Value Pricing Tough Road But Right Path

Just another whopper sales incentive or a well-executed transition into a new pricing era?

General Motors, Ford and Chrysler are set to pull the plug next month on their popular “employee-discount” sales incentive programs and move toward a new strategy of lower prices and fewer and smaller rebates.

The big question is whether auto makers truly have the stomach for this paradigm shift in marketing and whether it ultimately will pay dividends – or simply sap profitability.

The recent employee-discount programs have been criticized by some as just another round of massive rebates that moved the metal but not the bar, keeping the domestic auto industry caught in an endless boom-and-bust market cycle where customers show up in big numbers only when the deal is too good to ignore.

Looked at simply as an incentive program, the employee discounts for all have been a huge success. Sales shot to an any-month high in July and nearly a half-million units of mostly older '05 models were removed from stock.

But the fire sale was designed to do more than just that; it was engineered to set the stage for a whole new pricing philosophy.

Driven largely by GM, the Big Three are transitioning to the new strategy that puts sticker prices closer to actual transaction prices. That means when customers walk into the showroom or research car costs online, they'll be looking at starting prices closer to what they'll actually pay.

There still will be room for small incentives and haggling with dealers, but manufacturers won't have the kind of built-in profit margins that have enabled them to slap $4,000-plus rebates on the hood of many new cars and trucks.

Critics say the move won't work. They contend American car buyers have been hooked for far too long on the big deal and won't come without huge incentives to lure them into showrooms.

While that may turn out to be true, it's a risk worth taking – and the Big Three need to do what they can to make sure the scheme has every chance to succeed.

It will take time – a lot of time – and some deft management of production schedules. But if the Big Three can stay the course, they'll have a shot at least at reestablishing brand value, slowly creeping prices back up model by model and ultimately improving their long-term profitability.

Sticking with the past strategy of continually escalating rebates would ensure a future no brighter than the present.

Uncertain is whether the Big Three can deliver the must-have products to make it all work. And whether their executive teams and management boards have the fortitude and patience to stick with the game plan once the going gets tough.

So far it looks as if GM, at least, is digging in for the long haul. But the true test will come soon enough – as the market hits its inevitable post-rebate soft spot and cars begin to pile up on dealer lots.

[email protected]