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PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX WOLOSHIN, HENRI WUILLOUD PRESENTED TO AEM 4160.

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Presentation on theme: "PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX WOLOSHIN, HENRI WUILLOUD PRESENTED TO AEM 4160."— Presentation transcript:

1 PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY EMILY KOWALCHIK, SOFIA STEINBERGER, KAREN THIARA, ALEX WOLOSHIN, HENRI WUILLOUD PRESENTED TO AEM 4160

2 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 brands image has on a consumers willingness to pay and the price of a vehicle.

3 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

4 Herfindahl-Hirschman Index

5 Competitive Landscape Market concentration is medium Competition is medium and increasing Barriers to entry are high and steady Globalization high and increasing

6 Company/Brand Differentiation Aside from price, companies differentiate their brands by: Engine Level of luxury Design Status Independent company attributes

7 US Auto Industry- By the Numbers Total US Car Sales 2010: 11.5 Million Total US Car Sales 2011: 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 levels

8 Top Selling Automakers in United States

9 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%

10 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%

11 Toyota Company Numbers Sales: 2.1 Million cars Revenue: $ Billion (Global) US Brands Toyota Lexus Scion One year stock price increase of 29.24%

12 Chrysler Company Numbers Sales: 1.7 million cars Revenue: $65.78 Billion (Global) US Brands : Chrysler Dodge Jeep Ram Privately held corporation

13 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%

14 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

15 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.

16 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?

17 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

18 Premium Pricing Results

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20 Survey Results

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22 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)

23 Bundling Add-On Examples

24 Bundling Price Variance Among Companies CAR MODEL PRICE DIFFERENCE BETWEEN 1 ST AND 2 ND OPTION PRICE DIFFERENCE BETWEEN 2 ND AND 3 RD OPTION Ford Taurus$2200$4200 Toyota Avalon$2205$2305 Honda Civic$2650$1450 Acura ILX$3310$2200 Lincoln MKS$2800$4600

25 Is Bundling Worth It? ADDITIONLX ($18,165)EX ($20,815) 16-inch Alloy Wheels Option for $1634Standard 5-Speed Automatic Transmission Option for $1800Standard Moonroof, auto climate control, Better Audio System Not available individually Standard Value of additions: $ extra…= extra 3434 > difference between the two models ($2650)

26 Bundling Implications Price of bundles are more elastic Second Degree Price Discrimination is very important Bundles are worth it

27 Competition Pricing Among Dealerships Maguire has a monopoly in Ithaca No competition Other cities have dealerships clustered together Lots of competition

28 Dealership Advertising

29 These are ads from two dealerships (Toyota and Honda) that are both located on Van Nuys Blvd. in Los Angeles, CA.

30 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.

31 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?

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33 Depreciation Driving 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.

34 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

35 Honda Accord Certified Pre-Owned Pricing *Besides a small difference in price level, the Ford Fusion had a very similar chart.

36 BMW 328i Certified Pre-Owned Pricing

37 Scion tC Certified Pre-Owned Pricing

38 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).

39 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

40 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?

41 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.

42 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.


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