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Is GM Really Focused on Value or Low Prices?

By: A discussion with John M. McDonald of GM over their Pricing Strategy
Tim Smith, PhD, Chief Editor
April 2007 Pricing

Is GM reverting to MSRPs and high promotional discounts, or is it serious about its strategy to focus on value?  We put this question directly to GM.

Claims, Conflicting Developments, and Biting Questions

In December 2006, the Wiglaf Journal published a case study on Price Waterfalls.  In it, we described how a business can tilt the Price Waterfall Vector so as to lower the reference price while increasing the pocket price, thus improving the overall profitability and potentially the volume of sales.

However, the article ended with a difficult question:  “Will GM’s new pricing discipline stick?”  Recent developments require a re-examination of this issue.

Specifically, IntelliChoice gave GM 10 awards for “Best Overall Value of the Year”, second only to Toyota, based on category, segment, and class, in February 2007.  This independent review of GM’s offering would imply that GM has indeed improved their value proposition.

Unfortunately, Richard Wagoner Jr. is struggling with a 13% fall in volume during the last quarter of 2006.  Perhaps as a response to the lowered sales volume, GM introduced a March Sales Promotion that included no-interest financing and $1000 discounts on certain models.

So, is GM reverting to high reference prices (MSRPs) and high promotional discounts, or is it serious about its strategy to focus on value and are the sales promotions just temporary?  We let John M. McDonald, GM Communications for Sales Reporting, Pricing, Incentives and Market Trends, respond to this biting question directly.

GM Responds

TS: If I recall correctly, I read in the WSJ a month ago how GM was rated as providing Top Value in 10 categories by an independent rating agency.

JM: We certainly are the leading value in the marketplace — for a number of reasons including the best coverage in the industry that includes 5 years/100,000 mile powertrain limited warranty with roadside assistance and courtesy transportation. We’ve recently begun offering the same limited powertrain warranty with roadside assistance to our GM Certified Used vehicles that qualify (based on in-service dates). GM was the first domestic carmaker to ever sweep the North American Car and Truck of the Year awards at the Detroit Auto Show (North American International Auto Show) in January with the Chevy Silverado and Saturn AURA … the only other sweep was by Honda. Toyota has never done it. The Chevrolet Silverado also took Motor Trend Truck of the Year.

TS: Then, last week, I read in the WSJ that your volume has fallen roughly 13% and your CEO is introducing $1000 cash-back or zero percent financing to chase volume.

JM: While our volume was down almost 20% in January — this was for two very deliberate reasons: 1) We had significantly reduced incentives from the prior month’s year-end sales event as part of our continuing strategy to maintain incentive discipline while others increase their spending. 2) We pulled almost 30,000 vehicles out of the daily rental sales for the month (equating to almost 33% of our total annual reduction in just one month!) These two actions were publicly acknowledged and the marketplace understood these are part of our turnaround strategy.

For February we saw the start and extension of our annual Presidents Day Sale — resulting in an increase in sales of 3.4% (11 percent retail) despite the fact we continued to pull daily rental sales out of the equation. While our CEO didn’t announce it — we don’t even issue press releases on the incentive moves — we did recently confirm our annual March sales event. Both the Presidents Day Sale and the March sales events are annual industry sales windows that come every year. To be competitive, you must participate.

The Spring sales events, offering 0% for 36 months (not 48, 60 or 72) and $1,000 cash back on some vehicles is a planned, annual activity that again demonstrates our incentive strategy of executing tactical and strategic incentive programs that are limited in scope, yet position our vehicles competitively in the market place. You may have also seen recent media reports that Toyota has just put $2,000 incentives on their brand new Tundra, and has begun to heavily discount their Prius. DCX is under very heavy pressure to more the metal — and with Ford — have average incentive spends that are significantly above GM’s current levels and offers. Our competition is aggressively out in the market with their own Spring sales events, so we are remaining competitive — not “chasing volume” as your comment suggests. Our Spring sales events are limited in scope and EXCLUDE more than two dozen models including our brand new crossovers the GMC Acadia and Saturn OUTLOOK. While Saab, Cadillac and HUMMER have their own promotional programs, they are generally not included from this event as well.

TS: Now, how is a reader of facts supposed to reconcile that with the concept that GM is sticking to its guns in playing the Value game, and tilting the Price Waterfall up, when it is coming out with advertisements based on Low Price, and Price Discounts?  It seems simply incongruous.

JM: While it may seem incongruous to those who do not carefully watch the industry as you do, GM was the ONLY automaker to both reduce incentive spending AND increase average transaction prices in 2006 … all while reducing daily rental sales by almost 100,000 vehicles and improving residual values. We will continue to offer the best value for the best products in the market place, and believe that our customers are responding to those offers including the 5 year/100,000 powertrain limited warranty announced for GM Certified Used Vehicles last month.

Our plan for 2007 is to continue to reduce low-margin daily rental sales by about 100,000 vehicles (we already have cut about 40,000 in just two months) and that will continue to weigh heavily on the top-line total monthly sales numbers … so folks should look for that impact. In years past we would have chased top-line sales results by pumping out loss-leading airport rentals and having across-the-board discount and incentive programs — but no more.  We are holding our own on the retail sales line, and this is a tremendous accomplishment in a soft industry market that is showing intense incentive competition and near-record numbers of segment product offerings. GM still sells more vehicles in the United States than anyone else, and our 2006 financials just announced show that our North American automotive operations are turning the corner with the help of new products — both due to record annual revenues and historic cost-cutting initiatives in partnership with our UAW friends.

References

  1. Mike Spector, “Toyota, GM Top List for Best Overall Value”, The Wall Street Journal, February 7, 2007, p D2.
  2. John D. Stoll and Neal E. Boudette, “GM Declares No Victories Yet”, The Wall Street Journal, March 15, 2007. p A2.
  3. Tim Smith, PhD, GM May Be Learning Price Discipline”, The Wiglaf Journal, December 2006. http://www.wiglafjournal.com/Articles/2006/06-12-PriceWaterfall.htm


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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