8 | Nissan Needs to Limit MSRP Increases and Focus on Improving Volume and Value Per GT-R
The Issue
Increases in the MSRP of the USDM GT-R have been understandable over the last few model years of production. However, the argument to continue to increase the GT-R's MSRP has progressively become weaker. If Nissan continues to increase its prices, it will expose the GT-R program to new risks that are likely to outweigh the benefits of increased revenue from initial GT-R sales.
In the Community's Words
"In theory, the interplay between supply and demand should result in efficient price discovery. But has it? The reason for skepticism is that economy of scale should result in superior products at reduced prices. But volume is shrinking so economy of scale is lost. Product is improving but prices are skyrocketing. It may be ok from a halo car perspective, and clearly the gtr has achieved that status, but I feel an opportunity has been missed. Namely to beat Porsche at their own game. Nissan have made a car that is a better value for the money, which is why I bought it, but after a great opportunity to achieve just that, I seriously wonder if they can sustain the game. In the US market at least, the boorish behavior of many franchises, aided and abetted from on high, serves as a cultural drag on the otherwise stellar trajectory of Mizuno and team's magnificent creation. I can't help but think that if the corporate stiffs had the intelligence and integrity of the engineering team that the outcome in terms of sales would be notably different. Maybe I am delusional, but that's my belief." ->
The Solution
Nissan should slow the rate of MSRP increases on the GT-R and instead focus its efforts on improving the ownership experience and offering customers the products and services they desire. In the process this will improve overall GT-R demand, unit sales, and revenue per customer - for both new and existing GT-R owners - in a way that has the potential to bring program revenue to all time highs.
Detail
When the GT-R first came out in 2008, it carried an MSRP of roughly $69,000 and $72,000 for base and premium trims respectively. At the beginning of the pre-order announcement, I contacted approximately 100 dealers in the Southern, SouthEastern, and Eastern United States to determine the mean asking price of the GT-R. At the time it hovered near MSRP + $18,000. That translated to dealer asking prices of roughly $90,000. Although I never knew what the actual transaction prices were, anecdotal reports suggested that a majority of sales were done in the +$5,000 to +10,000 range, with a significant number of sales going higher. Most interestingly though, this was not occurring in the most expensive regions of the US. Asking prices in the California and New York regions were significantly higher.
In this context alone, it made sense that Nissan raise the MSRP on the GT-R. The fact that dealers were asking significantly more than MSRP on average was hurting not only long term sales prospects and resale value, but also buying experiences. If the market valued the GT-R at $5,000-10,000 above then-current pricing, Nissan should have taken its cut of that money, not dealers.
At the same time that the GT-R preorder program started, the Japanese Yen began gaining significant strength against the US dollar. During the first month of preorders alone, the Yen strengthened more than 8%, marking a 12% increase from its level at the time that Nissan announced US GT-R pricing, and in the process hitting a 12 year high.
Given the reluctance of dealers to sell closer to MSRP and unexpectedly adverse movements in the Yen, it made sense that Nissan immediately increase the price of the GT-R - even if the Yen would see some recovery prior to GT-R deliveries. The reality was that as GT-R deliveries started, Nissan was losing on four fronts: (1) economic conditions were worsening- particularly in the automotive sector (2) GT-R sales were slowing (3) dealers were asking too much money amid strong customer interest, and (4) although the Yen had recovered somewhat- economic headwinds and recent, sharp currency movements meant that its future was uncertain.
Following the mid year MY09 increase in MSRP, sales slowed but did not collapse. Meanwhile, over time, the yen continued to get stronger. With overall conditions largely remaining the same, Nissan continued to increase the GT-R's MSRP over the following. The following chart, which shows the MSRP of the GT-R in comparison with the Yen/Dollar exchange rate, paints this picture:
While the causes of the slowdown in sales after the MY09 price increase can be debated, it can be easily argued that due to superior product design, demand has been noticeably price inelastic. That is to say, despite dramatic price increases, demand has persisted. The chart below illustrates this, where demand has increased despite continued increases in the GT-R's MSRP:
Following the US MY12 GT-R update, demand for the car increased significantly - returning to a point not seen since the GT-R's initial release three years prior. Unfortunately, Japan experienced a tragic earthquake in March of 2011. The catastrophic damage and loss of production that resulted included many GT-Rs that would have been sold in the following 2-3 months. This caused GT-R deliveries and therefore sales to slow.
Further dampening demand was the fact that Nissan North America informed customers that GT-R orders, particularly for Black Edition GT-Rs, had been cancelled and might not ever be replaced. This was a strategic error. The impression left on buyers led more than a few would-be GT-R owners to buy other cars. Given the low inventory of GT-Rs at the time, there were no real alternatives. Had Nissan instead communicated that the cars would still be built, and production was simply delayed, the customer reaction would have been different. Although it's hard to render a judgment on a company in such a tragic situation, the reality is, corporations the size of Nissan are held to high standards and customers expect that risk management plans cater to a multitude of circumstances by containing a number of contingencies. At a minimum, customers expect clear communication and actions that confirm the brand quality in both good times and bad.
