Before Christmas, we saw headlines from around the world as Tesla slashed prices to boost sales ahead of the year.
This led to the desired outcome for Tesla of coming close to its previously stated delivery target for the quarter, but also drew negative headlines from customers who recently bought at original price and from those in the auto dealership who now own Teslas had had to be written off in terms of value.
More recently, after transitioning to agency from Mercedes-Benz UK, they have also attracted negative comments as they have launched high profile promotions on specific models e.g. B. £3000 off an A Class.
That doesn’t appear to tally with the claim on their website, which details the agency’s benefits to ensure customers “can rest assured that they’re getting the best price, no matter where they’re buying.”
Discounts are obviously nothing new in the industry and current circumstances aside, customers have been trained for decades to negotiate a price when buying a car.
Under the traditional franchise model, rebates were delivered through a number of different levers, including rebates funded from dealer margin, additional rebates funded indirectly through specific manufacturer campaigns, incentives for obsolete stock, and support for soft financing and deposit contributions.
Manufacturers are also making tactical use of low-margin channels, including daily rentals, brokers, and pre-registrations. On average over the total sales volume, these differences can easily add up to 15% to 20% of the sales price, but applied selectively.
Whether a manufacturer is sticking with a franchise model, or especially when moving to an agency, pricing is clearly an important tool to influence demand and match it as closely as possible to supply.
This is basic economics, but how it is applied is fundamental to how a brand is perceived and consequently residual value is preserved.
When the perception is that the new car price is regularly and significantly discounted, residual values reflect this, which in turn affects the assumptions built into the lease payments and affordability of that product.
To shed light on this area, last week we held a webinar for members of the ICDP Research Program in which we examined the practices of other industries to see how they might be applied in the automotive industry.
Specifically, we’ve come back to the topic of dynamic pricing, something we first mentioned in reports over 20 years ago but have more recently suggested should be a cornerstone of any move to an agency.
Dynamic pricing is a tool that most of us know from experiences when buying airline tickets or booking hotel rooms.
Everyone understands that there is no one-size-fits-all price for a particular flight, nor for a night in a particular hotel – both of which change on a case-by-case basis depending on the supplier’s expectations of daily demand.
They continuously track the filling rate against an expectation of how it should develop in order to ideally achieve 100 percent occupancy of the seat or room by the actual daybreak.
From an automotive perspective, a series of flights or the capacity of a hotel over a period of time can be compared to a factory’s available production slots.
180 seats on each plane serving a given route four times a day during the year, or 500 available rooms per night in a hotel is comparable to a plan to assemble 2000 cars per day in the coming months.
In any case, capacity is limited, and from a business perspective, you want to maximize revenue, which is not just about taking advantage of every slot, but also optimizing the mix so that high-quality slots help balance those discounted in order were made to stimulate demand.
For airlines and hotels, this means price differentiation between early and late bookers, premium and economy customers, and free tickets from award programs. In the automotive industry we have to differentiate similarly.
If a customer is willing to order for delivery in a seasonally slow period, the price should be lower than for someone who wants delivery in a seasonal peak.
A customer interested in a car with some high-margin options may get a higher discount than a customer who wants the plain vanilla variant with a lower margin to hit a given price.
In monitoring order fill as we approach the sales month, the pricing policies applied must reflect actual order fill versus expectations so that the order fill rate can be either stimulated or curtailed in order to reach 100% by the end of the sales month.
However, if we take a closer look at the airline or hotel model, there is another level of sophistication where additional services are offered to a customer who has expressed interest or committed to a purchase, such as: full board or spa treatments at a hotel, or incentives to upgrade their purchase, e.g. B. Paying a discounted rate for a suite because the hotel operator knows that suite order fulfillment is falling short of the required rate.
After the customer has been secured, there may also be mechanisms in place to help build the brand and loyalty through complementary offers and reward systems. All this forms a fully dynamic pricing model that gets the maximum profit from the available capacity.
Even as the industry rushes towards widespread adoption of the agency model, one of the most fundamental building blocks for success seems to be going untapped. I know that in some cases manufacturers have explored this type of best practice, but I am concerned that in others there is a naïve belief that just by claiming that prices are fixed, customers will continue to feed in the numbers needed to optimize the supply chain leave whole.
Tesla was in an exceptional position when it was able to maintain stable visual prices over long periods of time, but they have now shown that that time has come to an end for them too.
Coming from a heritage of regular deep discounts, other manufacturers really need to be at stake in terms of dynamic pricing if they want to succeed with the agency.
Steve Young is the executive director of ICDP
