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Luxury Automobile Industry Luka Jankovic, Alexa Davis, Laila Judeh Spring 2015 AEM 4160: Strategic Pricing

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Page 1: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Automobile Industry

Luka Jankovic, Alexa Davis, Laila Judeh Spring 2015 AEM 4160: Strategic Pricing

Page 2: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Executive SummaryINDUSTRY BACKGROUND

Value/Premium Pricing1st and 2nd Degree Price

DiscriminationSecondary Market Pricing

PRICING STRATEGIES

RAW DATA ANALYSIS

• The overall US automobile industry will see weakened growth throughout the rest of decade, but demand for luxury vehicles will be buoyed by an improving macro economy

• The average price of standard and luxury vehicles continues to rise• The luxury and sports car industry comprises of 17% of the market

• Luxury automobile manufacturers utilize several pricing strategies to extract the maximum surplus from consumers

• The secondary market pricing is heavily linked to high rates of depreciation

• Our analysis does not show any discernable relationship between the average price paid for a luxury automobile and median income, level of education, population, or geography

• There are several unobserved factors that may affect pricing strategies

Page 3: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Industry Background

Page 4: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Industry at a GlanceCar & Automobile Manufacturing in 2015

Revenue

Profit

Annual Growth 10-15Exports

Annual Growth 15-20Businesses

$107bn

$4.5bn

5.4%$57.3bn

2.5%203

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 5: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Consumer Confidence Index

Demand from new car dealers

World price of crude oil

World price of steel

Greater demand at the retail level, which is represented by car dealers, generates greater demand at the manufacturing level.

As gas prices decrease, consumers will be less sensitive to fuel-efficient vehicles, which are often from International brands.

Steel prices can be a major cost pressure, which can’t be passed onto customers. Prices are expected to decrease.

The 10-Year Treasury note is tied to interest rates. As interest rates rise, demand for cars rise due to lower financing costs.

Yield on 10-Year Treasury note

Spending behavior on large purchases, like automobiles, have a positive relationship with consumer confidence.

Auto industry is international so appreciation of USD lowers export rates and industry revenues.

Trade-weighted index

Key External DriversThe automobile industry is sensitive to macroeconomic pressures

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 6: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Supply ChainThe automobile industry is heavily dependent on its suppliers

The public or car rental leasing

companies

New car dealers

• Paint manufacturing• Steel manufacturing• Battery

manufacturing• Parts manufacturing

Automobile Wholesalers

Buying Industries

• Electronics manufacturing• Steering manufacturing• Brakes manufacturing• Interior

manufacturing

Selling Industries

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 7: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Cost StructureAuto manufacturers are cutting costs to bounce back from bankruptcy

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

4%5%

77%

3%3%2%6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Value

Industry Costs (2015)

Other

Rent & Utilities

Marketing

Depreciation

Purchases

Wages

Profit

‣ Largest percentage of costs are inputs, including engines, transmissions, etc.

‣ Wages falling, but still large due to labor contracts and inflated salaries

‣ Manufacturers that work with UAW Union will struggle to compete with mass-market, lower priced cars

‣ Renewed profitability due to:

‣ Lower labor expenses

‣ Improved retail sales

‣ Greater credit access

‣ Increasing consumer confidence

Page 8: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

International TradeNAFTA inflated trade statistics between US, Mexico and Canada

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Exports ($57.3bn) Imports ($159.8bn)

Germany, 10%

Saudi Arabia, 7%

All Others, 43%

Canada, 25%

China, 15%

Germany15%

Mexico12%

Canada29%

Japan27%

All Others17%

‣ HIGH and INCREASING

‣ High rate of exports to Canada due to NAFTA restrictions and location of manufacturing plants near Great Lakes

‣ China’s growth as export market due to rising affluence and standard of living

‣ HIGH and INCREASING

‣ High rate of imports from Canada and Mexico due to NAFTA restrictions

‣ International automakers moving assembly plants to Mexico to lower labor costs

Page 9: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Products & Market SegmentationLuxury and sports cars only comprise 17% of the market

