Regular readers will know that I’ve been lambasting automakers’ “Employee Pricing” programs as counterproductive. (One even sent in a link to this article from investment site Motley Fool. When investment sites blame your pricing strategy, it’s well past time to listen.) Of course, criticising is not the same as fixing the problem. While I have neither the data to make good decisions, nor the power to enforce them, I thought I’d throw out a proposal for GM’s pricing and executive teams.

Unfortunately, in some ways Chrysler has beaten me to the punch.

To recap, Japanese automakers make money on cars and sell them without huge incentives. The Big 3 do not. Yes, they have higher labor costs. They also have cars in less demand, and huge fixed costs regardless of production volumes. This has led to a vicious cycle of discounting, conditioning consumers to expect more discounting, which Detroit has had to do, because of huge fixed costs.

Pricing by itself cannot solve the labor challenges or the magically make people want cars (except by practically giving them away). However, we can actually apply the pricing lever to the other areas. The idea is simple: 4 years of free maintenance, similar to BMW’s program. Chrysler’s program only includes 2 years of maintenance (and gas), which is better than nothing, but much less convincing than 4 (or 5) years.

This is:

  1. A significant incentive, but one that is paid over time, and where the company has some control over the amount of the discount. Giving the billions GM spends (wastes?) promoting huge discounts, their advertising arsenal should be able to shift the debate somewhat from sticker price to Total Cost of Ownership (TCO). Using trusted third party data, they could compare TCO on GM cars to average and worst-case scenarios for competitive vehicles.
  2. Shows that GM stands behind their cars, improving brand image and perception of quality. GM quality has actually improved considerably in recent years, but the perceived quality is still low for cars. (Making a full line of cars that people want will take a lot longer, but there’s no reason it can’t be done. Alfred Sloan must be spinning in his grave at high RPM over the collapse of his branding strategy.) Make no mistake, this is a discount, but it focuses on the reliability of the car, rather than simply on the price, a good way to triangulate between the current discount addiction and a true value-based approach.
  3. Allows management and labor to work together for mutual benefit. GM should establish a sliding scale of $/vehicle for maintenance over the course of the program. Exceeding quality targets will save GM billions. Some of this savings would go directly to workers, providing an incentive for them to try to build solid cars. To get access to this pool, however, unions would have to provide concessions to reduce fixed costs. It’s a gamble, but probably a better bet than the zero-sum games played today.

Given GM’s announcement of 30,000 layoffs, swirling rumors of Chapter 11, and a languishing share price, why not? As an exec, I’d rather go to labor and say “if we can make the most reliable cars in the world, we can all make a lot of money, let’s figure out how to make it happen” than constantly fight. As a worker on the line, it would be better to make cars that people want, with the chance to make really good money than simply wait for the plant to close.

One Comment

  1. Jon

    Reuben,

    Here’s a couple of great quotes I thought I might share you & your readers…

    “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, its the reputation of the business that remains intact”

    …and…

    “there are no unprofitable customer segments, only unprofitable business models.

    I leave it for your readers to explore any link(s) between these quotes and the US domestic auto manufacturers.

    FYI, the virus has crossed the Pacific…GM in Australia is currently running a very high profile (prime time TV) Employee Pricing Offer.

    Jon

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