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European manufacturers are currently three to ten times more indebted than they were a decade ago. As a result, almost all manufacturers have launched programs to improve earnings. It remains to be seen whether manufacturers and suppliers will be able to reduce debt to a sustainable level using their own resources and cash flow.
Pricing strategies are not only a massive lever for improving results in the automotive industry. That’s why I’m talking to pricing expert Dr. Danilo Zatta today. Danilo has published two international bestsellers on pricing in 2022 and 2024, in which he summarizes his experiences from 25 years of pricing. The Financial Times has described Dr. Zatta as ‘one of the world’s leading pricing minds’.
With the “price wars” in China and the “bottoming out of EV prices” in Germany and Europe, pricing is a trending topic, also for automotive.
Danilo Zatta, pricing expert and bestselling author.
Danilo, you started your career with a passionate Italian premium brand.
Dr. Danilo Zatta: Yes, I was with Maserati for years. That’s when I started pricing the new vehicles, such as the new Quattroporte or the new GT. That was super cool. We went to Santa Monica, New York and all over the world to analyze the vehicles in car clinics: What are the actual success factors, what are the purchase decision criteria? The clinics comprised a qualitative and a quantitative part. The vehicle was shown with a new design, but without a logo, then with a logo. Simply to understand: How does it look without the logo and with the logo?
This brings me to the opening question: What is your dream car?
Dr. Danilo Zatta: There’s this Spyder A6 from the 60s, designed by Zagato. It was also produced in small numbers, has a cool design, comes from Modena and is worth millions of euros today. People talk about Italian garage gold with a trident. I witnessed how everything was made, and when I went to the canteen, test vehicles drove past with real power. Over time, you fall in love with the Maserati brand.
You have worked in various industries on the subject of pricing. How strong is the automotive industry?
Dr. Danilo Zatta: The pricing maturity in the automotive industry is relatively high. Not as high as in the pharmaceutical industry, but perhaps higher than in other industries.
But of course it always varies greatly from manufacturer to manufacturer. When developing new vehicles, leading manufacturers not only consider target costing, but also target pricing.
Target pricing in the automotive industry.
Where will my vehicle be positioned? What is the willingness to pay, and what does that mean for the design of the vehicle so that the costs and price are in line with what customers want to spend on it? Manufacturers invest in car clinics to understand what a vehicle is worth, what volume can be achieved and how it should be priced.
And more recently: how can you actually monetize new data, push new services, introduce software solutions. And there are also exciting new business models, exciting new pricing models.
On the other side are volume manufacturers such as GM and PSA, two companies that have not shone in the past through innovation, Blue Ocean or being particularly premium or particularly cost-effective, but are somehow average.
PSA (now Stellantis) has focused very strongly on pricing under CEO Tavares.
GM, on the other hand, only used pricing as a lever to generate more volume. Around 2009, was talking about these huge price discounts, which led to so-called “desperation pricing”. They really wanted to feed the “monster in the back”, namely the production plant, and try to sell as many vehicles as possible. But then they only generated losses. The price image was destroyed and GM then had to file for Chapter 11.
PSA said at the time: “Our focus is on improving net prices. The aim is to achieve the price ratios. We want to make sure that we have pricing power. We want to price the vehicles on the basis of customer benefit.”
PSA said at the time: “Our focus is on improving net prices. The aim is to achieve the price ratios. We want to make sure that we have pricing power. We want to price the vehicles on the basis of customer benefit.”
The highlight is that Tavares bought Opel from GM. Opel had only generated losses for 17 years. Then Opel was taken over and in the first year after the takeover they already had an operating profit of 5%.
Pricing mentality beats cost mentality.
This shows the difference between a more-cost mentality and a pricing approach.
In your book, you talk about four stages: Price strategy, price setting, price implementation and price control. At PSA and GM, the big differences are in the last part, the price implementation.
Dr. Danilo Zatta: Jedoch ist auch das Thema Preisstrategie vorne wichtig. Bin ich bereit, auf Marktanteile zu verzichten, weil ich dann höhere Margen habe, höhere Preise und deshalb meine Marktquote runtergeht?
You have to accept this and communicate it clearly.
Because if I am not prepared to sacrifice volume and market share is very important to me, then I will also have to accept price reductions.
The CEO must set the direction in the pricing strategy. People like Stellantis CEO Tavares or former Porsche CEO Wiedeking.
During the 2008 crisis, Wiedeking reduced production volumes, not prices. In doing so, he supported the value of used cars. This kept prices higher and still generated margins, rather than using pricing to boost demand that may not even exist.
Increase sales with subscription models.
Somewhat newer are subscriptions, also known as subscription models. When financing a vehicle, hardly anyone pays attention to the list price if the monthly installment is right. Subscriptions or long-term rentals also feel the same. What is changing here in terms of pricing?
Dr. Danilo Zatta: Many vehicle manufacturers are looking for ways to capture the entire life cycle of customers and then practically “cross-sell and up-sell” several vehicles, several services, all kinds of things over the course of the life cycle.
In the past, when I sold a vehicle for x euros and transferred ownership, the buyer paid y euros.
Then he was the owner and was gone.
Today, Nio or Volvo with the “Care-by-Volvo” model say: “I don’t want to sell cars anymore, I want to sell a subscription. You’ll be my customer for life and I can upsell. I can sell software packages. I can sell options. “And I’ll sell the next car.”
In other words, I want to focus on the customer relationship and ensure that the customer stays with me. This also changes the price perception. You pay much less, depending on the use, depending on the month, and no longer these €50,000 or €70,000 for a vehicle all at once, which are then also a big hurdle.
