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Old 14th September 2016, 12:09   #1
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Default Car pricing and the importance of getting it right at launch!

As the Indian auto market gets filled with more and more car models by the day, pricing has suddenly become a very tricky (and sensitive) strategy for car manufacturing companies. As competition grows fierce with car companies striving for their proverbial share of the sales pie, the pricing of new car models has become increasingly important as the market is not too forgiving or relenting for (perceived as) over-priced models.

Over the past few years, over-pricing a product has suddenly become a norm. If the product tastes success, the company goes on a roll. If the product receives lukewarm response from the market, official/unofficial discounts start pouring in 5-6 months down the line, and are followed by officially declared price cuts later if sales figures don't pick up along expected lines of the company's corporate management.

Not every company has got the pricing spot-on right from the word go either, yet we have models which are distinctly over-priced for what they offer and have gone on to become bestsellers, and then there are models which are perfectly priced or are immense Value For Money (VFM) options when compared to the competition, yet sell in low numbers. This is one conundrum related to the market which is yet to be explained.

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The country's biggest car manufacturer, Maruti-Suzuki India Limited (MSIL), was guilty of overpricing it's premium crossover offering, the S-Cross in it's 1.6L avatar when it was launched last year. Discounts to the tune of 90,000 rupees followed within 2 months of it's launch, and the company officially declared a price slash of over 2.05 lakh rupees in the 5th month of the 1.6L S-Cross's sales tenure, back in January 2016. (link)

The company also extended a goodwill gesture to all early S-Cross 1.6L buyers at the same time, by offering them refunds of 90,000 rupees and a free 2-year extended warranty package. (link)

R S Kalsi, executive director (marketing and sales), MSIL:

Quote:
In case of S Cross, the 1.6 litre variant had an imported power train and hence was expensive. But customers did not see a value in 1.6 litre variant (priced at a premium of Rs 3 lakh) vis a vis the 1.3 litre model. Today, pricing has to be market driven as the market is highly competitive."

Another company which has been in the news for price slashes of it's car models is Ford. The American blue oval car company slashed the prices of it's bestselling compact SUV, the EcoSport, to the tune of about 1.12 lakh rupees back in March 2016 just days after MSIL launched the Vitara Brezza as a strong in-segment competitor. Of course, the EcoSport had benefited from regular price hikes ever since it's launch 3 years back (as it had become a huge bestseller), so the price slash pretty much negated all the hikes the EcoSport had had in this time period. (link)

Then, last month, the company slashed the prices of it's Figo/Aspire siblings. Reason? Lukewarm response to the new-gen products ever since it's launch about a year back. The Aspire received price cuts up to 91,000 rupees, while the Figo became 50,000 rupees cheaper. The impact on sales of these two cars is yet to be seen. (link)

Renault India also did a similar price slashing exercise couple of months back when they slashed the Lodgy MPV's price by almost 96,000 rupees! Weak sales in the MPV segment, plus offering a better challenge to the segment-leader, the Maruti Ertiga, was touted as the main reason. (link)

Rafael Treguer, vice-president (sales and marketing), Renault:

Quote:
The MPV segment is on a decline. As a marketing strategy you need to correct prices sometime.”
The S-Cross and the EcoSport have seen a steady rise/stabilisation in sales after their price corrections, hence have been beneficial to their respective companies to some extent.

But not all such pricing fiascos result in profits/realisation of margins.

Early Honda Jazz owners will remember the brutal price slashing exercise the earlier-generation Jazz went through back in 2011-12. The Japanese auto major cut prices across the Jazz range to the tune of over 1.75 lakh rupees (link), leaving many owners fuming. Reports came in that Honda Cars India was actually making a loss on every Jazz sold then, and Honda launched the facelifted earlier-gen Jazz at a much lower price point to push sales further. Of course, none of that did much to revive the Jazz's sales fortunes, and the company discontinued the Jazz shortly afterwards, making way for the "India-specific mainstream" new-generation Jazz a couple of years later.

