Presentation on theme: "PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY"— Presentation transcript:
1PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY PRESENTED TO AEM 4160Emily Kowalchik, Sofia Steinberger, Karen Thiara, Alex Woloshin, Henri Wuilloud
2Why 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.
3Distribution and Sales Channels Manufacturing ProcessIndustry StructureManufacturing process is labor and capital intensiveChannels: private v. independentUS industry is heavily regulatedSales of carsManufacturingEmissionsFuel economy standardsSafety
5Competitive Landscape Market concentration is mediumCompetition is medium and increasingBarriers to entry are high and steadyGlobalization high and increasingConcentration: top %, top %/ varies quickly Hyundai almost doubled 5.9 to 11.4 fromCompete on fuel economy, price, reliability…redesigns…Globalization is find efficient model
6Company/Brand Differentiation Aside from price, companies differentiate their brands by:EngineLevel of luxuryDesignStatusIndependent company attributes
7US Auto Industry- By the Numbers Total US Car Sales 2010: 11.5 MillionTotal US Car Sales 2011: million leading to total dealership revenue of 609 billion.Total US Car sales 2012: 14.5 million cars13 percent growth from 2011Projected US Car Sales 2013: Projected to be millionWould return US car sales to pre-recession levels
9General Motors Largest automaker by vehicle sales in the US Sales: 2.6 Million carsRevenue: $152.3 Billion (Global)Extensive brand portfolio in US that includes:BuickCadillacChevroletGMCOne year stock price increase of 4.8%
10Ford Second Largest automaker in US US Brands: Sales: 2.3 Million carsRevenue: $134.3 Billion (Global)US Brands:FordLincolnOne year stock price increase of 8.5%
11Toyota Company Numbers US Brands Sales: 2.1 Million carsRevenue: $ Billion (Global)US BrandsToyotaLexusScionOne year stock price increase of 29.24%
12Chrysler Company Numbers US Brands: Privately held corporation Sales: 1.7 million carsRevenue: $65.78 Billion (Global)US Brands:ChryslerDodgeJeepRamPrivately held corporation
13Honda Company Numbers US Brands One year stock price increase of 2.82% Sales: 1.42 million carsRevenue: $47.32 Billion (2011)US BrandsHondaAcuraOne year stock price increase of 2.82%
14Pricing Strategies Industry Wide Agreements Manufacturer/Brand Level: SpecialsManufacturer Level: Premium PricingBrand Level: Bundling of Add-OnsDealership Level: Competition PricingUsed Car Pricing
15Industry-Wide Norm: Types of Agreements Second Degree Price Discrimination – VersioningThere 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.
16Manufacturer/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?
17Premium Pricing Raw Data Analysis Collected MSRP car prices by hand for Honda, Ford, Toyota, and ChevroletCompared a premium brand model and a base brand model for each manufacturerUsed 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 XTSCalculated the percent markup in order to equalize the price levels and get a more clear picture of the premium pricing trends
22Bundling Automakers 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 pricesMany options can be purchased separately from the bundlePremium brands always haveBetter Sound SystemBetter interior materials (leather…)Better safety features (fog lights, back camera…)Cool specs (heated front seats and moon roof)
24Bundling Price Variance Among Companies CARMODELPRICE DIFFERENCE BETWEEN 1ST AND 2ND OPTIONPRICE DIFFERENCE BETWEEN 2ND AND 3RD OPTIONFord Taurus$2200$4200Toyota Avalon$2205$2305Honda Civic$2650$1450Acura ILX$3310Lincoln MKS$2800$4600
25Is Bundling Worth It? ADDITION LX ($18,165) EX ($20,815) 16-inch Alloy WheelsOption for $1634Standard5-Speed Automatic TransmissionOption for $1800Moonroof, auto climate control, Better Audio SystemNot available individuallyValue of additions: $ extra…= extra3434 > difference between the two models ($2650)
26Bundling Implications Price of bundles are more elasticSecond Degree Price Discrimination is very importantBundles are worth it
27Competition Pricing Among Dealerships Maguire has a monopoly in Ithaca No competitionOther cities have dealerships clustered together Lots of competition
33DepreciationDriving 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.
34Certified 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
35Honda Accord Certified Pre-Owned Pricing *Besides a small difference in price level, the Ford Fusion had a very similar chart.
38Results 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).
39Lemons ProblemPrevalent in the used car industry since the birth of the automobileIn order to solve the problem automakers offer certified pre-owned vehiclesGives customer confidence in the vehicle they are purchasingAutomaker 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
40Recommendations 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?
41Recommendations 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.
42Recommendations 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.