5%

12%

41%43%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Sports Cars Luxury Cars Compact andSubcompact

Cars

Midsize andFull-SizeSedans

Product Segmentation (2015)

11%

5%

54%

20%

12%

0%

10%

20%

30%

40%

50%

60%

RentalCompanies

Government Exports Dealers Wholesalers

Market Segmentation (2015)

17%

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 10: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Competitive Landscape

Page 11: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Car IndustryHighly fragmented industry driven by consumer spending and interest rates

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

‣ Industry is highly fragmented with independently owned dealerships

‣ Luxury car dealers sell new and used vehicles, provide routine maintenance, repair and warranty services

‣ Price is secondary to customer service, staff training programs, single-point service, low-pressure experiences

‣ Market split between large and small companies

‣ Large companies: offer greater vehicle variety and well-stocked lots

‣ Small companies: offer boutique experience and individualized customer service

‣ Product segments

‣ Price: lower, middle, upper

‣ Type: sedan, SUV, sport luxury, super luxury

Luxury car = vehicle costing over $30,000

Page 12: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Barriers to EntryThe automotive industry has high and steady barriers to entry

Competition

MEDIUM

Technology Change

HIGH

Regulation & Policy

MEDIUM

Industry Assistance

HIGH

Concentration

MEDIUM

Life Cycle Stage

MATURE

Capital Intensity

HIGH

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 13: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Internal Basis of CompetitionCompetition in automotive industry is medium and increasing

Price Fuel EconomyStyling Reliability

‣ Each car class (compact, mid-size, etc.) has range of prices

‣ Similar vehicles, which are marketed to different customers will be priced differently

‣ Price varies according to personalization and higher add-ons

‣ Automakers redesign vehicle’s styling every five years

‣ Recently redesigned cars sell in higher volumes than other cars

‣ Redesigning a vehicle is not always a profitable venture if customers prefer the outgoing model

‣ Reliability concerns are lesser since domestic auto makers caught up to international auto makers, like Toyota and Honda

‣ Quality control procedures and manufacturing equipment have improved among domestic companies

‣ Consumers have shifted away from cars with low fuel economy (SUVs & trucks) towards compact and mid-size cars

‣ Manufacturers offer environmentally friendly options, like hybrid-electric, electric & clean diesel engines

‣ Shift from naturally aspirated engines to forced-induction engines

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 14: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Leading Luxury Car BrandsIndustry is becoming dominated by Japanese and German brands

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

• German-owned, manufactures premium cars under BMW, MINI and Rolls-Royce names

• 17 global production facilities with external partners in emerging markets (e.g. India, Thailand)

• 2014 unit sales = 339,738; 9.8% annual change(50% revenue from Europe, 50% from US & China)

• Subsidiary of Volkswagen, manufactures premium automobiles and armor-plated security vehicles

• Entering small, high-powered motor industry to acquire Ducati and launching diesel technology in N.A.

• Financial services offers financing, Audi Visa Signature credit card, Liberty Mutual insurance

• 2014 unit sales 182,011; 15% annual change (75% revenue from Europe, 50% from US & China)

• Division of Japanese-based Toyota, manufactures passenger cars, utility vehicles and sports cars

• Distinguishes itself from competitors with early-adoption of hybrid technology, quality and reliability

• 2014 unit sales = 311,389; 13.7% annual change

• German company, which symbolizes status, success and good taste; celebrated by popular culture

• First mover in luxury autos in early 1900’s; differentiates with variety, luxury features & safety measures

• 2014 unit sales = 356,136; 6.5% annual change

• Launched during 1980’s under Japanese company Honda with only two models

• Differentiated with low ownership costs but struggled to expand product line and lacks niche market

• 2014 unit sales = 167,843; 1.5% annual change

Page 15: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Car Market ShareCar & Automobile Manufacturing in 2015

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

17.6

17.1

16.1

9.4

8.8

8.7

6.1

4.9

2.9

2.7

2.4

0.8

0.7

0.2

1.6

0. 2. 4. 6. 8. 10. 12. 14. 16. 18. 20.

