Episode #0088 🚗 Mercedes- Benz Fixed Pricing Model
In this episode of Pricing College – we talk about Mercedes-Benz’s fixed pricing model. What it is and how they’re going to execute this in the Australian market?
TIME-STAMPED SHOW NOTES:
[00:43] Mercedes Benz is moving to the fixed pricing model.
[01:50] Here’s why dealerships are unhappy and undervalue the value of the selling experience.
[03:49] Customer wants to negotiate the price with a certain range.
[05:39] Salespeople roles are vital in any market.
[07:20] Demand and supply issues of cars.
[10:49] If you get backed off by salespeople, it will backfire on you.
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. 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 air? We’ve decided to take a topic that we probably all have read a bit about as pricing sales professionals. 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.
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.
They think that the product sells itself and that the marketing, the advertising, the brand image those things are selling the product. Literally, they also think 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, it might undervalue the value provided through the selling experience and 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, or you might be a repeat buyer. Now, 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. You might ask:
1. Is it available today?
2. Is it available to drive away?
3. Is it a demonstrator model that’s been sitting on the forecourt for a while?
There’s a lot of little intangibles. Now, I’m all for canning, cloning, and selling through websites. But when you’re going into something as tangible as a car, there’s a lot of stuff in there.
I agree with that and 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, they’re missing out on a very important value driver. And that is customers want to negotiate the price of 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 it 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.
Maybe that was a reason in itself to go to a fixed pricing 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.
Perhaps 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 podcas. 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 for 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 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, and being able to tailor the offer to you.
Even getting down to 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 of, there are just too many things around it. 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 also decentralizing the implementation. And I think what we’re doing here is we’re over centralizing. But you’re damaging the actual skills of salespeople that in any market are vital.
Yeah, I suppose that itself is 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 and 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. This 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, there were a number of price increases prior to six months before introducing this new fixed model.
I imagine that they use those price increases as a usual covering of 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.
As Aidan was saying, they have missed out on the tradable with 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. They’re potentially introducing a completely new look and modern Mercedes feel that is more aligned to the electronic car.
It’s the Tesla type idea that’s phasing out old, bringing in new thinking about demand as well as supply, and 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. That 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 doing so, maybe they’ve got broader business implications for making these decisions. Now, I’m thinking it’s probably deranging when 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 backoff, it will often backfire on you. That’s the first thing I will say. Now, 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, BMW or a Lexus, or whatever it is. Now, maybe they just want a little bit of knock off of 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 that 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 for those in different markets?
So, I think it’s a very interesting one. There could be the concept of a change in the model completely like the Mercedes mode.
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. Now, can you centralise something as passionate 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 centralised 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 it’s 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, we’ll be happy to answer them.
All right. Well, thank you very much for listening! Thanks again. Bye!