German luxury carmaker Audi announced plans to close the pricing gap with BMW and Mercedes-Benz by improving the product, customers’ perception, and raising prices over the next 5 years. The announcement comes as Toyota’s Lexus brand moves into the 6-figure price range to compete with the top end German luxury sedans. Lexus’s climb up the price ladder reflects years of careful planning– not just highly reliable cars, but also a new dealer network, and first-class fit and finish.

Audi’s goal is good. Why not start from the price and work backwards to do the things that make customer’s willing to pay that price? (This is the way pricing is supposed to work: outside-in. It usually works inside-out, with someone building a product, and then someone later putting a price tag on it.) And 5 years may sound like a long time to achieve a 4% relative price increase, but in an industry where product cycles are often longer than 5 years, this is will take considerable effort. Audi is seeking to bolster its brand image with fancy new stores, and the R8 coupe as a “halo” vehicle, designed to make the overall brand cooler. (Halo vehicles are often more about ego than good marketing. Chevy is struggling despite the Corvette, while BMW is doing fine without its Z8 vanity car.)

What should Audi do? A detailed Value Price Waterfall analysis of which features provide value in which customer segments, and how Audi stacks up in those areas, followed by rigorous implementation. (I’m sure they did something similar already.)

One nice thing to note: Audi does not want to achieve pricing parity by dragging down competitors’ prices, but by climbing up to them. Sure, not everyone has the luxury (very bad pun) of being in a market where price sensitivity is relatively low, but the principle applies broadly. How many people have asked their customers “what do we have to do to earn the higher price that our competitor gets?”

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