Rakesh Srivastava, senior vice-president (sales and marketing), Hyundai:

Quote:
"Many products fail to clock volumes as the price does not justify the value proposition to the customers. Pricing of a car is strategic commercial decision targeting projected volumes over various stages of product life cycle. With changes in market scenario, many times the volume does not happen, creating an inward pressure to discount and alter the price value proposition. But such a step leads to reduced margins and affects the sustainability of the product.”
Also, some overpricing stunts are deemed as "strategic".

Jeep India, which teed off it's Indian innings a few days back, brought it's first 3 Jeep offerings at steep, eye-watering prices. But the general thinking behind the rationale of such pricing decisions was that when Jeep would bring out it's "India-specific" products from next year onwards, their competitive pricing will make them seem more value-for-money (VFM) when compared with the rest of the Jeep's lineup. (link)

And most recently, Hyundai India brought out the much asked for Elite i20 automatic in a single "Magna" trim at a price of over 9 lakh rupees, ex-showroom Delhi. The company has tasted resounding success with it's already overpriced products (Creta, Elantra) hence the price tag for the Elite i20 automatic wasn't surprising for ardent Hyundai followers. And if it manages to garner sales in the days to come, the company will again have the last laugh. (link)

Of course, if the sales don't come through for such atrocious pricing stunts, there's always the discounts/price slash exercises to fall back on.



(With inputs from Business Standard)

Last edited by RavenAvi : 14th September 2016 at 16:07. Reason: All set.
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Old 14th September 2016, 12:56   #2
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Default re: Car pricing and the importance of getting it right at launch!

The Aria is the master of all pricing disasters in recent memory. With price cuts and discounts, I remember few people bought the Aria Pure at 10-11 lakhs (which is almost Ertiga diesel pricing), it was originally 13 lakhs at launch I think. It will stand close to Jazz which was instrumental in the rise of i20, with a pricing disaster of its own.

The Figo twins were perceived to be overpriced?
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Old 14th September 2016, 13:21   #3
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Default re: Car pricing and the importance of getting it right at launch!

I think the price cut on the EcoSport was 1.2L not 0.55-2.05L as shown in the image. Looks like they have used the data from S-Cross for EcoSport too.

The Aria and the previous gen Jazz ring a bell in my mind, when I think of good products that were let down by bad pricing at the start... And the new Elite i20 AT might become one, if India does not hug that car, like it has hugged the Creta
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Old 14th September 2016, 14:01   #4
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Default re: Car pricing and the importance of getting it right at launch!

Nice thoughts there.

I wish to add the Ford Fiesta, Ford fusion, Skoda Fabia, Grand Vitara, also as examples of disastrous pricing. Prices for these however were revised to make them more realistic, but too late to save them from collapse.

The latest entrant to this list would be the Jeep Grand Cherokee (I would be very happy if it proves me wrong by gathering more sales).
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Old 14th September 2016, 14:06   #5
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Default re: Car pricing and the importance of getting it right at launch!

Quote:
Originally Posted by King_pin09 View Post
The latest entrant to this list would be the Jeep Grand Cherokee
Nice list, missed out those you have mentioned, but I agree on those examples too. And, why single out the Grand Cherokee? I would call the entire Jeep brand as a complete pricing disaster as of now. I only hope they learn quickly and price all future cars, starting from the Renegade sensibly.
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Old 14th September 2016, 14:22   #6
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Default re: Car pricing and the importance of getting it right at launch!

One important bit about car manufacturing is the raw materials constitute only 60 to 70% of the ex-factory price. You can get this info easily when you read annual reports of companies like Maruti, Mahindra etc. Now, this means car manufacturers have decent flexibility in pricing.

Some manufacturers take the route of low initial pricing, and then hiking it up slowly based on demand - while others probably have a fixed formula (based on expected net profit margins). After all, the sale price of a car (ex-factory prices) should reflect the investments made in setting up the factory, employee costs, R&D costs, dealer margins and bank loan interest payments.

Car pricing basically depends on volumes. If a car sells 4000 units per month at Rs. 10,00,000 and if it sells 6000 units per month at Rs. 900,000 - then obviously the latter is more acceptable in spite of 10% reduction in prices.

