The troubled auto giant is trying to rein in runaway incentives as Red Tags turn to red flags. Its new pricing strategy, to be announced at the North American International Auto Show in Detroit, is expected to abandon broad, multi-brand incentive deals like its recent "Red Tag Sale" for lower transaction prices. Action is crucial since it's introducing 19 new models this year.
Paul Ballew, executive director-global market and industry analysis at GM, hinted at the new pricing strategy in a sales call with analysts and the press. Over the past 18 months, he said, GM's key messages on value weren't getting through "because incentives had gotten too complex and there was a lot of noise out there in the marketplace and it was hard for consumers to understand." GM's core strategy in 2006 will be "simple pricing, transparent pricing and simple messaging on our part wrapped around the portfolio, which is pretty robust. "The auto giant tried something similar with its "Total Value Promise" program in October, the month after its summer employee discounts ended. That concept, mentioned in ads for several vehicle brands, was intended to convey lower sticker prices, improved warranties and added standard features.
What it did instead was confuse consumers. "It doesn't mean one thing to any one person," Steve Hill, director of retail marketing at the company said when asked by Advertising Age to define the program.
Even more startling was the confession of Mark LaNeve, VP-vehicle sales, service and marketing in North America, to The Wall Street Journal last week about its popular employee-discount-pricing program: "Hindsight being 20/20, I probably wouldn't have done it," he said. He told the paper that "The Japanese made their mark by making good products at a lower price. So to some extent, we are going to underprice them."
If Toyota Motor Corp. carries out its plan to boost global vehicle production 10% this year, it will usurp GM's title as the world's largest automaker. General Motors plunged headlong into the red in 2005 and lost $4.8 billion in North America through September. GM said last week it sold 4% fewer cars and trucks in the U.S. in 2005 vs. 2004. And while the automaker spent $2.2 billion through September 2005 in measured media, up from $2 billion a year ago, according to TNS Media Intelligence, nearly half a billion dollars of the total went not toward individual models but to hype sales incentives.
If GM wants to break away from incentives, it needs to drop sticker prices by as much as 20%, said Susan Jacobs, president of consultant Jacobs & Associates. While she pointed to several new GM models that are priced right and selling well, such as the Chevrolet HHR, the Hummer H3 and Cadillac DTS, "most of GM's models without incentives are overpriced," she said.
GM's price cuts will have to be dramatic to get buyers' attention, agreed Art Spinella, president of CNW Marketing Research. GM has buyers well trained when it comes to incentives: The auto consultant found that through December, consumers expected to get $4,300 off any carmakers' suggested retail price.
In 2005, GM led Detroit with an average incentive of $3,623 per vehicle, while Chrysler Group spent $3,510 and Ford Motor Co. $3,148, according to Edmunds.com. Toyota Motor Sales USA spent an average of $961.
In order to capture new vehicle buyers, GM needs to "hammer its messaging on price cuts on a daily basis and sustain it," said Mr. Spinella, who said it could take up to four years for the message to become ingrained in consumers' minds. By then, Toyota could have left it in the dust.