Big 3 Vow End to Employee Discounts

GM plans to end the popular discount program on September 30, while Ford and DaimlerChrysler will end their on October 3. The programs led to surging sales and cleared out 2005 inventory, but did little to boost the bottom line. GM’s sales volume actually fell off in August, although that may have been because so many people bought cars in July.

What should we make of this? I think the first thing to note is that if you lower prices enough, you can increase demand. However, the increase in volume required to offset the loss in contribution margin per unit is huge.

This is fine if you have low incremental costs. For example, Vermeer Software, makers of the FrontPage web publishing tools set a price of $695. They raised millions of dollars of venture capital and sold a grand total of 289 of copies. Microsoft bought the company and realigned the pricing strategy. They released a version for $149 (really about $99 with discounts) and sold millions of copies. This had a lot to do with Microsoft’s distribution channels, but they would not have achieved nearly the same sales or profits at the earlier, higher price.

Second, pricing can be a catchy promotion. “You pay what we pay” is more emotionally compelling than just lowering prices, both with consumers and the press.

Third, price transparency can be appealing in industries where price obfuscation is rampant. Consumers feel at a disadvantage in these situations (see an earlier post Price Obfuscation Is Not A Strategy). Customers may be willing to pay a “clarity premium” to avoid this obfuscation. GM’s Saturn unit did this quite successfully for years, but you have to make a product people want. GM may try to reduce the discretionary pricing power at the dealerships, but I don’t know if they truly have the power to enforce this.

Fourth, if you want to move to value based pricing, as GM has stated, you have to deliver the value. In the auto industry, a lot of “value” comes from design and other emotional considerations. The reinvention of Cadillac proves that this is possible, so why not on the other brands? GM also needs to provide a warranty that will inspire long-term confidence in the vehicles, as Hyundai has done well.

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