**I had this post scheduled to go up today about a week ago. Then two days ago GM announced the biggest yearly loss ever for an auto manufacturer making this article more relevant than ever.
I wrote this article for the Toronto Sun in 2006. As I review it today in 2008, not too much has changed. Oh – aside from the President of GM Canada (he actually has a sweet gig in the company elsewhere now).
Incentive battles were the method of choice to woo customers into auto dealerships as little as a year ago.
A car would be listed for a price, but the consumer might then be eligible for one of several money-saving offers. Sometimes it would be as easy to claim the incentive as phoning a special number after you’ve made a purchase while others were time sensitive.
Regardless of how the incentive was delivered, Michael Grimaldi, president of GM Canada says it’s time to break the backbone of the incentives and change the marketing reliance of this type of discount.
“If you look back year-after-year, our incentives were just ratcheting up,” Grimaldi said. “We got to the point where customers weren’t sure what incentives they were eligible for nor where they sure of what the actual price of the vehicle was.”
To top it all off, manufacturers – especially the Big Three – kept one-upping each other by offering larger incentives and extending the amount of time they’d offer them. Grimaldi likened this practice to a poker game whereas a manufacturer would “see your incentive and raise it.”
There’s nothing wrong with offering incentives like the employee pricing program offered in the summer of 2005 by one of the Big Three, Ken Wong, faculty member at Queen’s University and marketing guru said.
“It’s especially justifiable when you can offset the costs with increased volume or if you are trying to move end of the line product to make room for new stock,” he said. “But the problem with car incentives is it leads the consumer to expect a discount and if they don’t get one they feel like they’re being ripped off. Then the consumer will postpone their purchase until it becomes what they perceive is a good deal.”
Wong likened the incentive wars to the warranty battles of the late 1960s and early 70s. “The standard at the time was to offer a three-year, 36,000 mile warranty,” he said. “Then manufacturers started offering five-year, 50,000 mile warranties. What do you do next? Do you offer a longer warranty and just figure the cost of honouring these warranties as a cost of doing business or do you blink?”
Blinking first is what is known in game theory circles as the Prisoner’s Dilemma. The concept is simple: two players have an option to cooperate or betray each other. If they both cooperate, they both stand to gain a little, but if one opts to cooperate while the other betrays, the one who betrays gains a lot while the one who cooperated loses plenty.
The way to blink first and still win, Wong said, is to offer the right new products at the right time. He points to the Chevy Colbalt as a product that fits this mold.
“The Colbalt has the right mix of style and performance for the market it’s aimed at,” he said. “Giving customers the features they want in a car that’s designed better will help auto manufacturers, especially the Big Three, get away from incentives.”
Grimaldi echoed those sentiments.
“GM has spent between six and seven billion dollars on new product development,” he said. “We’re going to be introducing 15 new models in the coming months. If you’re not competing with new models, you’re going to lose consumer interest.”
Another battle GM will have to contend with is build quality, both actual and perceived. But if building higher quality vehicles was the answer to increased car sales, why haven’t they been doing it all along.
“We can improve build quality in the plants,” Grimaldi said. “But there is also the way consumers perceive quality. That’s done through the types of material used in the vehicles and re-establishing brands.”
Simple things like the grain on the dashboard and the finish of real wood used in interiors help increase perceived quality, he said.
Grimaldi points to the Cadillac brand that successfully reinvented itself with the introduction of the CTS a few years ago.
“People said that brand was dead and GM should drop it,” Grimaldi said. “Look at it now. We’re in the middle of doing the same with Saturn and each of our lineups is going to be distinctively different.”
Part of GM’s new pricing strategy is to lower their prices to the ‘real’ price and not offer incentives. This should lead to ending confusion and the expectation that the price advertised is actually several thousand dollars higher than the actual price consumers can buy the vehicle for.
“There are certain technical trade-offs that have to be made when building a car with respect to price and quality,” Wong said. “Unfortunately, the consumer doesn’t care about the technical trade-offs, they just want a great car at a great price and if an auto manufacturer can’t deliver that, they’ll buy elsewhere.”