Toward the end of the MY12 production run, US demand remained although supply did not. While public data doesn't reflect a detailed picture of North American inventories, I can affirm that NAGTROC had interested GT-R buyers but lacked the ability to find GT-Rs for them. Had it not been for the Earthquake and the limited production run, at least 20% more GT-Rs would have been sold that year.
Starting with the introduction of the 2013 GT-R, the GT-R's base price moved to exceed $95,000. Also, for the first time, a standard GT-R trim exceeded $100,000 with the Black Edition being priced at just above $106,000. Despite these substantial price increases, sales have not collapsed, as seen in the prior charts. What does this picture look like from the standpoint of the GT-R program as a whole? The following chart, which depicts Japanese eqivalent revenue from US sales (Monthly Sales * GT-R's MSRP in spot Yen) roughly illustrates the story:
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Viewing this chart, one can see that, had it not been for the Earthquake and demand miscalculation, the GT-R program would have been netting close to the same revenue that it had immediately following its release in early 2009. Worth noting is that this strength in revenue was found despite the fact that the Yen has been strengthening the entire time, climbing to post-WWII high, and despite the fact that the MSRP has risen to a point roughly 40% higher than it was just three years prior.
One should not expect this demand to remain should the GT-R's price continues to increase. Given market and economic conditions, the GT-R program is at a point where the North American market benefits more from a stabilization in price and a shift toward focusing on customers than further MSRP increases.
The main reason why demand is unlikely to remain at higher price points lies in market expectations. Namely, GT-R buyers are starting to have higher expectations on the GT-R purchase and ownership experience, particularly as more GT-R buyers come from higher end competitors. This is resulting in buyers expecting much more from Nissan and Nissan's dealers than is being currently delivered.
Another reason why demand will be difficult to maintain is that customers are fast expecting the GT-R to outperform other cars such as the GT3RS, ZR1, and Viper/ACR in all aspects. While the GT-R currently offers that capability, it has too many limitations to effectively and convincingly deliver on this in factory form, particularly as all of these cars are expecting significant platform (and performance) updates in the near future.
One of the biggest arguments in favor of continuing to increase the GT-R's MSRP is to protect GT-R revenue from further movements in the Yen. However, it appears unlikely that the Yen will strengthen to become significantly stronger than the record highs recently seen. The Japanese Ministry of Finance, via the Bank of Japan, have been committed to limiting movements near recent highs. But even if the Yen did return to - or exceed - record highs, the effect should not be particularly adverse as Yen adjusted revenue per GT-R sold is at multi year highs:
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At this point in time, a nominal increase in the GT-R's MSRP might, if Nissan is fortunate, improve revenue over the short term. But it's not necessary and will make it very challenging to ensure that sales remain. And if those new owners aren't satisfied, the net effect of the price increase will be markedly negative and Nissan will have driven itself into a hole. Sure, prior GT-R owners would have an improvement in resale value - but those prior GT-R owners will be even less likely to upgrade. And as the gap to Porsche products closes and the GT-R nears parity with other, once more expensive cars, many options will become attractive to prospective GT-R owners. At a minimum it becomes worth it for GT-R buyers to take a very close look at the alternatives. After all, if Nissan holds GT-R Experience Events and expects its own 2009-10 GT-R owners to have the capital to upgrade to 2013 GT-Rs, Nissan should definitely expect 2013 owners to be able to directly cross shop against Porsche and other manufacturers as the incremental price premium is far less. Making matters worse, by this point, Nissan would not be able to back down. Nissan would not be able to remove thousands from the GT-R's MSRP to switch strategies.
The four challenges that led Nissan to continually increase MSRP are slowly fading: The balance of economic conditions is now aligning for the better not worse, with US car sales performing well. GT-R sales have been retained, despite higher prices and minimal added investment. Dealer prices- although still high- are in some areas finally adjusting. And the Yen/Dollar balance is now less likely to see the same degree of extreme strengthening that it did in 2008.
Clearly, with market conditions having changed, the aggregate risk profile is now asymmetric, arguing against continued increases in the GT-R's MSRP. Indeed, it's now better for Nissan to slow its price increases and focus on improving the customer experience to improve unit sales. Offering customers the products and services they want, to improve both revenue per customer and total revenue via sales, and maintaining the gap to more expensive cars in the segment is now becoming more valuable. Revenue per car sold- which is currently near record highs- will ensure that cash flow exceeds current levels as customer satisfaction and therefore sales, improves. Additionally, this strategy shift- combined with the implementation of new customer-oriented programs- will lead to a fundamental improvement in demand that offers protection from competitors while allowing Nissan to improve its product. All while assuming minimal risk and without sacrificing future strategic options. To be sure, the strategy of increasing the GT-Rs MSRP is now the riskier and less rewarding path forward.
A continuing increase in the GT-R's MSRP will simply create an artificial boost in short term revenues. It's a short sighted strategy that exposes the brand to risk from competitors in addition to constraining more robust paths. None of this is to say that the GT-R can't compete at higher price points. It absolutely can. But as customer sentiment and market data indicates, this is not the optimal path to improving the GT-R market and maximizing profits. Nissan needs to instead focus on improving the GT-R and the fundamental GT-R ownership experience. From that point forward, improved sales numbers will follow and achievable upmarket opportunities will be presented. If Nissan does not do this, that opportunity will be lost.