I don't think the Business Standard article gets it right regarding car pricing. Car pricing basically depends a LOT on how a manufacturer reacts to overall trend in sales (rising, falling, stable etc) or entry of new competitor (Brezza entry resulting in Ford slashing Ecosport prices) or other market factors.

Last edited by smartcat : 14th September 2016 at 14:28.
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Old 14th September 2016, 16:48   #7
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Default re: Car pricing and the importance of getting it right at launch!

Mod note: Moving out from Assembly Line. Thanks for sharing.
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Old 14th September 2016, 22:18   #8
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Default re: Car pricing and the importance of getting it right at launch!

The problem after pricing a car too high are the the resulting discounts are always big. This creates a perception that a discount for the brand is always the norm.

This is prevalent with Audi, BMW Chevrolet and Ford
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Old 14th September 2016, 23:54   #9
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Default re: Car pricing and the importance of getting it right at launch!

This is actually a very good piece you've written here. Got the facts and a few examples. Commendable.

But i think we all can agree, car prices are rapidly increasing every year. For whatever reasons, whether the exchange rate, the economy, strategy or greed. Local manufactures who've been in the game for long seem to have most of their products priced right. MSIL, Tata ( though its relatively new in a more established sense), Hyundai. Even Honda and Toyota have raked in huge incomes from half their stable line up. But every now and then, every company releases a new car which is completely overpriced.

Maruti- S-Cross. Though i think its a splendid car, the public never took to it. Same as for the Vitara Brezza and Kizashi

Tata, Aria. With the almost Innova pricing, its lucky to even sell what they sold.

Honda- CR-V and Jazz as mentioned above. CR-V, no diesel SUV really went against it in our diesel frenzied nation.

Toyota- somehow all their products seem to sell decently besides the Altis in the private sector. Commute engine killed it there.

Renault- Pulse, Fluence and Koleos. Pulse cause prospective buyers went for Swift instead, more reliable and fluence and Koleos were
incredibly overpriced for a new brand (though not exactly new, but besides car fanatics not many people heard or even considered Renault earlier pre-Kwid and Duster era).

Ford- Ive always felt most of their products are 50,000 to 2,00,000 over priced. They could've just taken the entire game away from MSIL if they would've reduced profits. Getting a greater market share and then just banking on minimum profit could've potentially worked for them. And then perhaps creepily increased price. I don't know.

Mahindra- I feel got the best understanding of todays market. Though I'm not the biggest fan of the TUV and KUV, the rest of their products were marvellously placed. Ya'll remember when XUV dropped? 15 Lakhs for full fledged SUV with tremendous looks? Even today i think it looks better than the Beamers and Benz.

Fiat- Apparently they are pulling out in a few years. No comments here.

Volkswagen- Did their job, provided decent engine and cars over the years. Pricing once again a tad bit high.

Skoda- Once again, no comments. Remember how many features were added to the Rapid and how many discounts were offered country wide? If i recall correctly, Skoda Gujarat had the offer of "Buy a Rapid today (Somewhere around 2012 to 2014) and get a Fabia for free in 2017?" And they said if Fabia wasn't available, an equal product would be given and if not 3.5 lakhs. Did anyone over here partake in this offer?
If you did, please share whether or not you get the money.

Now this was the bad but as for the good, almost all of the companies listed above had 1 or 2 or 3 or even 4 cars raking in great sales throughout the years.

Maruti- 800, Alto, Swift, DZire, Baleno, Brezza and the Omni among others.

Honda- City and partly Brio

Hyundai- i20, Verna, Creta, Santro

Mahindra- Almost all their products or atleast half

Ford- Ecosport. Like mentioned above, the game could've been theirs.

Volkswagen- Polo, baby back brought it home for them

Renault- Duster and Kwid taking the game young out here

Toyota- With the success of Innova and Fortuner, they could've bought an island


As for the Fabled German trios? Grossly overpriced down the years. 40 Lakhs ex showroom for the X1? I remember it retailing at 20 once. 65 lakhs for the E class and 5 series, makes me laugh. The M5 in the UK goes for 75,000 pounds. With an almost 100 exchange rate, that is 75 lakhs. Though after the Brexit the rate has dropped to 89. Even after local production they almost mock us with their prices. And if you go into super car territory, it gets funnier. AMG GT is retailed at 1 cr in the UK, whereas in india its at 2.4 cr. Bentleys go for 1.4 to 2.5 cr in UK and in india? Best not to mention that.

So, besides all the CKD's and CBU's, the pricing is almost on par with todays worldwide market. Some offer discounts and start selling whereas mostly it doesn't affect the numbers in a great manner. Though some cars could've sold better with a smaller tag from the beggining in greater volumes. But in the end, all we can do is speculate in either happiness or amusement. Good article though, gives a 'Food for thought' wala moment to me.

Edit- The best time for discounts is at the end of a life cycle of before an updated version comes out. I got wind of the A6 lately, its pre matrix petrol version was around 50 ex showroom, an associate bought it at 40 lakhs OTR. The same showroom had offered it to me at 38 ex showroom. So hard bargaining has always done the trick.

Last edited by Eddy : 15th September 2016 at 13:56. Reason: Spacing for better readability
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Old 15th September 2016, 05:09   #10
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Default re: Car pricing and the importance of getting it right at launch!

Tata too killed its Bolt by pricing it to closely to sedan version,Zest. Bolt was a major improvement by Tata in almost every aspect, but bombed again partly due to the manufacturer's image & partly due to close pricing with the Zest.

Last edited by GTO : 15th September 2016 at 10:42. Reason: Language
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Old 15th September 2016, 11:03   #11
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Default Re: Car pricing and the importance of getting it right at launch!

Outstanding thread, RavenAvi. Many thanks for sharing. I had also thought of creating a new thread on getting the pricing right at launch, but you beat me to it . Here's a related thread though - link (Big Money + Big Talent = The overpriced market dud. How?).

A good launch is critical and overpriced flops rarely ever recover. We have a long list of overpriced cars that flopped at debut, went through massive price corrections, but never managed to stay afloat.

People forget to include the Logan in this list. Fact is, the Logan was grossly overpriced at the time of launch. It was a lakh more than the Indigo and had cost-cutting written all over it.

The Baleno in the late nineties. Pricing it on par with the City & Lancer killed the car entirely. Massive price cuts later, volumes improved a bit, although it was still a flop. The lower price only helped Maruti get rid of all the Baleno parts it had accumulated.

The Tata Aria - great MPV, but killer (pun intended) pricing.

The previous-gen Jazz - great hatchback, same story. The Jazz had a unique case where its pricing was suicidal, but it increased the sales of a competitor - the i20 . The i20 became 'THE i20" only after the Jazz' pricing debacle.

The Fiesta. Nice sedan that Ford thought will be positioned on par with the City. Problem for Ford was, Honda slashed the prices of the City a fortnight before the Fiesta's launch. You'd think that Ford would revisit the pricing....they never did. DUMB. R-I-P.

Skoda Yeti - too overpriced for such a small SUV. Dead on arrival.

In the wake of competition, Daewoo slashed the price of the Cielo by 2 lakhs overnight. Ironically, that price cut murdered it. It was seen as a 'cheap' car with zero aspirational value after the price was reduced. Tomorrow, if Levis starts selling jeans for 400 bucks, its sales might actually reduce.

Quote:
Originally Posted by RavenAvi View Post
Another company which has been in the news for price slashes of it's car models is Ford. The American blue oval car company slashed the prices of it's bestselling compact SUV, the EcoSport, to the tune of about 1.12 lakh rupees back in March 2016 just days after MSIL launched the Vitara Brezza as a strong in-segment competitor.
I wouldn't include the EcoSport in this thread. It was superbly priced at the time of launch.
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Old 15th September 2016, 11:29   #12
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Default Re: Car pricing and the importance of getting it right at launch!

It's also a factor of how the general public view the manufacturer or a specific car. Think about the Creta. IMO, it's way over-priced for what it offers. But we still haven't seen any price cuts or even an ability to negotiate. If the same car was presented as a Ford, it may have been a flop at that price point.