And will the price perception then also change?
Absolutely. You just see a small amount and not the very high amount.
Nevertheless, you can also play around with these subscription models, because there is no standard buyer, but many different segments with many different needs.
And you can also better serve many different needs with these subscription models. With such a subscription, the customer sometimes even has access to the entire product range of a brand.
Don’t I have to completely adjust the entire price analysis? When I ask people what the biggest cost item in car ownership is, many people often spontaneously say fuel. And in fact, it’s depreciation.
Dr. Danilo Zatta: You have to analyze it well. You have to come from the market and understand what the willingness to pay is, what the price thresholds are, which segments I can best serve with what. And the big OEMs in particular have many opportunities to play around with different models and brands. But that’s the great thing, it opens up a lot of opportunities that didn’t exist in the past.
Artificial intelligence in pricing.
What role does artificial intelligence currently play in pricing?
Dr. Danilo Zatta: According to a study, AI (artificial intelligence) is not only of great interest, but also a priority for many companies. Almost 80 percent of those surveyed see it that way.
But only 25% can name specific use cases.
Some say that they have to wait for the right data. This will never be the case, even if all the data is complete and perfect. It is important to develop a solution instead of giving in to the illusion of perfect data.
The rest fail to recognize possible use cases.
Nevertheless, there are many fascinating applications for AI.
One example of this is pricing for spare parts. Aftersales is becoming increasingly important, especially when sales volumes are falling. The falling margins on new vehicles can be compensated for with profits from aftersales.
I used artificial intelligence to optimize spare parts prices for a premium manufacturer. At the beginning, the aftersales staff asked me: “What do you actually want?” You’re only here because the boss wants you to be. “But we are already the leaders, our prices are already extremely high.”
A few weeks later, we were best friends: “Wow, with your algorithm, we’ve determined where we stand compared to competitors.” When we take the competitor prices and see 100,000 parts, where were we actually below average and should have been above? “We discovered different ways that prices could be adjusted, and overall we were able to quickly get hundreds of thousands of euros that you couldn’t see with either the naked eye or Excel.”
But when the artificial intelligence processed all these elements simultaneously, many options emerged. Several €100,000 of additional monthly profit was generated for one national company without affecting its image. We were able to increase prices without losing volume or generating customer complaints.
You develop the algorithms yourself?
Do not start on perfect data, but in aftersales.
Dr. Danilo Zatta: That’s exactly what colleagues who have studied physics, statistics and data engineering do. I explain to my colleagues what the algorithm has to be able to do, what it has to process, how it has to compare. I explain the rules and they are then implemented by the PhDs and data engineers.
It is important not to wait for perfect data to be available.
My suggestion is to start with after-sales pricing. If fewer new cars are sold, this usually has a positive effect on the demand for used cars. This usually also boosts demand for spare parts. My recommendation would therefore be to start there, as this generates sales in the short term.
This can finance the long-term AI transformation, including for the new car business. With the help of AI, it is possible to carry out targeted upselling, cross-selling, discounts and other measures that may not have been possible in the past. Based on data, learning, customer characteristics and customer decisions, the process can be made more effective.
How long will it be before we see the first AI that can actually implement dynamic pricing?
Dr. Danilo Zatta: I think that dynamic pricing is a use case for the future.
It is currently very important and valuable to understand which customers are interested in which incentives. One would like to receive a cash back and receive €4,500 as a discount on the purchase of a car. Another wants a sports package. Another would like 0% financing. Many manufacturers ask themselves which incentives are effective, where do I sink money and where do I put it to good use? This is currently a very important use case for AI.
We see something similar today with AI in the online retail sector, where promotions are optimized.
The idea there is similar to what is my return on investment in the promotion? What is my uptake? How do I actually cannibalize sales before and after the promotion period? Many of these ideas could also be transferred and understood here. Which incentives are the right ones? Which ones should I design and which not, right down to the cashbacks or incentives for dealers? You can generate a lot of knowledge and optimize a lot.
If you were to write a letter to the CEOs in the car industry, what would you say to them?
Dr. Danilo Zatta: Remember that there are always three ways to improve the result: Volume, cost and price.
In the automotive industry, the focus is on costs or volume. Prices are often treated as a secondary consideration. But if you do everything right on the price side, you get the fastest and strongest payback.
In times of new technologies (AI) and innovative monetization approaches (software services, extended offering), it is becoming even more important to understand how to better capture buyers’ willingness to pay and set up suitable pricing models.
Prices are one of the core priorities at C-level.
What is more important for profitable pricing: AI or strategy?
Dr. Danilo Zatta: Strategy; am I prepared to give up market share in order to achieve higher profits?
Marchionne, ex-CEO of Stellantis, said: “I want market share, but it has to be profitable.” “I will then do without cheaper vehicles in the portfolio.” He then pushed Maserati harder again. He pushed Alfa Romeo. He simply wanted to push the premium brands where he had a higher margin and where he could sacrifice volume if necessary.
A good example from another industry is Sony.
Sony, the global leader in consumer electronics, had been in the red for years. And when we spoke to them at headquarters, they said: “How can we get back to profitability?” We said: “You have to raise prices”. And that was a taboo. A few years later, they said: “No more volume strategy, we just have to raise prices. “We have to give up market share because otherwise we’ll never be profitable.”
And it’s the same in the automotive industry. In other words, if you say your priority is to be profitable and gain market share, then you will no longer push volumes into the market, because that will have become a second priority.
Thank you very much for a super interesting interview, Danilo.
