Monday, January 19, 2009

Short Termism and Pricing

With the thoughts of my last article on charities and their short-termist marketing ploys in mind, my German guest poster Jo has come up with some anti-short termism thoughts of his own.

Well, we are still somewhere in the turmoil, crisis whatever you want to call it. Like most of the times people and firms react different to pressure. Today’s post is going to have a look at inappropriate short-term focus. An industry which has caused a lot of bewilderment in my eyes in the last years is the US car industry. It is one of those, most affect by the crisis, but there’s more. Beside inappropriate product portfolios and missed trends, the US carmakers have been gone completely crazy with discounting to prevent the erosion of their market share on their home market.

You want to see what I am talking about, well let’s examine a case. Take GM for instance:

“A 2007 Chevrolet Tahoe will have an MSRP of $33,990 for a model with a 5.8-liter, V-8 engine. That is $2,000 below the 2006 Chevrolet Tahoe even though the new Tahoe offers better fuel economy.”

First obvious question, why do you offer a product at a reduced price when it offers more value to the end customer?!
Anyway, just to show what this 5.6% price cut from the 06 to 07 model implies. Let’s assume they sell 1000 cars, and made a profit on each car of 3000 USD (a very positive assumption, in fact GM actually lost (!!!) some money on certain models). The graph below shows what this short-term, market share orientated marketing move means for the bottom line:
The graphs show that GM will have to sell 3000 (!!!) cars to just make the same profit as before. Amazing, right, what do you think a 5,6% price cut will you boost your sales by 200%? I simply don’t and even worse you ruin your long-term profits and prospects. This is how the fall of America’s car industry started. Well see where it goes, or well maybe their competitive strategy is more like this: