Vehicle pricing is definitely a science…but also an art! In finding out the price competitiveness of vehicles in the market, we were faced with the question: In the purest sense, when does the vehicle become competitive? Assuming that all key factors like branding, days’ supply, parts distribution et al are equal, pricing plays a crucial role, since it determines the profitability of the manufacturer…particularly if it is a key model in the brand portfolio.
Pricing in the Automotive Industry
Setting the Context
- Manufacturers maximize revenues when plants run at full capacity; however optimizing the balance between price and volume is not easy.
- The relationship is almost never linear; a small price reduction might have the potential to generate a big increase in volume and vice versa.
- Thus, automotive pricing in theory is governed by the largest positive gap between revenues and total costs; and achieving a fine balance between the two.
- The price position of any new vehicle along with its strength or weakness can never be in isolation; it is always relative to competitor models.
- Market reality is that the price position of a new model is constantly changing because competitors’ products, price positions, and other brand strategies are in a state of flux.
- A sub-optimal price position can result in a dip in revenues and volumes if the model is overpriced, and margin erosion if it is underpriced.
- The challenge remains in identifying the most appropriate price position considering tactical market reality and competitor activity.