BMW (BMW)

Mercedes-Benz* (Daimler)

Lexus (Toyota)

Audi (VW)

Cadillac (GM)

Acura (Honda)

Infiniti (Nissan)

Lincoln (Ford)

Volvo (Volvo)

Land Rover (Tata)

Porsche (VW)

Jaguar (Tata)

Maserati (Fiat)

Bentley (VW)

Other**

Luxury vehicles: United States premium vehicle market share 2014 U.S.

HHI =

1189

Page 16: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Pricing Strategies

Page 17: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Pricing StrategiesLuxury car manufacturers employ several pricing strategies

1 Value/Premium Pricing

3 2nd Degree Price Discrimination

1st Degree Price Discrimination2

• Options

• Leasing

• Secondary Market

• Inter-temporal

• Willingness to Pay

• Income

• Bargaining Skills

4 3rd Degree Price Discrimination

• Military Discounts

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 18: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Value/ Premium PricingPremium pricing is the primary strategy employed

Companies use value-based pricing to set prices on the customers’ perceived value instead of the cost or production or historical prices.

Only a small population can afford to purchase luxury automobiles, which furthers its perception of luxury and exclusivity.

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

$263,200Rolls Royce Ghost

$16,950Toyota Corolla

• Cost of manufacturing for luxury cars is not necessarily higher than economy vehicles

• Profit margins for luxury vehicles are significantly higher because of boosted revenues

• Advertising focuses on brand and image rather than cost savings and efficiency

Page 19: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Car ProfitsManufacturers with luxury cars have higher profits

0%

1%

2%

3%

4%

5%

6%

7%

8%

BMW Volkswagen Mercedes Honda Nissan GM Ford Chrysler

Pro

fit

Mar

gin

(%)

Predominantly EconomyLuxury or Major Luxury Lines

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 20: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Communications Manager James Warren

“Rolls Royce is the ultimate expression that you have made it.”

Page 21: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

1st Degree Price DiscriminationLuxury car manufacturers attempt to gather all consumer surplus

Charging a different price to each consumer based on their perceived WTP

Elements

Income (Credit Check)

Willingness to Pay

Bargaining/Negotiation

2

3

1P

P’

P’’

A

B

C

Pricing down the demand

curve this captures all

CONSUMER SURPLUS

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 22: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

2nd Degree Price DiscriminationLuxury car manufacturers utilize several 2nd degree strategies

Designing a menu of alternatives to allow consumers to self-select based on different willingness to pay

1 Options

3 Secondary Market

Buying vs. Leasing2

4 Inter-temporal Pricing

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 23: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

OptionsLuxury features provide additional surplus extraction

Rear Wheel DriveAll Wheel DriveMSRP starting at

$54,275MSRP starting at

$56,775

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

+$5,640• Premium Package 1• Sport Package• Radio: Command w/

Navigation & Voice

+$9,305• Premium Package 1• Lighting Package• Sport Package

+$15,895• Redline Package• Premium 1 Package• Drive Assistance

Package

Mercedes e350 2015

$25,965 $24,565Toyota RAV4 2015

-

-==

$2,500$1,400

Difference

Mercedes e350 2015 Packages

Page 24: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Secondary Market PricingSecondary luxury vehicles sell for significantly less than new cars

FACTORS

Age

Mileage

Repairs

Information Asymmetry4

2

3

1

Quality Uncertainty5

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 25: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Vehicle DepreciationLuxury vehicles tend to depreciate more in value

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 2 4 6 8 10 12 14

Val

ue

of

Car

Le

ft

Years

Standard (15% per year) Luxury (20% per year)

Source: Based on data from Kelly Blue Book (Assumes 15% dep./yr and 20% dep./yr for standard and luxury automobiles, respectively

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 26: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

$0.00

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Cu

mu

lati

ve D

epre

ciat

ion

Years

Standard Luxury

Cumulative DepreciationCumulative depreciation losses from luxury cars are nearly double

