Episode #0088 - Mercedes- Benz Fixed Pricing Model

In this episode of Pricing College -  Joana and Aiden talk about the Mercedes Benz fixed pricing model.

What it is and how they’re going to execute this in the Australian Market?

Hello and welcome to pricing college with your hosts Aidan Campbell and Joanna Wells. You may have noticed that this is our first podcast in quite a while and you might be asking, why? Fundamentally, the reason is that we were too busy, and we were caught up with work at Taylor Wells. And so now we are back on track and we've made a few adjustments basically to speed up the process. You may notice we don't have an intro because some people said they didn't like it and it delayed getting into the good stuff. So I suppose we're stripping away some of the superfluous stuff and hopefully leaving the good stuff.

To get down to it. What's the first topic we're going to speak about today after such a long time of not being on there? We’ve decided to take a topic that we probably all have read a bit about as pricing sales professionals and that would be the Mercedes pricing model change moving to a fixed pricing model and sales model. Before I suppose the recommended retail prices were just that and the franchisees could obviously use that as a benchmark but could negotiate around those prices. Now, since a couple of weeks ago, they have launched a completely new model where the franchisees cannot do that and the salespeople in those franchisees are not happy about it because they've lost I suppose the compensation benefits and all of that negotiation power that they had in one fell swoop.

I think there’s a lot of stuff going through the court at the moment because obviously, the dealerships are very unhappy, dealerships I believe it'll cut their margins that aspect of the actual structure of the pricing we're not too sure about, but the dealerships are very unhappy. They’ve obviously invested in fancy showrooms, etc. and feel they're getting all their hard work has been taken away. But I suppose some of my thoughts on this are from a value perspective, you can look at it in very many different regards. You can make the argument that Mercedes is so confident in their value that they think they don't need salespeople in theory that the product sells itself that the marketing, the advertising, the brand image those things are selling the product and literally the showrooms are distribution centres, it’s a shipping model to get them to the place, that's one aspect. I would say to some extent might undervalue the value provided through the selling experience, the differentiation of answering questions. If you've been to the Audi dealership, and then you pop in to see the Mercedes dealership there's a lot of value that if you'd have questions you'd want to be answered, you might even trust the salesperson, you might know them previously, you might be a repeat buyer and that gives you confidence in them where they're a good dealer, they're not selling lemons as the old saying goes. And also thinking that a car is just a single item is to me it's a bit foolish. There are so many slight differentiation, leather seats, colours, trims. Is it available today? Is it available to drive away? Is it a demonstrator model that's been sitting on the forecourt for a while? Is it something you know, there's a lot of little intangibles, I'm all for canning and cloning and selling through websites, but when you are when you're going into something as tangible as a car, there's a lot of stuff in there.

I agree with that and when I read Mercedes' response to that very point about the value and the different attributes of their cars and range. They came back and said, Well, we considered that within the fixed pricing. However, the sales teams don't agree with that and they argue that the number one value driver for customers is the ability to negotiate and search for high-value cars through different franchisees. So, they're claiming that yes, on a product level, i.e the car, that may be the case or may not, but from a customer perspective that they're missing out on a very important value driver and that is customers want to negotiate the price on the car within a certain range and highly value that. Now look, when you think about that in itself, it's a little bit of a grey area and I could see that, that might trouble head office and Mercedes that having that grey sort of wide price range and ungated value proposition in the hands of sales and franchisees and maybe that was a reason in itself to go to a fixed price model where they could control that. Maybe they were hearing other sorts of market intelligence feedback from their customers that was contrary to the sales team that was actually saying they didn't like the wide price bandwidth for high-value cars and if you're going to pay a lot of money for a car, you want to know what the price of that car actually is.

