Co-Opetition - Adam M. Brandenburger [95]
Lessons in the Cards What has been the bottom-line effect of the GM Card program and its imitators? The fortunes of the auto makers depend on many factors: the overall state of the economy, exchange rates, new-model introductions, their ability to forecast demand, and much more. So it’s hard to disentangle the effect of the credit-card programs from everything else that has been going on. But it does seem that the programs are helping the automakers raise price by cutting back their traditional incentive programs. BusinessWeek noted the drop-off in incentives: “Nearly all of the auto makers—and especially the Big Three domestic manufacturers who got consumers hooked on rebates in the past recession—are seeing big payoffs as they wean buyers away from cash-back offers and leasing subsidies.”18
On January 31, 1995, GM reported that its core North American auto operations (NAO) were back in the black for the first time since 1989. BusinessWeek explained how “NAO has fattened its bottom line by curbing low-profit sales to rental-car fleets and by trimming … marketing incentives.”19
The story of the GM Card program provides an important lesson on pricing and the kind of rules you might want to govern it. People often think that the best strategy is to charge their own customers high prices and offer their rival’s customers low prices. After all, while your own customers are willing to pay, your rival’s customers need to be tempted by the offer of low prices. How does this strategy compare with the results of the GM Card?
The card appeals first and foremost to people planning to buy a GM car. Prospective Ford buyers are much less likely to have a GM Card. So what happens when GM scales back some of its other incentive programs to offset the cost of the credit-card rebates? The answer is that the effective price of a GM car—net of any rebates earned on the GM Card—is now higher to Ford loyalists than to prospective GM buyers. GM ends up pricing its cars higher to its rival’s customers than to its own customers. This is the reverse of what people usually think is the best strategy.
But GM got it right! By raising price to prospective Ford buyers, GM gave Ford some breathing room to raise price—and that gave GM an opportunity to firm up price, and that gave Ford room to raise price some more, and so on. It’s the win-win dynamic we talked about above. Contrast this with what happens when you price low to your rival’s customers to tempt them away: you force your rival to respond by lowering price, which, in turn, puts you in danger of losing your own customers to your rival, and now you have to drop price to your own customers. You’re worse off than when you began.
So the underlying principle is: treat your own customers better than your rival’s customers. Companies seem to understand this idea in some contexts. For example, their efforts to improve products are often aimed toward strengthening ties with their existing customers, not toward luring away someone else’s customers. But when it comes to pricing, companies often get it backward. They go after a rival’s customers with low prices when, instead, they should focus on giving their own customers the best deal.
To prevent price wars, you want to charge your own customers low prices and offer higher prices to your rival’s customers. Frequent-flyer programs accomplish just that. The price of a trip from New