1. PRICING STRATEGIES OF THE AUTOMOBILE INDUSTRY
PRESENTED TO AEM 4160
Emily Kowalchik, Sofia Steinberger, Karen Thiara, Alex Woloshin, Henri Wuilloud

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 brand’s image has on a consumer’s willingness to pay and the price of a vehicle.

3. Distribution and Sales Channels
Manufacturing Process
Industry Structure
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
HHI 1158
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%

5. Competitive Landscape
Market concentration is medium
Competition is medium and increasing
Barriers to entry are high and steady
Globalization high and increasing
Concentration: top %, top %/ varies quickly Hyundai almost doubled 5.9 to 11.4 from
Compete on fuel economy, price, reliability…redesigns…
Globalization is find efficient model

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

13. Honda Company Numbers US Brands One year stock price increase of 2.82%
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

19. Premium Pricing Results
----- Meeting Notes (4/15/13 17:20) -----
Add names of cars and recreate the graph

20. Survey Results

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 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
Lincoln MKS
$2800
$4600

25. 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
Moonroof, auto climate control, Better Audio System
Not available individually
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. Dealership Advertising
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:
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?

33. 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.

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.