ECON 101 w. Prof. Ferguson: Class is now in session.
Mid-term exams are in just 8 days. Study the basics, folks (it's a long term).
Cheers to the Longs!
A slight question with 'the basics'. Generic macroeconomics does not consider or explain market dynamics that are not explicitly economic. Thus, most people think the odd price elasticity charts are accurate even when dealing with premium products. In quite a few cases price reductions can result in permanent brand pricing power destruction. Listing only a couple of examples:
Tumi- was a strongly positioned luggage maker until they began to discount and even sell excess production through discounters. Net result was to end out sold to Samsonite. Wisely Samsonite billed it as a coup and recouped a little of the cachet.
Fiorucci and Alexander McQueen for Target. Short term is has been great for them, but their highest business alley disappeared.
There are many car examples, nearly all of which coincided with reduced success, price cuts, then loss of innovation, the failure, nearly all succeeded in good times and died in recessions:
Prince, in 1946 maker of the first EV in japan, the 1946 Tama, followed by a succession of high performance as successful cars but limited R&D so... In a recession they were acquired by Nissan, is a good example.
From Horch, Packard and Pierce-Arrow to modern cases of Jaguar, Lamborghini and not-quite so modern ones such as Douglas aircraft the common elements are engaging in price competition to increase volumes, followed by reduced loyalty from customers, followed by reduced profits, reduced innovation and failure.
Every single case has major contribution from multiple factors.
Even the McDonnell Douglas effective takeover of Boeing was followed by obsession stock price obsession, reduced investment and oversight coupled with equally obsessive price competition. Formally Boeing has not failed, but the litany of the last years shows that it survives only because it, like GM, really cannot be allowed to fail.
The truth of all this is that many factors combine to produce success or failure.
A singular simplistic view of simple price elasticity, together with a simple undergraduate supply/price curve misses the entire point. That axis does have value, it represents accurately
sourcing decision for commodities. For completely generic products it even represents relative purchase decisions between brands. Even there Kleenex has pricing advantage over store brands, even when the two are identical. The famous Costco stories usually include finding out what company produces their brands more cheaply.
Zero doubt, price is a fundamental influence. It is NOT, repeat NOT the only major factor.
In many cases price si indeed a factor, when higher price conveys exclusivity. Coach handbags, watches, jewelry, cars.
The absolute perfect example for this is the VW Phaeton vs Bentley Continental. They were identical! The Phaeton died a sad death, the Continental transformed Bentley.
None of this, I repeat, has price as the only factor but it clearly shows that perfect price elasticity of demand is absolutely incorrect, except in true community sourcing decisions.
It is absolutely true that ability to pay does establish limits in total accessible market. Even there, we should examine the Bentley Continental. When launched nearly everyone though a car priced at US $150,000 had a tiny market:
Bentley Continental GT (2003)
Few cars were more eagerly anticipated than the Bentley Continental GT in 2003. The Crewe-based company had been building
barely 1000 cars per year, so what would its new parent company Volkswagen do to improve on that? The resulting Continental GT was just the ticket thanks to its
sleek coupe looks, four-seat cabin and, of course, the twin-turbo 6.0-litre W12 engine with 552bhp. No wonder 3200 customers put down deposits before the car was even launched.
Another first for Bentley was four-wheel drive in the Continental GT that helped make this a year-round daily driver for many of the thousands who flocked to the Flying B’s showrooms. In its first year,
6896 Continentals were sold and more than 40,000 of the first generation left the production line including the convertible GTC. Without the Continental GT, Bentley would likely be another British marque left to history books alone.
This car and the sedan version made the entire US >$100,000 car maker rise by over 100%.
So much for price/demand charts! FWIW, at that time, 1992, I was doing marketing consulting work for VW. Based on everything we knew then it was quite silly to try to sell a VW-branded twin, especially since the entire success depending on attracting more people to buy in that price class than and ever been done before. Frdinand Piëch was determined to upgrade yje Volkswagen brand despite its very name. Their version survived for a long time with constant downgrades, and was given mercy killing in 2016.
The moral of all this is that price positioning does matter, but it is only a single factor in a complex equation. However,
Price changes do definitely influence decision timing and can increase or decrease total addressable market. Engaging in direct price promotions and end of period promotions on price can and do help decrease pricing power. To that extent aggressively positioning pricing changes as some version of cost-plus does diminish brand image and pricing power.
The latest Tesla changes and those now happening fairly often as quarter end promotions are not likely to benefit Tesla, apart from a short term boost. Tesla is now trained customers to buy only when promotions happen. This is very unfortunate.
Whatever happens with earnings Tesla is diminishing it's cachet.
Offering lower priced products is time honored even with highly successful brands, including Ferrari and Porsche, both highly profitable and both having dealers which tend to use leasing promotions more than retail sales promotions, a time-honored way of promoting expensive products without obviously reducing prices. From Rolls-Royce, McLaren, Porsche to Cessna Citation, HondaJet, Dassault Falcon and Gulfstream they all use leasing based promotions and add other incentives from options to customized features and similar tactics.
Tesla desperately needs highly professional customer service, investor relations, and marketing (BTW, that is NOT likely to include advertising, but does include product placement). The company is now too large to exclude professional support services.
www.wsj.com
global.nissannews.com
the demand curve as they scale supply, they lower prices. Simple
It’s NOT some disaster. https://t.co/esbHbiETca" / Twitter
