafety

Herfindahl-Hirschman IndexCompetitive LandscapeConcentration: top 4 54.3%, top 8 80.4%/ varies quickly Hyundai almost doubled 5.9 to 11.4 from 2007-2012Compete on fuel economy, price, reliabilityredesignsGlobalization is find efficient model5Company/Brand Differentiation Aside from price, companies differentiate their brands by:EngineLevel of luxuryDesignStatusIndependent company attributes

US Auto Industry- By the NumbersTotal 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 millionWould return US car sales to pre-recession levelsTop Selling Automakers in United StatesGeneral Motors Largest automaker by vehicle sales in the USSales: 2.6 Million carsRevenue: $152.3 Billion (Global)Extensive brand portfolio in US that includes:BuickCadillac Chevrolet GMCOne year stock price increase of 4.8%

Ford Second Largest automaker in USSales: 2.3 Million carsRevenue: $134.3 Billion (Global)US Brands:FordLincoln

One year stock price increase of 8.5%

Toyota Company NumbersSales: 2.1 Million carsRevenue: $225.85 Billion (Global)

US BrandsToyotaLexusScion

One year stock price increase of 29.24%

Chrysler Company NumbersSales: 1.7 million carsRevenue: $65.78 Billion (Global)

US Brands:ChryslerDodge JeepRam

Privately held corporation

HondaCompany NumbersSales: 1.42 million carsRevenue: $47.32 Billion (2011)

US BrandsHondaAcura

One year stock price increase of 2.82%

Pricing StrategiesIndustry Wide AgreementsManufacturer/Brand Level: SpecialsManufacturer Level: Premium PricingBrand Level: Bundling of Add-OnsDealership Level: Competition PricingUsed Car PricingIndustry-Wide Norm: Types of AgreementsSecond 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: SpecialsThird 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 PricingRaw 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 baseHonda Civic and Acura ILXFord Taurus and Lincoln MKSToyota Avalon and Lexus ES350Chevrolet 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 trendsPremium Pricing ResultsPremium Pricing Results----- Meeting Notes (4/15/13 17:20) -----Add names of cars and recreate the graph 19Survey ResultsBundlingAutomakers offer several versions of the same car

Raw Data AnalysisCollected MSRP for all different versions of the Ford Taurus, Honda Civic, Toyota Avalon, Acura ILX, and Lincoln MKSCompared bundled prices to menu prices

Many options can be purchased separately from the bundle

Premium brands always haveBetter Sound SystemBetter 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 CompaniesCAR MODELPRICE DIFFERENCE BETWEEN 1ST AND 2ND OPTIONPRICE DIFFERENCE BETWEEN 2ND AND 3RD OPTIONFord Taurus$2200$4200Toyota Avalon$2205$2305Honda Civic$2650$1450Acura ILX$3310$2200Lincoln MKS$2800$4600Is Bundling Worth It?ADDITIONLX ($18,165)EX ($20,815)16-inch Alloy WheelsOption for $1634Standard5-Speed Automatic TransmissionOption for $1800StandardMoonroof, auto climate control, Better Audio SystemNot available individuallyStandard Value of additions: $1634 + 1800 + extra= 3434 + extra

3434 > difference between the two models ($2650) Bundling ImplicationsPrice 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 competitionOther cities have dealerships clustered together Lots of competition

Dealership AdvertisingDealership 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: Lets 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?

DepreciationDriving off of the dealerships 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 LocationsBy 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 AccordFour Regions: Los Angeles, CA; Manhattan, NY; Ithaca, NY; Tallahassee, FLModel 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. BMW 328i Certified Pre-Owned Pricing Scion tC Certified Pre-Owned PricingResults and Other ObservationsOn 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 ProblemPrevalent in the used car industry since the birth of the automobile

In order to solve the problem automakers offer certified pre-owned vehiclesGives customer confidence in the vehicle they are purchasing

Automaker goes through a rigorous certification process to ensure the quality of the vehicleBuyers pay a higher price for this luxuryLuxury Vehicles: $2,100 to $3,400 more than a typical used carNon-Luxury Vehicles: $300 to $1,750 more than a typical used car

Recommendations for ConsumersBe 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 ManufacturersGet 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 DealershipsBe 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.