Reuters reports this morning that Fiat CEO, Sergio Marchionne, is accusing Volkswagen of waging a price war. The price discounts and promotions in Europe have reached a feverish pitch with deep cash rebates as high as 26% off list, free insurance, tax, servicing and roadside assistance, and even one manufacturer offering a free tiny electric car with the purchase of one new car.
While price wars can mean short term bargains for buyers, the long term effects can be devastating to the participants and the entire industry. Beyond the obvious hit on profit margins, participants are “training” buyers to expect discounts. And, as dynamic as these situations can be with constant package, rebate and discount offers, when is the best time for buyers to make their move?
Often times, highly dynamic price discount environments cause buyers to take a wait and see approach for an even better offer. It’s a lot like playing jump rope. You want to jump in at the best possible time.
The underlying cause of the European automakers discounting lies in excess capacity issues not to mention the overall economic situation. Automakers may be best served by reducing capacities as some have begun shutting down plants and laying off workers.
The long term consequences of price wars can mean a significant drop in industry profitability as buyers come to expect deals and discounts. Look at the U.S. auto market where manufacturers still offer “employee discount pricing” to lure buyers to the showroom.
The bottom line is to resist price discounting at all cost especially when competitors may perceive your move as a price war. Price wars are often started un-knowingly with an innocent price drop that is mis-interpreted by other industry participants as a strategic and offensive move for market share.
Read more in this article European Car Discounts Revved Up to the Max in Reuters.