When it comes to new car pricing, OEMs are currently shooting themselves in the foot, but to date they haven’t been able to find anywhere better to aim.
The COVID-19-induced straight-line acceleration into online shopping has now made it urgent for OEMs to rethink their current focus on List Price, Recommended Retail Price (RRP) and on On The Road (OTR) price.
For 25 years manufacturers have been petrified by the idea that the internet would trigger those dreaded five words: A Race to the Bottom.
It consequently took them over five years to publish list prices on the internet, and then another twenty years to consider publishing website prices that were competitive.
When it comes to new car pricing, OEMs are now caught in a cleft stick.
On the one hand they want to take advantage of the changes in buyer behaviour and to sell direct on their own website.
This means that they need to offer material discounts to RRP if they want to sell in any volume.
On the other hand, they don’t want to be seen as undermining their brand and to publicly offer discounts larger than those offered by some of their dealers.
Used car transparency
Meanwhile, away from the OEMs’ collective feet-dragging, used car pricing has journeyed a long way towards transparent and fixed pricing, with prices online now typically being within 1% of the final transaction price.
Going even further, those used car prices are often also accompanied by the website’s independent view on how attractive the price is.
Despite all the online price transparency, there has been no race to the bottom and returns on used cars have not materially dropped over this period.
New car pricing has therefore a long way to catch up, but it is slowly changing, and a visit to today’s Mercedes-Benz website reveals new car discounts from 5% to over 20% on some models.
One senses, however, that the fine folk at Mercedes are somewhat bashful about these discounts as they do little to promote them.
Visit premium manufacturer websites in other sectors - Mulberry and Tumi are two examples that I have visited recently - and the majority of stock has a price but no discount.
Both websites were however running sales with prominent Sale pages promoting savings up to 50%.
These premium brands follow a strategy where discounts are rare, but when you offer them you promote them heavily.
Just the opposite of Mercedes.
If car manufacturers want to sell direct, they need to learn how to retail, and they need to learn how to construct their own retail pricing strategy that doesn’t revolve around slapping on a discount.
The pricing approach demonstrated by used car retailers and by strong consumer brands in other sectors points the way.
Quite simply, OEMs need to stop communicating their RRPs.
RRP is an old-fashioned tool designed in an analogue world to give consumers some context for the price a retailer was offering.
In today’s world of online retailers and aggregators it is far easier for consumers to compare and to conclude if the price is fair or not, without needing to know the RRP.
In this brave new world the sales focus shifts away from the discount and whether it is enough, and turns instead towards justifying that the price is fair for the product relative to competitive offers, taking into account the features and the benefits and the brand.
Surely something an OEM would embrace.
All things considered, I am convinced that the time has come to retire RRP into the realms of P11D and BIK tables, and move away from discount-led pricing.
New car retailing must follow the example of used car retailing.
The only Race to the Bottom that OEMs need fear is the decline in new car market share and brand equity that would result from failing to change their approach to pricing.
Author: Andy Carroll, director and consultant, Albeda