Does Customization Have a Sweet Spot for Maximum Profit?
With automakers working to go back to normal operation as quickly as possible, it’s time to make some tough decisions
The health crisis we’re currently living has forced many people to stay home and left many people in a tough financial situation. Those factors not only make car purchasing difficult, but also not so necessary at the moment, which helps explain the sales tumble we’ve seen in the past few months. While many of them stepped up and reallocated their resources to activities like producing face masks and ventilators for the community, everyone wants life to go back to normal as soon as possible.
Normality still seems distant to automakers because people’s main concern at the moment is to recover their income sources and rebuild the living standard they used to have; it’ll take months for many of them to even consider buying a new car again. What the industry can do to make that process quicker is, in a few words, make cars more attractive. One way is by understanding what will be their needs from now on, as this Car Design Chronicle says. A much quicker one is to make them cheaper.
You can have any color as long as it’s black
Henry Ford’s famous quote is a good case of exaggerating to make a point: one of his concerns when creating the Model T was to make it affordable, and that was achieved largely by minimizing its customization. Any option you add to a given product adds steps to its production process. Color choices, for example, imply stocking different colors of paint, grouping cars to make the machinery switch as little as possible, keeping a minimum number on each color ready to sell, and having a catalog for buyers.
Nowadays, most cars offer choices of body, equipment, energy source, engine, traction, transmission and trim; some go further and add accessory packages, special editions and/or bespoke modifications — car production has gotten too variable and, therefore, complex and expensive. J.D. Power’s president Doug Betts calls attention to the fact that ‘2019 cars were sold in more than 600,000 variations excluding color. Knowing that 13.6 million units were sold in retail, they average 22 units sold per option.
Why is customization so popular, then?
Basically, because they increase the scope of each car model and, as a result, make them attract more people. For generalist cars, it reduces the price gap between each available option; buyers can decide how much they’ll effectively get of what they want based on how much they can pay for it. For example, if you like the Golf but want it in a sporty version, Volkswagen offers the R-Line accessory kit, the GTI dedicated version (with diesel and electric options) and the even sportier R version.
Moving to luxury automakers, the wide array of options exists pretty much to retain customers: companies like Audi and BMW are so similar when it comes to quality and price that many buyers could be easily attracted to one of them if their desired configuration wasn’t available at the others. Another common example is high-luxury automakers: they have whole divisions specialized at catering to clients’ most specific wishes, down to the wood used in the trim or the stitching pattern of the upholstery.
We’ve heard both sides. What’s the problem?
According to Betts, such quantity of options generates many unicorns, options which sold 50 units or fewer. Those cars “often linger on dealer lots and fail to justify the cost of manufacturing them”; they’re more useful to enlarge the list and impress the potential buyer than to actually make a profit. The article also remembers the Dodge Dart, released in 2012 with an online configurator and a long list of options: people would go to the dealership to buy it but ended up frustrated because it didn’t have one.
After discussing production and sales, having too many variations is also bad after the car leaves the dealership. Once the automaker notices the unicorn is making it lose money, it decides to end its production. The few units that got sold lose resale value more quickly than normal and any exclusive parts it had tend to become harder to fix and/or replace in the aftermarket. Because of all that, those unicorns are more undesirable than ever nowadays, when makers are doing everything to cut costs.
Tell me more about that
While Betts focuses on the USA, it’s possible to consider its findings at a global level: “the U.S. is a ‘sell-from-stock’ automotive market as opposed to Europe’s predominantly build-to-order approach.” The first business model mentioned is much more common because it aims to optimize logistics: dealers buy some versions of a car model than others because they sell faster. The second model consists of placing specific orders and waiting for the cars to arrive in order to actually conclude the purchase.
Although people enjoy the idea of modifying the car as they wish, even within the limits of the model and of their budget, many don’t end up with what they wanted. They simply buy what the dealer already had in stock because they’re readily available (no need to place a special order) and/or come with an extra discount. Since the dealer will always prefer to stock fast-selling products, the very business model favors the creation of unicorns by denying them visibility and making their sales difficult to happen.
How can automakers deal with that?
Reducing the available options would simply erase the benefits customization has brought: automakers would lose sales and try to recover them by offering more car models; the same drivers would be satisfied with a more expensive solution. On the other hand, converting the entire process into built-to-order works only for luxury cars because they are sold in small quantities and bring high profit margins: generalist makers would hardly be able to execute it with costs as low as they need them to be.
Many automakers already offer each trim level with few options of individual items; they usually come in packages. Another possible solution is to expand a type of outsourcing: many dealers have a repair shop in the same building and already use them to install accessories before delivering the car. That could be expanded into a full customization service, where dealers would buy the base cars and a list of accessories to install in situ. Each car would be as customized as the respective buyer required.
What consequences would that have?
Dealers would have to stock more parts, but that would be easily compensated by stocking fewer cars: each one could be offered to more potential buyers, so they would be easier to sell. Besides, most parts could also be installed in used units. Demand for services would increase, but that’s actually a great thing: by properly scheduling each task, it could reduce idle capacity and even generate new jobs. When it comes to resale value, any customization affects it; that’s an entirely different issue to address.
Making potential buyers effectively embrace this strategy is a matter of proper investment and advertisement, like pretty much everything in the industry. By reducing variation at the factory and adding demand for the dealer’s services, the creation of those customization centers would convert a profit drain into a potential profit generator. Along with the “rational cars”, an idea suggested in this Car Design Chronicle, it’s an interesting solution to help the auto industry adapt to the tough times we’re facing.
