The Right Price

Ford has an ambitious revenue-management strategy, but can it save the company?

Ninety 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.

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