Source: Based on data from Kelly Blue Book (Assumes 15% dep./yr and 20% dep./yr for standard and luxury automobiles, respectively

Avg Price: $55,763

Avg Price: $32,086

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 27: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

25%of all new car transactions are leases

Page 28: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Inter-temporal PricingThe innovation adoption lifecycle illustrates inter-temporal pricing

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

INNOVATORS EARLY ADOPTERS EARLY MAJORITY LATE MAJORITY LAGGARDS

Willingness to Pay Economies of ScalePatience

INNOVATION ADOPTION LIFECYCLE

Page 29: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

3rd Degree Price DiscriminationAutomakers charge different prices to certain demographics

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Seller charges different prices to two or more different buying groups with different demand elasticities.

These groups can then be differentiated based on characteristics such as, age, location, or sex.

United Services Automobile Association (USAA)* Members Receive Up to $7,000 in Member Discounts

BMW ChevroletMercedes-Benz

*USAA is a member-owned Fortune 500 company that serves members of the military and their families with insurance, banking, investment and financial service products

Page 30: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Raw Data Analysis

Page 31: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Raw Data Component

GoalsWe intend to analyze several factors that may have an effect on the average price paid for a luxury vehicle.

Raw data analysis can provide insight into key pricing strategies

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

2 Education

4 Dealership Effects

Population3

5 Regional Differences

Analysis Points

Income1

Hypothesis

Higher education will lower price with better bargaining

More competition will lower price paid

Higher population lowers information asymmetry

Sparsely populated regions will have higher prices

Higher incomes will be more susceptible to premium

6 Extrema Comparison Price insensitivity with high income individuals

Page 32: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

DataOur sources provide us with adequate tools for our analysis

BMW 5 Series StatisticsMedian $50,553.00Average $51,170.32Standard Deviation $1,559.02Maximum $54,161.00Minimum $48,843.00

Elements

50 random zip codes

Car prices from truecar.com

Consistent model (BMW 5 Series Base)

Demographic data from zipwho.com4

2

3

1

Dealership data from Kelly Blue Book5

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 33: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Median IncomeMedian income does not seem to have an effect on final price paid

y = -0.0203x + 52205R² = 0.0456

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

$0.00 $50,000.00 $100,000.00

Av

era

ge P

rice P

aid

Median Income

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 34: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Education

y = -437.38x + 51292R² = 0.0014

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Av

era

ge P

rice P

aid

College Degree (%)

Education does not seem to have an effect on final price paid

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 35: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

PopulationPopulation does not seem to have an effect on final price paid

y = 0.03x + 50173R² = 0.029

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

Av

era

ge P

rice P

aid

Population

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 36: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

26%of surveyed luxury dealerships were BMW

Market Space: BMW, Mercedes, Audi, Acura, & Lexus

Page 37: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Dealership FrequencyHigher income areas tend to have more luxury dealerships

y = 1E-04x + 0.246R² = 0.2706

0

2

4

6

8

10

12

$20,000.00 $30,000.00 $40,000.00 $50,000.00 $60,000.00 $70,000.00 $80,000.00 $90,000.00

Lu

xu

ry D

eale

rsh

ips

Median Income

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 38: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

BMW DealershipsMore BMW dealerships in the area do not seem to alter the price

y = 37.808x + 50984R² = 0.0012

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0 1 2 3 4 5 6 7 8

Av

era

ge P

rice P

aid

Number of BMW Dealerships

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 39: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

BMW Dealerships/CapitaBMW Dealership/Capita does not affect prices

y = 884929x + 50984R² = 0.0012

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0 0.00005 0.0001 0.00015 0.0002 0.00025 0.0003 0.00035

