People often ask why the automotive industry is doing so well in the UK, even in the adversity of economic crisis. While the retail sector generally remains flat, car sales have gone up double digits in 2012 and 2013.
This cannot all be pent-up demand or the consumer’s burning desire for a new set of wheels. In fact, I believe it’s down to the clever way car companies price their products and arrange finance for their customers.
Read the article
of sales through manufacturer financing (versus 45% five years ago)
Following the financial crisis, automotive firms identified bank finance and consumer credit as their biggest obstacles to sales. This was due to stricter loan availability criteria and the rising cost of credit.
Their solution was to eliminate the middle man, the bank. As a result, sales of cars through manufacturer finance arrangement or personal car plan have soared. From 45 percent of sales seven years ago these arrangements have increased to 75 percent.
This shift has also changed consumer buying behaviours. In the past, some people bought new cars and kept them for 3-4 years before selling them through AutoTrader magazine or a local dealership. Most kept them for longer.
Today, after three years on a pay monthly car plan, the consumer gets a call from the manufacturer’s finance team. They’ll be offered a shiny new car and plan at a similar monthly rate, or a large balloon payment to take ownership of the car.
This boosts brand loyalty and keeps the consumer locked in. The monthly rate allows car manufacturers to sell more optional extras and grow margins. After all, £19 per month for in-car satellite navigation sounds much better than adding £700 to the sticker price.
Car prices don’t vary massively over time. A ford focus as a percentage of annual household income per capita has been constant for a long time.
By and large, auto pricing strategies are market-based. Companies assess how their product lines up against their competitors and price accordingly. Ten years ago, Hyundai and Kia priced their vehicles at a significant discount to the likes of Ford and Vauxhall. As their brand and products become competitive and their market share grew they gradually increased their prices. Today they’re practically on a level footing.
Generally, though, car prices don’t vary massively over time. For example, Ford Focus as a percentage of annual household income per capita has been constant for a long time. In response, car companies have improved their product specification in order to keep prices flat and maintain margins.
For instance, the new Vauxhall Adam, released in February 2013, has over one million different specifications: a million prices for just one vehicle. Car companies have also segmented the market and tailored their products and prices to the needs of the consumer, much like the airlines and large supermarkets.
For example, in-car connectivity is essential to the young demographic, not for the average Toyota or Hyundai customer. The latter prioritise safety and general reliability over built-in satellite navigation systems. So identical optional extras are priced differently according to each model’s market segments.
An especially interesting feature of the UK car market is the ‘squeezed middle’ category. Traditional luxury carmakers BMW, Mercedes and Audi have recently brought out smaller models that encroach on the volume brand space, historically the preserve of Ford and Renault. New entrants, including Hyundai and Kia, are chipping away too.
The middle’s solution has not involved pricing. They are fighting back by creating new luxury cars such as the Ford Mondeo Vignale.
However, I believe that this strategy won’t work because it’s so hard to elevate an existing brand. Citroen’s upmarket DS range has succeeded precisely because it’s a new brand.
Another pricing challenge for the auto industry is the long lead times.
It often takes six months for a company to respond to market demand. Price is routinely used either to clear out surplus stock or slow down sales until volumes can be readjusted. As a consequence we often see sub-optimal pricing as supply and demand volumes go out of balance.
Improving demand forecasts and reducing over-capacity remain critical to profitability.
I also agree with Robert that more should be made of the seasonality of pricing. Twice a year the new registration plates create an entirely predictable sales rush, yet car companies seem almost reluctant to respond.
More forecasting needed
There is a different dynamic between manufacturers and suppliers. Here it’s all about price-downs.
Since cars usually have a seven-year production life, contracts with suppliers are set at this length. Suppliers therefore need strong forecasting and pricing models to allow for price chippings each year over the contract and sub-component purchase price changes, if applicable.
This is because, every year, there is the expectation that the supplier will produce the same volumes, but for 3 percent less. This of course puts a lot of pressure on the industry. Indeed, back in 2008 a number of US suppliers went bust due to thin margins at a time of falling volumes.
Pricing is important within the automotive industry and there is clear ownership within each organisation. However, I believe that companies could get still more from it.
Specifically, manufacturers should make use of the vast amounts of customer data they hold and do more forecasting. They should also capitalise on robust UK demand for new cars, which we expect to continue well into next year.
Thanks for reading