SALN #34 – Dr. Danilo Zatta: Automotive Pricing.

Reading time: 12 minutes 

European manufacturers are currently about 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 on their own and with their own cash flow. 

Prices are a lever for improving earnings. That’s why I’m talking to pricing expert Dr. Danilo Zatta today. In 2022 and 2024, Danilo published two international bestsellers on pricing, 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’. 

Is pricing a trending topic, also for the automotive industry? 

Danilo, you started your career at a passionate Italian premium brand. 

Dr. Danilo Zatta: Yes, I was with Maserati for years. That’s when I started pricing new cars, such as the new Quattroporte or the new GT. That was super cool. We’ve been to Santa Monica, New York, and all over the world to analyze the vehicles in car clinics: What are the success factors, what are the purchase decision criteria? The clinics consisted of a qualitative and a quantitative part. The vehicle was shown with a new design, but without a logo, then with a logo. Just to understand how it works without a logo it will be with logo.  

This brings me to the initial 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 quantities, has a cool design, comes from Modena, and is worth millions of euros today. This is referred to as Italian garage gold with tridents. I have seen how everything is made, and when I went to the cafeteria, test vehicles drove by with real power. Over time, you fall in love with the Maserati brand.

You have worked in various industries on the topic of pricing. How strong is the auto industry? 

Dr. Danilo Zatta: Pricing maturity in the automotive industry is 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. Leading manufacturers, when developing new vehicles, look not only at target costing, but also at target pricing.  

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 the price are in line with what the customers want to spend on it. Manufacturers invest in car clinics to understand what a vehicle is worth, what volume can be achieved, and what its price is. 

And most recently: how can you monetize new data, push new services, and introduce software solutions? And there are also exciting new business models, exciting new pricing models 

On the other hand, there are volume manufacturers such as GM and PSA, two companies that in the past did not shine through innovation, Blue Ocean, special premium, or particularly cost-effectiveness but are somehow average. 

PSA (now Stellantis) has relied heavily on pricing under CEO Tavares.  

GM, on the other hand, has only used pricing as a lever to generate more volume. Around 2009, GM was talking about these huge price reductions, which have led to so-called “desperation pricing.” They really wanted to feed the “monster at their back,”  namely the production plant, and try to sell as many vehicles as possible. But then you only created losses. The price image was destroyed, and GM had to file for Chapter 11. 

PSA said at the time: “Our focus is on improving net prices. The goal is to achieve the price metrics. We want to make sure that we have pricing power. We want to price the vehicles based on customer benefits.  

Price quality was CEO Tavares’ goal, and the results are impressive. Profitability was 0% in 2014, then 8% in 2018, and almost 10% in 2022. This is due to improved price discipline and, thus, higher profitability.  

The trick is that Tavares bought Opel from GM. Opel had only generated losses for 17 years. Then Opel was acquired, and in the first year after the acquisition, it had an operating profit of 5%.  

So, this shows the difference between a more cost mentality and a pricing approach. 

In your book, you talk about four stages: pricing strategy, pricing setting, price implementation, and price control. In the case of PSA and GM example, the big differences are in the back part, the price implementation. 

Dr. Danilo Zatta: However, the issue of pricing strategy is also important at the outset. Am I willing to give up my market share because then I will have higher margins, higher prices and therefore my market quota will go down?  

You have to accept that and communicate it clearly.  

Because if I’m not willing to give up volume and market share is very important to me, then I’ll also have to accept discounts in price.  

The CEO must determine the direction of the pricing strategy. People like Stellantis CEO Tavares or former Porsche CEO Wiedeking.  

In the crisis of 2008, Wiedeking reduced the production volume, not the prices. This gives it the value of used cars. As a result, prices were kept higher and margins were still generated, rather than pricing being used to drive demand that may not exist. 

A newer concept in automotive is subscriptions. When it comes to vehicle financing, 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 the customer and then “cross- and up sell” vehicles, services, all kinds of accessories 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 is the owner and is 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 will remain my customer for life, and I can upsell. I can sell software packages. I can sell options. And I’ll sell the next car.”  

This means that I want to focus on the customer relationship and make sure that the customer stays with me. Even then, the price perception changes. You pay much less, depending on the use, depending on the month and no longer these 50,000 or 70,000€ for a vehicle at once, which are then also a big hurdle. 

And does this also change the perception of prices?  

Absolutely. You just see a small amount and not the very large amount. 

Nevertheless, you can also play very nicely with these subscription models because there is not the standard buyer, but many different segments that have many diverse needs.  