Av

era

ge P

rice P

aid

Number of BMW Dealerships/Capita

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 40: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury DealershipsMore luxury dealerships in the area does not seem to affect price

y = -22.726x + 51228R² = 0.0049

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0 2 4 6 8 10 12 14 16 18 20

Av

era

ge P

rice P

aid

Number of Luxury Dealerships

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 41: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Luxury Dealerships/CapitaLuxury dealerships/capita does not seem to affect price

y = -531927x + 51228R² = 0.0049

$48,000.00

$49,000.00

$50,000.00

$51,000.00

$52,000.00

$53,000.00

$54,000.00

$55,000.00

0 0.0001 0.0002 0.0003 0.0004 0.0005 0.0006 0.0007 0.0008 0.0009

Av

era

ge P

rice P

aid

Number of Luxury Dealerships/Capita

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

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GeographyGeography does not seem to have an effect on final price paid

$51,086.33

$50,980.00

$51,087.17

$51,729.63

WEST

MIDWEST

SOUTHEAST

NORTHEAST

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

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Significance TestThere are no statistically significant differences across regions

Statistic Value

n 50σ $1,559.02μ $51,170.32α 5.0%

Region Value Z-Score Probability Significant?Northeast $51,086.33 -0.38 35.2% No

Southeast $50,980.00 -0.86 19.4% NoMidwest $51,087.17 -0.38 35.3% No

West $51,729.63 2.54 99.4% No

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

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Average Price PaidLower income areas may pay more for luxury cars

$49,000.00

$50,000.00

$51,000.00

Mahopac, NY Beverly Hills, CA

Ave

rage

$49,000.00

$50,000.00

$51,000.00

Tacoma, WA Oakland, CA

Ave

rage

Top Two Income Bottom Two Income

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

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Price SpreadLower income areas experience greater price spreads

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

$0.00

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

Mahopac, NY Beverly Hills, CA

Stan

dar

d D

evi

atio

n

$0.00

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

Tacoma, WA Oakland, CA

Stan

dar

d D

evi

atio

n

Top Two Income Bottom Two Income

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SkewHigh income areas have a lower price sensitivity

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

0

0.5

1

Mahopac, NY Beverly Hills, CA

Skew

0

0.5

1

Tacoma, WA Oakland, CA

Skew

Top Two Income Bottom Two Income

Page 47: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Unobserved FactorsDespite our results, pricing strategies could still be in play

Potential Unobserved Factors

Negotiating Ability: Individuals who understand the value of money may be better negotiators

Heterogeneous Demographics: Areas with a wide range of demographics can lead to higher spreads

Perceived Value of Money: Some individuals may more be frugal no matter income levels

Geography: Individuals may require different vehicles depending on the terrain/climate4

2

3

1

Information Asymmetry: Knowledge of automobiles is not homogenous among consumers5

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

Page 48: Luxury Automobile Industry - Cornell University · Luxury Automobile Industry Luka Jankovic, Alexa Davis, ... RAW DATA ANALYSIS • The overall US automobile industry will see weakened

Raw Data ConclusionsOur analyses do not seem to yield any distinguishable relationships

The data reveals that the initial hypotheses are not supported by the data.

Dealership frequency does not seem to impact luxury car prices

The correlation coefficients are not strong enough to support any relationship.

The differences in prices paid for a BMW 5 Series across geographic regions is not statistically significant.

| INDUSTRY BACKGROUND | | COMPETITIVE LANDSCAPE | | PRICING STRATEGIES | | RAW DATA ANALYSIS |

More granular data points and more accurate data is required to determine the actual relationships.

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Questions/Comments?

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Appendixhttp://www.goodcarbadcar.net/2015/01/usa-auto-sales-brand-sales-results-2014-year-end.html

http://www.edmunds.com/lexus/?mktcat=lexus-type&kw=new+lexus&mktid=ms17110224

http://www.edmunds.com/mercedes-benz/

http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=816,

https://johnson.library.cornell.edu/databases

http://subscriber.hoovers.com/H/industry360/overview.html?industryId=1910,

https://johnson.library.cornell.edu/databases

http://images.forbes.com/forbesinsights/StudyPDFs/automotive-outlook_report.pdf

http://www.statista.com/statistics/281574/size-of-the-luxury-car-market/

http://truecar.com/

http://kellybluebook.com/

http://zipwho.com/