VideoNinety years after Henry Ford decreed that all Model T's would be painted black, most automobile buyers still wait months for a custom order. Today, Ford Motor Co. is working hard to shorten that wait. The goal is not just to make customers happier and thereby acquire more of them, but to manage revenue to ensure the company makes as much money as possible on each car it sells.
The stakes are high. Ford's revenue-management strategy is a vital part of the troubled company's turnaround plans. "It has played a major role in our profit improvement in North America, especially compared with our domestic competitors," says Lloyd Hansen, vice president of revenue management. "Our success comes from an intense focus on providing value to our customers."
While Ford is not the only automaker targeting consumer car preferences, it is the only one with a vice president heading a unit on revenue management. Ford is also notable for its combination of three technology tools to sell the right car with the right mix of features to the right customer at the right price. It uses one tool to determine the car with the optimum package of features most likely to appeal to consumers in a specific market. Another tool, pricing software technology from Manugistics (J.D. Power, I2, and Trilogy offer similar products), determines which sales-promotion campaign should be offered on each car in each market. A third tool puts Ford dealers in the driver's seat to order the inventory most likely to wheel off their lots.
With this knowledge in hand, Ford can gear its production, sales, and marketing to get the biggest bang for the buck. "There is a clear link between what customers want and what we build," says Hansen. "The problem has been finding it."
Ford believes revenue management is that missing link. "Revenue management has the most leverage in industries with low profit margins. That's what makes it so critical in the auto industry, where pretax profit margins have historically averaged only about 3 percent," says Hansen. "If better pricing tools and processes can improve revenue by just 1 percent, and raise historical margins to 4 percent, bottom-line profits would grow by 33 percent. Because the improvement is essentially all cash, the increase in cash flow and market value is even higher. Very small improvements in revenue can have a huge impact on bottom-line results."
After phasing in its revenue-management strategy, the Dearborn, Michigan-based auto giant's per-unit revenue (average price net of any incentives) was up $699 (year-over-year) in the first half of 2003, while virtually every other carmaker's per-unit revenue was down. And even with the improvement in revenue, Ford has held its own on market share compared with its domestic competitors. Ford's retail market share through July was 18.7 percent—down three-tenths of a point. This compares with a decline of six-tenths of a point at General Motors Corp. and one point at Chrysler, according to R.L. Polk & Co., a Southfield, Michigan-based provider of automotive intelligence.
Perhaps most tellingly, in July the Ford division's retail incentive spending per unit was $900 less than at rival Chevrolet, estimates London, Ontario-based Autodata Solutions. "Ford's revenue management is making a difference," says Gary Lapidus, managing director of global investment research at Goldman Sachs in New York. "They're more selective about where they apply their money and where they don't," the veteran auto analyst adds. But Lapidus is quick to point out that Ford's profitability in North America "has collapsed over the last three years. The best I can say is that revenue management has helped them do as good a job as they can in the context of the current competitive environment."
"Ford's revenue-management strategy helps at the margins," says Sean Egan, managing director of Egan-Jones Ratings Co., a Philadelphia-based ratings firm that is not paid by issuers for a rating, "but the company needs to address some fundamental problems. We would derive much greater comfort if, rather than attempting to manage the last couple hundred dollars on each sale with a revenue-management strategy, Ford produced fresher products at a reasonable price."
"Ford is only 18 months into its revitalization plan," counters Hansen. "To date, we have seen substantial progress in all key elements—quality, revenue, and cost performance. Our bottom-line results, however, are still not where they need to be, and more improvement is planned. The most important part of our recovery plan is the launch of an unprecedented 65 new Ford, Lincoln, and Mercury products in the next five years.
"In the U.S.," he adds, "this product-led transformation begins with the new F-150 pickup, followed by two new minivans this fall and six cars next year. These products have been designed and packaged around customer wants and needs. They give us huge confidence in the future."
Growing Profitable Markets
The challenges facing Ford became all the more apparent on July 21, when GM stunned the industry by offering current owners of its vehicles a "loyalty" discount of up to $1,000 if they buy or lease a new GM car or truck. The discount was in addition to GM's zero percent financing offer and other cash incentives adding up to $4,000 on many vehicles. Ford elected not to match GM's loyalty discount. Says Lapidus, "Even the best revenue-management strategy can go awry when the competition takes an ax to its pricing."
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