All in the Family: After Employee Pricing Strategy, What Next?

September 28, 2005

Sales promotions often wrap up with these words: "…..don't delay; this offer ends soon!"

 

This time they mean it.

 

The auto industry's ubiquitous employee discount plans (EDPs) dominated summer advertising, but after two extensions all three will end within a week of one another at the end of September and beginning of October. Begun by General Motors in June and copied by Ford and Chrysler in July, the promotion spurred record sales and depleted 2005 stock, but may have been a Band-aid at best for struggling U.S automakers.

 

"EDP is really only a short-term fix, to 'move metal,' as I think Americans say," says Australian Antony Peloso, who teaches marketing at the W. P. Carey School of Business. "It is not going to save Ford or GM. Short term, it has cut inventory. In the longer term, Americans will continue buying Toyotas and Nissan and, eventually, Chinese-made cars."

 

As a temporary balm, however, the EDPs are unqualified successes. Ford's U.S sales analysis manager George Pipas reports that July was a record month for Ford profits, while GM spokeswoman Deb Silverman says GM's June sales rose 60 percent over the previous year, July's 20 percent, and for the three-month period, 16 percent. Chrysler's July sales rose 32 percent over a year ago.

 

The EDP was GM's idea, which it implemented in June. The other two manufacturers watched and analyzed, then joined in.

 

"We felt we had a good, solid program," Silverman says. "Even with that confidence, our expectations were exceeded. The simplicity of the offer and the transparency of the price are something we'll use going forward in our marketing plans."

 

Though consumers are motivated by lower prices, Peloso, Pipas and Silverman agree the attraction of the EDP was the process. According to Silverman, the notion came to a GM executive who had used his right to extend his employee discount to a friend. The friend gushed over the ease of the deal: the lower price was set, without the negotiations that consumers find messy and off-putting.

 

"Anecdotal reports suggest that GM consumers did relate to the 'employee' and 'insider' element, and that both dealers and customers appreciated the terms of the transaction –- basically no hassle," says Peloso.

 

Silverman says the GM marketing team was concerned that consumers might not understand employee discounting, and their research of other retail sectors guided them. For one, says Silverman, "You really want to use the term 'employee discount,' rather than 'employee price.' As it turned out, they understood it very readily."

 

After GM's blockbuster June, Ford and Chrysler joined the fray. Pipas, a 29-year Ford employee, says his company would not have started its "Ford Family Plan" had GM not extended its "Employee Discount for Everyone."

 

"We had time to discuss and debate its merits," says Pipas. "The most positive feature of all was that it was a clear and simple message to consumers, and a compelling message."

 

Compelling, indeed. Ford's July rate of sales, when annualized, were $21 million -- nearly 25 per cent higher than 2004's number. Industry sales for the year's seventh month, with The Big Three all offering an EDP, were the highest since October 2001, when GM's no-interest financing promotion boosted business. All involved knew it wouldn't last forever. For one, by August, the record sales had thinned the dealers' inventories, and thus consumer choices; Silverman says GM's inventory fell from 1.2 million units to a historic low of 760,000.

 

Also, dealer profits had to be considered. According to Edmunds.com, which evaluated the manufacturers' prices under the EDPs, GM and Ford are offering their cars at 2.6 to 2.9 percent below invoice, Chrysler at 3 percent. Dealers are selling cars at cost, giving up what's known as "holdback" money -- typically 2 or 3 percentage points of either the manufacturer's suggested retail price (MSRP) or invoice price paid to the dealer upon sale. Before the EDPs, dealers sometimes gave up the holdback to close a deal, but tried to make a profit from the sale of extras, such as rust-proofing or extended warranties.

 

In other words, dealer profit margins were reduced during EDPs, though the sales volume compensated. Because of inventory shortage and the inevitable wearing off of a new promotion's "honeymoon" period, that blockbuster volume was short-lived.

 

"A vibrant profitable dealership is an important asset," says Pipas. "If a dealer has difficulty making sufficient profit, that jeopardizes their viability."

 

Meanwhile, import automakers went about their business, secure in their growing market share and solid reputation. Why didn't they also scramble to copy GM? They didn't need to.

 

"Basically it appears that Toyota, Nissan and to some degree Honda, just sat this one out -- and comparing August 2005 sales with August 2004 figures, the implication is that the Japanese three have increased overall share of the U.S. market, and have also slightly increased their pricing," Peloso says. "The U.S. three will probably experience a 'post sales surge lull' that is typical of this type of 'moving forward' of sales levels by offering heavy discounts. The Japanese three seem to have experienced the opposite –- their sales remained strong over the intense period of the discounting, and are now in a natural incline, potentially at a higher price."

 

Toyota Motor Sales U.S.A. spokeswoman Denise Morrissey says her company simply doesn't have the same philosophy as The Big Three -- or their inventory issues.

 

"We try to make our manufacturing process as lean as possible," she says. "We manufacture so we can deliver a quality product at a good price. Why do you need incentives? We have them, but they're not the huge ones. We use them strategically. We rely on the quality and reputation of our product."

 

So the foreign automakers won't have the problem Pipas has worried over since the start: how to wean the consumer off the great prices and easy process.

 

"The best thing is [EDP] is a simple, compelling offer," Pipas says. "The worst thing is [EDP] is a simple, compelling offer. The question becomes, what's next?"

 

Ford has introduced "True Blue Pricing" on many of its 2006 models, making the MSRPs closer to the actual transaction prices. Sounding much like Toyota's Morrissey, Steve Lyons, Ford's group vice-president of North American marketing, sales and service says, "We're going to sell on the strength of our products rather the amount of the incentive. With a strong, fresh product lineup we are best positioned to take advantage of this pricing strategy."

 

With its "Total Value Promise" campaign for 2006 models, GM makes a similar move.

 

"GM is trying to move away from the rebate," Peloso says. "GM has loaded its cars with extras; set many up as 'packages' at bundled prices so that comparison with earlier deals is difficult; increased warranties etc. This Total Value Promise is an attempt, I think, to capitalize on the goodwill generated by the employee discount offer."

 

Michael Mokwa, professor of marketing at the W. P. Carey School of Business, suggests that automakers would do well to extend the family theme into their customer relationship strategies.

 

"A major theme of the promotions included a message that the automakers would treat prospects and customers as part of 'their family,' offering them a price and bargaining process that conventionally was available only within their families," Mokwa points out. "This strong relational message needs to be extended into the post-purchase interactions among the companies, their dealers and the customers. If companies offered customers, the 'family and friends discount' when they bought the vehicle, they should now treat customers as family when the vehicle needs servicing, when they recommend that a friend buy a car from the dealer, and when they are ready to buy again. Stronger, more sincere, more effective relational strategies can be more important than price."

  

The lesson learned from the EDP sales surge was the appeal to the consumer of ease of transaction and transparency of price. Despite EDPs status as the highest-impact marketing tool since 0 percent financing, Pipas isn't sure it will go down on history as an industry shaker.

 

"Ten years from now we'll probably lose sight of it," he says. "It still could be very important for the next three or four years. Right now, it looms large. Prices have been declining in both real and nominal terms. We can all learn to operate more efficiently."