Think about the new Innova. While the base entrant maybe competitively priced, the higher variants are scary money. But since it's Toyota, it will sell regardless of how highly it's priced. If the same Innova is labelled as maybe Renault or even Maruti, it may not sell as well.

This, I guess, is what they call brand equity / value. Some brands sell at a much higher price without offering much more than their competitors simply because they have that brand equity with their customers.

And in some cases, I think it's simply not even possible to compete with certain brands. You could throw anything at the Innova and it will still be #1. You could throw anything at the Alto and it will continue to be #1. Other manufacturers either need to create a unique brand identity (Mahindra / Fiat etc.) or just play second fiddle (VAG, Nissan etc.) in their respective segments.
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Old 15th September 2016, 11:51   #13
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Default Re: Car pricing and the importance of getting it right at launch!

@RavenAvi, @GTO and all,

What would be your verdict on the Innova Crysta ?

It is a sales success, without question.

However, is it really value for money for what it is and what it does, at it's current price point ?

Would like to have your views, since you've been thinking about this for a while.

Cheers,

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Old 15th September 2016, 12:40   #14
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Default Re: Car pricing and the importance of getting it right at launch!

Quote:
Originally Posted by FourWheelDrift View Post
What would be your verdict on the Innova Crysta ?

It is a sales success, without question.

However, is it really value for money for what it is and what it does, at it's current price point ?
Same question holds valid for the Hyundai Creta and the Honda City, and for every other car which is pricey yet a sales success.

It all boils down to a customer's viewpoint in the end - what all does a car offer at it's price points, and how does he/she justify them according to:

1) Usage
2) Practicality
3) Reliability
4) Maintenance
5) Brand value, and subsequently
6) Resale value

"Value for money" has become a relative term these days.

I think smartcat, GTO and Mad Max got it absolutely spot-on.

Honda can afford to price the City (or it's other offerings) higher than it's competition just because it enjoys the "H" brand recall. Same goes for Toyota and (slowly but surely) Hyundai. You start associating certain things with particular brands, and if they go out of their way and do something different, it might fail.

Also, I feel that the ownership period has a big say in purchases these days. Cars usually don't stay with people for more than 5-6, say 7 years at the max. Gone are the days when car models stayed with people for more than 10 years. The rate at which technological advances are happening, emission norms becoming stricter by the day, the number of people capable of owning/maintaining a car growing rapidly - most (I would say 75-80%) of the car buyers are ready to swap their cars for new ones after 5 years. (One of the main reasons why the used car market is booming)

In such a scenario, people would want the most bang for the buck AND the best resale value of their purchases when they are ready to be sold after 5-6 years. Hence those car models which tick all the 6 boxes above, tend to sell the most.

I dare say that if the Innova and the Creta were priced even a couple of lakhs more, they would still sell.

It was easy for the Innova, because it has become an established brand (ownership-wise and resale value-wise), and is yet to see a proper competitor at those price points offering what it does. It was a bit more difficult for the Creta, though. Yet, the small yet spacious footprint which is a boon for driveability and ease of parking in congested urban conditions, loaded with features, premium quality inside and out, and backed by Hyundai's brand and service network, all this made the car click with the masses.

Last edited by RavenAvi : 15th September 2016 at 12:43. Reason: Added a point
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Old 15th September 2016, 13:09   #15
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Default Re: Car pricing and the importance of getting it right at launch!

Nice thread!
My take on this is that there are 2 important factors that can either let the company get away with their 'heist' (I'm using the term, for heist it is) or doom/ stunt the model for the foreseeable future.
The first one is the segment and competition within that segment. Great examples are the Innova and the Creta. They have managed to get away because of lack of credible opposition in the segment.
The second one (intertwined with the first one of course) is the mass loyalty/trust for the brand. This also helps helps companies get away to an extent with such pricing as customers tend to be more forgiving towards such automakers. Hyundai and Toyota have more of the factor that a Ford in India.
S-cross is an exception because its understated looks and image didn't go down well here IMO.
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