That may not sound like much, but smart pricing contributed some $260 million to Ford's $896 million first-quarter profit, figures Prudential Securities Inc. analyst Michael Bruynesteyn. All the more impressive, Ford gained a half-point of market share, to hit 21.2%. Says Chief Executive William C. Ford Jr.: "This has been very effective at getting us the maximum share for the dollar."
How did Ford do it? The company is careful to spend its marketing cash to promote money-makers that aren't selling out on their own, such as the high-margin F-150 pickup truck, and to promote lucrative options that fatten profits. Ford has even sneaked in a few sticker-price hikes, such as a $90 increase on the Taurus.
Smart pricing is crucial to Bill Ford's plan to turn around the No. 2 auto maker. Two days after taking charge, in late 2001, he promoted pricing guru Lloyd E. Hansen to vice-president of revenue management. After two painful years in which Ford lost $6.4 billion, amid nagging problems with quality, productivity, and ho-hum models, Hansen's strategy is emerging as a bright spot.
The plan allowed Ford to hold prices steady in 2002, while GM's net vehicle prices fell 2%. This year's price gain helped Ford raise its revenue per vehicle by $868 in the first quarter, to $21,716 -- $1,400 more than GM pulls in.
Here's how it works: Ford collects sales data daily from dealerships and feeds it into computer models that predict which incentives will spark the best results. The output also shows marketers which cars need a boost and in which regional markets -- and which cars don't. Why waste cash on vehicles that sell well without it? Ford offers a $1,000 rebate on the popular Escape small sport-utility vehicle but puts $3,000 on the slower-selling Explorer. Thus Ford spends $300 less per car on incentives than rival GM, with its $3,800 average, says CNW Marketing Research.
Revenue management also concentrates Ford's spending on the most lucrative vehicles and options. So the rebate on the high-margin Expedition jumbo SUV is $3,000, but it's less for low-profit vehicles, such as the subcompact Focus. Likewise, the carmaker coaxes buyers to spend lavishly on expensive extras, often as a pricey package of features, as Japanese auto makers often do. Ford's edge is its extensive use of computer models to find the combination that generates maximum profit while appealing to the most buyers.
That strategy led Ford to create limited-edition vehicles, such as an upscale version of the proletarian Escape, whose price tops the previous high-end model by $3,000. Knowing that Lincoln Navigator customers are willing to pay extra for novel features, Ford sells a $2,500 package that includes a power running board and heated and cooled seats.
Such moves seem like common sense. Yet they're surprisingly rare in the U.S. auto industry these days. GM prefers the simplicity of promoting a single deal, say 0% financing, across the board. Chrysler is trying to kick the incentive habit by emphasizing long-term warranties instead. Most Japanese and European carmakers, with their stronger vehicle lineups, don't need to rely heavily on incentives.
GM's ongoing rebate game will keep the pressure on Ford. And the squeeze on Ford's profits from popular new Japanese SUVs and minivans will also make it harder to sustain pricing successes, especially without desperately needed new hit models. But with smart pricing, Ford at least has a chance of staying in the race. By David Welch in Detroit