Profit optimization potentials in the automotive industry by strategic management of optional equipment sales

Abstract

Abstract Due to increased competition, rising production costs, necessary investments in new technologies and other external factors, many original equipment manufacturers (OEM) face poor financial results. The contribution margins per car are rather low. In contrast to that, sales of optional equipment have significantly better rates of return. Strategically managing and improving the sales of optional equipment might bear significant profit optimizing potential. The intention of this thesis is to identify and quantify those profit opportunities. After defining the field of optional equipment sales and stating its importance in the OEM´s overall performance, promising strategies to improve the profits were derived. To do so, a literature research was performed, experts and practitioners in the automotive industry were interviewed and current practices of OEM were evaluated. To validate the findings, the application is presented in a case study. By optimizing their processes in three main focus areas, OEM can substantially improve their profits. The pricing of optional equipment has to be based on the actual customers´ price acceptance. By applying conjoint measurement studies optimal prices can be defined. A cost plus pricing approach or a pricing based on competitors ´ prices will not meet the OEM specific target group´s price acceptance and hence potentials are wasted. Having optimized pricing for optional items can improve the profits by up to 15%. If the current status of take rates and unit costs of optional items is known, bundling of items can contribute to further profit increases. Bundles are predefined combinations of items sold with a discount. By bundling items, unused customer´s price acceptance for one item can be transferred to another item. This allows supporting the sales of items with low take rates and thereby profits can be improved. The amount of additional profit that can be generated depends on the OEM´s initial situation, in the presented case study approximately 50â,¬ per car proves to be realistic. Involving the entire distribution chain to the customer in the corporate strategy also affects the OEM´s results. The salesmen at the dealerships and the importers will only focus on optional equipment profit optimization, if they benefit of it as well. Since the OEM usually has contractual relationships with the importer and not with the dealers, he has to let the importer participate financially, if the profits increase. The importer then has to assure that the dealers also support the strategy. If all those measures are furthermore supported by target oriented promotion, availability of the optional equipments at the dealer and well trained salesmen, focusing on and strategically managing optional equipment sales indeed bears significant profit optimizing potentials for OEM