Business Case Study 5. Price Reduction During Recession

2008 crisis was particularly fierce in the automotive industry.  Sustainable sales increase was the primary task of every producer in this industry... The pricing policy of branded goods has always been a delicate and difficult task because of the strong relationship between the price level and brand recognition by the consumers.  We are all familiar with the basic postulate of economics, valid for mature market, namely that the price decrease leads to sales volume increase ...


U.S. manufacturers decision:

Two of “the three big”companies - General Motors, Ford and Chrysler - used the following technique: for their numerous employees, they removed the downpayment for buying a new car and they also introduced substantial price discount. The effect was instantaneous - in the next quarter the sales growth was 40%.  However, another quarter later, sales collapsed to historically low levels.  What the "big" did was to borrow money from the future.  And when the future came there was no more money there.  All “three big" companies are now on the brink of bankruptcy ... (of course not only because of this blunder).

 
The decision of some European and Asian car manufacturers:

They introduced additional services such as 7 year warranty, without changing the car price. And they reduced the prices on the base models (with a highly truncated equipment).  In the first case they received additional appreciation on the part of loyal customers.  In the second – they gave to low price customers simple low cost models.  Thus they managed to preserve their main products reputation and penetrate deeper in the lower price segment without compromising their image.  Despite the temporary difficulties that they will continue to suffer in 2010, these manufacturers will come out of the crisis stronger and more successful.

 
Business lessons:

1. Borrowing from the future should be done only for products that will be abandoned.
2. Successful companies maintain a dual focus: on the present and on the future.  If conflict of interest in decisions arises it should be solved in favor of the future.

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