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Just before Christmas we see headlines from around the world as Tesla cuts prices dramatically to stimulate sales before the end of the year.
This achieved Tesla’s desired outcome of getting close to its previously stated delivery target for the quarter, but also attracted negative headlines from customers who had recently purchased at original price and from those in the motor trade who had used Tesla in inventory that should now be written down. value.
Recently, following the transition to agency by Mercedes-Benz UK, they have also attracted negative comments as they have launched high profile promotions on certain models such as £3000 off the A class.
This seems inconsistent with the claims on their website of explaining the agency’s benefits as a guarantee that customers “can rest easy knowing you are getting the best price, wherever you buy”.
Discounts are definitely nothing new to the industry and despite the current state of affairs, customers have been trained for decades that they have to negotiate the price when you buy a car.
Under the traditional franchise model, discounts have been provided using a variety of different levers including discounts funded from dealer margins, additional discounts funded indirectly through specific manufacturer campaigns and overage stock incentives and support for low interest financing and deposit contributions. .
Manufacturers also use tactically low margin channels including day rentals, brokerage, and pre-registration. As an average of the total sales volume, these variations can easily add up to 15% to 20% of the retail price, but are applied selectively.
Regardless of whether a manufacturer stays with the franchise model or especially if they move to an agency, then pricing is clearly an important tool for influencing demand and allowing this to be as balanced as possible with supply.
This is basic economics, but how it is implemented is fundamental to how a brand is perceived and consequently residual value is maintained.
If there is a perception that new cars are regularly and heavily discounted, then the salvage value will reflect this in turn influencing the assumptions built into the rental payments and affordability of the product.
In an effort to shed some light on this area, we hosted a webinar last week for members of the ICDP Research Program where we looked at the practices of other industry sectors to determine how they apply in automotive.
In particular we’re returning to the topic of dynamic pricing, something we first highlighted in a report over 20 years ago but recently suggested should be the cornerstone for switching to agency.
Dynamic pricing is a tool most of us will be familiar with from the experience of buying airline tickets or booking hotel rooms.
Everyone understands that there is no single price for a specific flight, or for a night at a specific hotel – both change on a case by case basis depending on the provider’s expectations for demand on the day.
They continually track fill levels against expectations of how they should progress to achieve 100% ideal use of a seat or room by the time the day actually arrives.
From an automotive perspective, the series of flights or the capacity of a hotel over a period of time can be compared to the production slots available at a factory.
Having 180 seats on each aircraft operating certain routes four times a day year-round, or 500 rooms available each night in a hotel is comparable to plans to assemble 2,000 cars per day over the coming months.
In each case there is limited capacity, and from a business perspective you want to maximize revenue, which is not just about using each slot but also about optimizing the mix so that the high value slots help balance those that have been discounted sequentially. to stimulate demand.
For airlines and hotels, that amounts to differentiating the price between early and late bookers, premium and economy customers, and free tickets available from rewards programs. In automotive we need to differentiate in the same way.
If a customer is prepared to order delivery in a seasonally slow period then the price must be lower than someone who wants delivery during a seasonal peak.
A customer interested in a car with several high-margin options may get a higher discount than a customer who wants a lower-margin plain vanilla variant to meet the price point.
In monitoring order filling as the sales month approaches, the pricing policy applied needs to reflect actual order fulfillment against anticipated expectations so that fill rates can be stimulated or capped to reach 100% by the end of the sales month.
However if we look deeper into the airline or hotel model then there is another level of refinement where customers who have expressed interest or committed to purchase will then be offered additional services, for example full board or spa treatments at the hotel, or given incentives to increase their purchase such as pay a discounted rate for a suite because the hotel operator knows that filling orders for suites is behind their required rate.
After securing customers, there may also be mechanisms to help build brand and loyalty through complementary offers and reward schemes. All of this forms a fully dynamic pricing model that will yield the maximum benefit from available capacity.
Even as the industry rushes to widely adopt the agency model, it seems that one of the most fundamental building blocks for success is not being leveraged. I know that in some cases manufacturers have investigated this kind of best practice, but I fear that in others there is a naive belief that just by saying a fixed price, customers will continue to flow the required amount to optimize the supply chain as a whole.
Tesla was in a great position when it was able to maintain a stable visual price over a long period of time, but they have now shown that that period is over, even for them.
Other manufacturers come from a legacy of regular deep discounters and really have to come into play when it comes to dynamic pricing if they are to have any chance of success with agencies.
Steve Young is managing director of ICDP
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