You may
as well learn from the mistakes of others
You
may as well learn from the mistakes of others. After all, life is too
short to make them all yourself.
There’s a good lesson to be learned from General Motors, and most of
the other car manufacturers for that matter.
Like the rest of us, General Motors found itself in the middle of a crowded
and competitive market. Business was particularly tough after the September
11 terrorist attacks so to coax jittery buyers back into the showrooms and
to steal market share from its rivals, GM started to offer discounts in the
form of incentives such as 0% financing and rebates.
For a while, the strategy worked. In 2001 and 2002 it gained market share
from Ford and Chrysler. Of course, the other manufacturers retaliated with
incentives of their own and three years into the price war, GM isn’t
so happy. Incentives are costing the company a whopping US$4100 per car, sales
have tumbled 15% and their market share has shrunk from 28.1% in 2001 to 26.8%
today. GM’s response has been to increase incentives to US$5000 on trucks
with dealers often throwing in an extra US$1000 of their own. Needless to say,
margins have been hammered as a result and profits are looking sick.
This past Christmas, GM decided that enough is enough. It stopped the incentives,
figuring that a bevy of new models would attract buyers into its dealerships.
They were wrong.
It seems customers have got used to the free financing and cash rebates. GM
has taught them to expect such deals and when they stopped offering them,
customers started looking elsewhere. The hapless auto giant found it had
no choice but to reinstate the discounts. As a result, GM now earns $436
per vehicle it manufactures! To make matters worse, its shrinking market
share means that it will probably have to cut back production - some experts
say by up to 17% - as it tries to slash inventory by 200,000 vehicles. That
will mean fixed costs will be spread over fewer vehicles, reducing profits
even further.
GM’s predicament teaches us two lessons. First, no one, but no one,
wins a price war. Ford, Chrysler, Nissan and Toyota all find themselves in
a similar situation, albeit they are not as badly off as GM.
Secondly, GM’s predicament reminds us that if you want to make a profit
tomorrow, you must make having profitable customers who stay with you a long
time the main thing today. Most of us understand that we should strive to turn
customers into loyal fans; however, most of us forget that they must be profitable
customers if their loyalty is going to have a positive impact on profitability.
In my experience, very few companies know which of their customers are profitable.
They know the profitability of a product line, or a region, or the last quarter.
But whether doing business with Mrs Jones or ACME Consolidated is profitable
is an unknown. Do you know the profitability of your customers?
When we look at GM, we should have some sympathy. After all, most of us could
find ourselves in the same boat. Discounting is the preferred (and often only)
competitive weapon for most companies. Companies discount because they fear
that unless they matched or bettered their competitor’s prices, they
would lose sales. “We can’t afford not to discount,” managers
tell me.
If you think that way, have a look at tables that show how much more you would
have to sell to make the same money you’d have made if you hadn’t
discounted. It’s truly scary. For example, if you have a 20% margin and
you discount 18%, you would have to sell 900% more to earn what you would have
earned had you not discounted!
The question is not: “Can I afford not to discount?” but rather: “Can
I afford to discount?”
If you’re not sure of the answer, ask General Motors.
|