I can see a lot of the point in protecting margins, protecting the brand image and this sort of stuff, but there's so many on this podcast, we often talk about the tradables, the intangibles, the little things people don't think about. When it comes to cars, there are so many things.  There's, you know, if you do a trade in your other vehicle that the dealership will take it away for you and give you a bit of money off. People like the concept of haggling and negotiating and even that they like to feel they're getting a little win here and there. Is the dealership near to your house? Has a dealership invested in a place that's super local that you can go to easily? Even then, the dealership, is there a car that they just want to shift to get off the forecourt they've invested in that stock or do they need to move it? We move into concepts such as clearances, people like the 2022 model versus the 2021 model, all these sorts of things. Can this be run from Germany when we're talking about the Australian market where there are these differences? The Australian market is significantly different to say the European market due to the size, the geography, the temperature, all this sort of stuff. The other thing I'd say is, on the Internet, yes, you can get all the information you want but oftentimes when you go to a dealership you want to know information that the salesperson knows. They know what will get you across the line, fuel consumption, what your value drivers are? being able to tailor the offer to you. Even getting to down to like financing, how many people go in and buy a car in cash? Can you trade and price for the financing aspect? All these sorts of things that I think there are just too many things around it that in theory, you could be stripping away and damaging your sales force. On this podcast, we often talk about centralizing, you know, centralizing the strategy, but then decentralizing the implementation and I think what we're doing here is we're over centralizing, but you're damaging the actual skills salespeople that in any market are vital.

Yeah, I suppose that itself it's a fixed model, not just a fixed pricing model it's a fixed business model and an inflexible by definition being fixed. It's inflexible with execution implementation and getting those regional and local differences. From a stock management perspective, interestingly, with this new model the franchisees no longer own the cars. Sales teams, franchisee owners are saying there's no incentive for them to shift old stock, new stock or any stock saying that they don't own the vehicle which is going to have, which I suppose was the very lever that they were using during sort of the long negotiations to prevent this new pricing model over the last few months. From a pricing perspective, I did notice that prior to the fixed price model changes Mercedes Benz had implemented a number of price increases prior six months before introducing this new fixed model. I imagine that they use those price increases as the usual covering costs in a fluctuating cost environment. But I also imagine they did a little bit of modelling on those attributes but I do believe a lot of those value attributes were based on the product and as Aidan was saying, have missed out on the tradable the other things that people value, not just the price, the product, or even the brand, it's everything else around it, which is the pricing system that architecture piece. So, yeah, in a way, maybe looking beyond that, what could be a broader business strategy implication of this new price model change? It could be that they are thinking of deranging certain cars in Australia, potentially introducing a completely new look and feel and modern Mercedes feel that there's a more aligned to the electronic car, the Tesla type idea phasing out old, bringing in new thinking about demand as well as supply thinking about that in itself. At the moment, there are huge supply issues with cars. Maybe they took that into account when they're doing a prior price increase over the past few months. But demand is high at the moment and supply is short, which means that maybe they've kept their own revenue opportunities right now because there's a huge demand for these cars and just not enough of them. So with a new fixed price model, they've kept the revenue opportunity but in so doing maybe they've got broader business implications for making these decisions, which I'm thinking is probably deranging and thinking about business strategy.

Yeah, I think one of the things we look at here is, on this podcast we often say never piss off your sales team. As a pricing department, one of the worst things you can do is get the back off of people on the sales team who need to implement the strategy. If you get the back off, it will often backfire on you. That's the first thing I will say and the second thing I would say is often we're very against discounting, you find strategies not to discount but often sales If you discount you might get a sale in the door where someone is shopping around the competitor to an Audi or BMW or a Lexus, or whatever it is, and maybe they just want a little bit of knocked off the price to get them across the line to match another price or something like that. So in that instance, I think it could be a foolish thing. The only thing I'd say is, what is the impact this will have on the second-hand market? If you're keeping the inflated price for brand new cars, what happens to a car that was sold two months ago, when someone needs to sell that will there be a significant difference in pricing in those in those different markets? So I think it's a very interesting one, there could be the concept of a change in the model, the Mercedes model completely and some newspapers have reported that potentially they're moving to electric engines and their entire model will change. Who knows? But the alarm bells for me will be annoying a sales team that has built up expertise over time and can you centralize something as passionate about such as a car?

Yeah, I think we're yet to learn the real answers to all of this. I think there's going to be a lot of work done locally to make this work, but which in itself seems hard to imagine because it's a very much centralized German strategy. So how they're going to execute this realistically in the Australian market is yet to be seen that it's probably going to be quite difficult. But an interesting topic, and we'll probably circle back as we learn more and provide you with those insights. But up to this point, I hope you've enjoyed our conversation about Mercedes and feel free to let us know your thoughts about this topic. If you know more, let us know. If you've got any questions, happy to answer them. All right. Well, thank you very much for listening.

Thanks again. Bye