The art and strategy of setting the sticker price of a new automobile
If you plan to buy an '85-model car in the fall, a small one might be the better buy. Yet even the larger-size cars may also have a tight lid put on how much they go up in price, for many reasons:Skip to next paragraph
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* If interest rates continue to rise, the demand for new cars may sag.
* Both General Motors and Ford begin talks with the United Automobile Workers in July prior to the expiration of the union contract Sept. 15.
''If they raise prices, then it raises the expectations of the work force,'' asserts Maryann Keller, a director of Vilas-Fischer Associates, a New York money-management firm, and a former stock-market analyst with Paine Webber.
Automakers are reporting what Ms. Keller calls ''monstrous earnings'' these days. A sharp rise in the price of a new car would further increase profits, and the reaction among potential buyers of Detroit-built cars could boomerang.
* A big jump in the cost of a new car would have a severe impact on the consumer price index just as the final push of the 1984 election campaign gets under way. This would run counter to the administration's effort to keep a lid on inflation.
* Then there is the matter of the Japanese imports. These are being controlled artificially by Japan's fourth-year extension of its voluntary quota, which expires March 31 next year. A sharp rise in the price of a domestic automobile could have the effect of increasing the demand for the imports. Then, when the voluntary curb finally ends, sales would soar.
Automakers in the past have not only shaken up their customers but slowed sales by pushing the price of their products beyond the ability or the willingness of a customer to pay.
''It seems to me that the odds for them raising prices in a very direct way are small,'' says Ms. Keller. But she adds, ''That isn't to say that they aren't going to raise prices. And it's not to say they aren't going to play the same kind of sleight of hand as they did last year when GM announced that its average price increase was 2.8 percent, while the real price increase was closer to 4 or 5 percent because they did some things such as strip off some of the equipment on the cars and then increase the price of the options.''
When GM theoretically cut the price of its S-10 pickup truck not long ago so it could offer a truck for under $6,000, it cut the dealer discount from 15 to 11 percent. This means the dealer has far less room to bargain with the customer and the price may be the same as without the cut.
Muddying the pricing picture is the Bureau of Labor Statistics calculations on the value improvement in cars. Quality changes in 1984 domestic automobiles, for example, were worth an average of $110.08 at the retail level, according to the bureau. The quality changes included improvements in fuel economy, emission controls, standard equipment, and corrosion protection.
Carmakers, in turn, use these improvements as justification for price increases. ''There was a chunk of money which GM did not report as a price increase on the '84 cars because it said it represented a value adjustment in the car,'' Ms. Keller reports.
Arvid Jouppi, a veteran Detroit-based market analyst, sees big-car prices going up close to 5 percent, although, he adds, ''the small ones will stand pat.'' The average, Mr. Jouppi asserts, ''will be up 21/2 to 3 percent.''
The 1975 energy act is forcing up big-car prices in order to keep small-car prices down. Neither GM nor Ford can meet the federal government's corporate average fuel economy (CAFE) standard for 1984-model cars, let alone the '85s. The CAFE figure for 1984 is 27 miles per gallon, while on '85-model cars it jumps to 271/2 m.p.g. Unless Congress does something about the CAFE figure, both GM and Ford stand to pay a huge fine for their inability to meet the letter of the law. If small-car prices go up to cover the fines, then the demand may drop, thus putting the car manufacturers in a worse bind.
''Pricing is a strategic matter, and GM's overall strategy is to improve its profit,'' reports stock analyst Mr. Jouppi, who expects GM to make more than $5 billion this year, compared with $3.7 billion in 1983.
The average new American-built car has more than doubled in price in the past 10 years, but carmakers insist that price increases are only keeping pace with inflation and that there is more value in a current-model car than in a vehicle of a decade ago.
Many analysts and price-conscious buyers agree that, when it comes to the price of a car, you're talking about an art form.
''Each year it becomes more and more complex,'' concludes Ms. Keller.