And even with these subscription models, you can better serve many diverse needs. With such a subscription, the customer sometimes even has access to a brand’s entire product range.  

Don’t I have to completely adapt 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 is the loss of value. 

Dr. Danilo Zatta: You must analyze that carefully. You must come from the market and understand what customers are willing to pay, what are the price thresholds, and which segments I can best serve with what? And the big OEMs have a lot of opportunities to play with different models and brands. But that is the wonderful thing, it opens a lot of possibilities that did not exist in the past. 

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 they must wait for the right data. That will never be the case, even if all the data is complete and perfect. It’s important to develop a solution instead of giving in to the illusion of perfect data.  

The rest fail to identify possible use cases.  

Nevertheless, there are many intriguing uses for AI.  

An example of this is pricing for spare parts. Especially with declining sales volumes, aftersales is increasingly coming into focus. Profits from aftersales can offset the declining margins for new vehicles.

I used artificial intelligence to optimize spare parts prices for a premium manufacturer. At the start, the aftersales staff asked me: “What do you want?” You are only here because the boss wants you to. However, we are already the leaders, our prices are already extremely high.”  

A few weeks later, we were the best of friends: “Wow, with your algorithm, we determined where we stood compared to competitors. If we take the competition prices and see 100,000 parts, where were we below average, and should we have been above that? We discovered different possibilities; the prices could be adjusted, and in total, we were able to quickly achieve hundreds of thousands of euros that could not be seen with one’s own eyes in an Excel spreadsheet.”  

But when artificial intelligence processed all these elements at the same time, many options emerged. Several €100,000 of additional monthly profit was made for a national company without any damage to its image. We were able to increase prices without generating volume losses or customer complaints.  

Do you develop algorithms yourself? 

Dr. Danilo Zatta: That is exactly what my colleagues who studied physics, statistics, and data engineering do. I explain to my colleagues what the algorithm must do, what it has to process, and how it has to compare. I explain the rules, and they are then implemented by the PhDs and data engineers. 

The important thing is not to wait for perfect data.  

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 promotes the demand for spare parts. Therefore, my recommendation would be to start there, as it will bring in 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 actions that may not have been possible before. 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 perform dynamic pricing? 

Dr. Danilo Zatta: The topic of dynamic pricing is a use case for the future. 

At the moment, it is very important and valuable to understand which customers are interested in which incentives. One wants to receive cash back, and he receives €4,500 as a discount on the purchase of a car. Another wants to have a sports package. The other wants 0% funding. Many manufacturers ask themselves which incentives are effective, where I am sinking money and where I am putting it to effective use. This is currently a particularly important use case for AI. 

We see something similar today with AI in the online retail sector, where promotions are optimized.  

The idea is similar there, how is my return on investment in the promotion? What is my uptake? How do I 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, which ones should not, right down to the cash backs or incentives for dealers? You can generate a lot of insights and optimize a lot. 

If you were to write a letter to the CEOs in the auto industry, what would you tell them? 

Dr. Danilo Zatta: Remember that there are always three ways to improve the outcome: volume, cost, and price.  

In the automotive industry, the focus is on cost or volume. Prices are often treated as sub-important. But if you get everything right on the pricing page, you’ll get the fastest and strongest payback.  

In times of innovative technologies (AI) and innovative monetization approaches (software services, extended offerings), it becomes even more important to understand how to better capture buyers’ willingness to pay and set up suitable pricing models.  

Pricing is one of the core priorities at C-level. 

What is more important for profitable pricing, data/AI or strategy? 

Dr. Danilo Zatta: Strategy; am I willing to give up market share to achieve higher profits.  

Marchionne, ex-CEO of Stellantis, said: “I want market share, but they have to be profitable. I’ll then forego cheaper vehicles in my portfolio.” He then pushed Maserati harder again. He pushed Alfa Romeo. He simply wanted to push the premium brands, where he has more margin and can do without volume if necessary.  

A good example of another industry is Sony.  

Sony, the global leader in consumer electronics, had been in the red for years. And when we talked to them at headquarters, they said, “How can we get back to earnings?” We said, “You have to raise the prices.” And that was a taboo. A few years later, they said: “Enough with the volume strategy, we just have to raise prices. We just have to give up market share, because otherwise we will never be profitable.”  

And that’s how it is in the automotive industry. This means that if you say that the priority is to be profitable and to gain market share, then you will no longer push volumes into the market, because that has become a second priority. 

Thank you very much for a super interesting conversation, Danilo.