Pricing – an output, not an input

I read an article a couple weeks ago in Automotive News Europe related to pricing power.  It was a good piece, citing various researchers, and with data showing how some brands, notably PSA under Carlos Tavares, have done better than others in improving real pricing in recent years.  This was undoubtedly a significant contributor to the fact that PSA turned a profit in the first half of this year, despite the effect of the pandemic.  But real pricing is not something that you set, it is the output of a number of other decisions and behaviours which together dictate the price that can actually be achieved, and also influence other costs such as supply chain, so driving both the top and bottom line of the margin calculation.

For anti-trust reasons we steer clear of pricing in ICDP research, but the story reminded me of some fascinating research that my colleague Ben Waller led almost 10 years ago.  The insights still apply now, and the only ways in which the data has aged in most cases is that the spends are higher and the supply chain management performance worse.  In that research, we gathered data from a wide range of manufacturers and markets and plotted their position on two overlapping matrices, one representing the network profile and the other the margin and bonus model.  In total there were eight dimensions – and you thought the maximum was three…  If you’re interested in the detail, we no longer list the publications on our website, but you can email a request HERE.

The bottom line from the research was that there was a close relationship between how a network was managed – size and complexity of the dealer network, the strength of the brand (measured indirectly by residual value performance), product variety and supply chain integration, and the margin and bonus structure which funded that network.  The margin and bonus structure included the base margin, qualitative and quantitative bonuses and campaigns.  Some of the connections between the two are fairly obvious – poor supply chain management will drive over-stocking which in turn attracts campaign spend to reduce it, which ultimately feeds through into lower residual values and lower brand value.

You could also see how some brands had to overspend relative to others, through their total margin and bonus spend, to support inefficient dealer networks (i.e. too many points, with insufficient scale) and inefficient supply chains (too much stock, pushed down to dealer level so that any flexibility was lost).  Other manufacturers who managed their supply chains well with an appropriately sized dealer network were actually under-spending relative to others and what we determined as the “norm”, because dealers were still able to make adequate returns despite a smaller pot of money from the margins and bonuses.

At a time when everyone is stretched – manufacturers and dealers – there is a strong argument for looking again at the underlying drivers of net pricing.  That means the network size and standards, the product range that is offered, and the way in which the supply chain is managed.  If appropriate choices are made in these areas, then margin and bonus structures – whether under a franchise model now, or an agency model in some cases in the future – can also be amended to align spend with costs and investments.  Net pricing improves, the opportunities for third party platforms and brokers to take advantage of the inefficiencies reduces, and residual values and brand value will improve.

It’s time to dust off some of the old reports, and apply them to today’s problems – they’re the same, but some new behaviours and solutions may make them easier to solve.