45-GM Goes for Help with its Used Cars

 

Some product innovations have more power to move market share than others. No benefit can move market share unless it is unique, a one-of-a-kind. Successful Function and Price innovations are powerful attractants for customers. They are so powerful that competing suppliers feel forced to copy them. Other innovations like Reliability or Convenience benefits move market share, but often slowly. They tend to have longer lives as unique benefits. Here is an example of those forces in play.

Posted 9/2/08

Recently General Motors decided to provide a bumper-to-bumper full warranty for one year or 12,000 miles on its used vehicles going back to the 2003 model year. The warranty applies to GM Certified Vehicles. You might ask yourself, why would GM bother to add a warranty to cars that they have already sold? The answer is that the company wants to improve the residual values that the market puts on its used cars, and for very good reason.

The original purchaser of a car rarely holds it to the end of its life. Rather, the majority seem to sell their cars, or trade them, after about five years. The residual value of the car after five years is the value that the original owner uses to reduce the purchase price of his or her next new car. Here is where GM, and Ford and Chrysler for that matter, has a severe problem.

The residual values for foreign auto marques, especially Toyota and Honda, are far higher as a percentage of the original purchase price than are the domestic makes’ residual values. These differences in residual values are an undeniable criticism of the GM products. Any purchaser of a new car who does his homework will factor this higher residual value into his evaluation of the “cost of ownership.” The foreign makes’ higher residual values are equivalent to a deferred discount on the next car he purchases.

Here’s how this works. Assume that both GM and Toyota are selling today an automobile with a $30,000 price tag. Further assume that after five years the Toyota is worth 50% of its original purchase price while the GM make is worth 35%. These are reasonable estimates for the current market. At the end of five years the Toyota automobile is worth $15,000, while the General Motors automobile is worth $10,500. The difference gives the owner of the Toyota automobile $4,500 more to purchase his next car than the General Motors purchaser has. Over the course of five years, the Toyota owner spends $4,500 in total, or $900 per year, less to drive his car. That’s a savings of 6 cents per mile on a car driven 15,000 miles per year.

General Motors is hoping that its warranty on its used cars will increase their residual values by enough to offset the advantages that the foreign makes have. GM is creating a Reliability innovation that puts the company’s promise in writing that the used car will operate for 12,000 miles or one year with no problems. (See the Perspective, “Reliability: The Hard Road to Sustainable Advantage” in StrategyStreet.com.) Will that be enough to offset the significant differences in residual values at the end of five years? Probably not, but it is a start in the right direction.

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Update 2022:

Because so many customers lease automobiles in 2022, Toyota’s residual value advantage shows up early in the customer relationship. Toyota continues to lead the US market in residual value of its automobiles. A recent study found that 5-year-old Toyota brand automobiles had a residual value of 64.7% of their original cost. Toyota enjoyed a 2.6% residual value advantage over Chevrolet and a 4% advantage over Ford. It’s advantage over Chrysler was 10.7%. This residual value advantage enhances the reputation of Toyota and also reduces the lifetime cost of ownership for the customer. This advantage is reflected early in the cost of leasing a Toyota brand automobile compared to those of its competitors.

GM sought to reduce the resources its customers used on its products. Here is a brief description of these kinds of innovations.

The company may add value by Reducing the Resources the customer uses with the product. These resources include money, time and energy. The Company may reduce the money resources the customer uses with the product by reducing the costs that the customer incurs with the product and all its attendant components and activities. The Company reduces the time the customer must spend with the product through innovations that reduce the customer’s learning and activity steps. The Company may also add value by reducing the energy the customer must use with the product. These energy reductions include overcoming the physical constraints the product sets on the customer and reducing any toll the product takes on the customer’s health.  Learn more HERE.

• Audio Tip #93: How Do We Reduce the Resources Used With Our Product?

 

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Update 12/25

GM had a good idea here. In fact, it was so good that Ford, Toyota and Honda copied the idea and Honda raised the bet by adding more to the standard warranty. So what does this mean?

Every customer sorts through all potential suppliers until he chooses only one. That unique supplier offers the customer something that no other supplier could or would offer that customer. The customer uses the Customer Buying Hierarchy as his sorting mechanism. This Hierarchy holds that customer needs are, in specific order, Function (or Features ),Reliability, Convenience, and, finally, Price. The customer proceeds through this Hierarchy as many times as necessary to eliminate competitor offerings until there is only one remaining, unique, supplier. The customer sorting process, the Customer Buying Hierarchy, is actually negative. It seeks to eliminate suppliers at every level of the hierarchy.

It follows from this description of the Customer Buying Hierarchy that the customer is unable to choose between two suppliers who offer a common benefit. The customer cannot make a logical choice between them. Any benefit offered by more than one supplier in the market cannot be the basis of the choice of a unique supplier.

Let’s return to the used car warranty program developed by GM. It worked for a short while… until competitors duplicated the benefit. In this case, at least three other competitors, selling to the same customer group, offered the benefit. At that point, the warranty program no longer could differentiate GM from its competitors. It offered no more potential to shift market share than would seatbelts. The warranty program, while it continues to this day, might not help GM. It is possible that it might help Honda because Honda’s program is better than all the other programs out there. It is unique and provides a point of differentiation… for Honda.

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