The Smart Car Prepares to Enter the U.S. Market

Transcription

1 The Smart Car Prepares to Enter the U.S. Market Date: March 1, 2012 Prepared by: Wasiq Chughtai ( ) & Danial Shaikh ( ) Prepared for: Professor Khuong Truong, ECON344

2 Contents The consumer decision process... 1 Determinant attributes & competition... 2 Differences between the Canadian and U.S car markets... 3 Success in Canada... 4 Appendix A The consumer decision making process... 6 Appendix B The Smart ForTwo compared... 8 Works Cited... 9

3 The consumer decision process In general, consumers who are in the market for a certain product go through a decisionmaking process similar to the one outlined in Appendix A. This report will now outline the process that a consumer looking to purchase a car, specifically the Smart ForTwo (which, from this point onwards, will be referred to as the Smart car), goes through. The process of purchasing a car involves complex buying behaviour due to the fact that a car is expensive, risky, bought infrequently, and is highly self-expressive (Grewal, Levy, Persaud, & Lichti, 2009). As such, when going through the decision process, after identifying their functional and psychological needs (e.g. fuel efficiency, reliability, convenience, being perceived as environmentally friendly), a consumer purchasing a car will spend a significant amount of time at the information search step. In the information search step, the consumer will rely on both their past experiences with the car brand, in this case, Smart, and the experiences of others, whether it be their friends, family, or topic professionals such as car journalists. The actual and perceived risks associated with the car purchase are also very important to the consumer. The risk that a product will not perform as expected is very important to the consumer as if this expectation is not met, it is possible an earlier identified functional need (such as providing a reasonable amount of space) is not met. According to British consumer advocacy group Which?, fuel efficiency, reliability, and thus, maintenance costs can be a deciding factor for many consumers when deciding between vehicles (Which?, 2008). Lastly, for many consumers, there is a substantial amount of psychological risk associated with the possible negative perception others have of their vehicle choice. For example, a potential car buyer may want to stand out from the crowd or want to be perceived as environmentally friendly and may choose the Smart car over a competitor because of this reason (Grewal, Levy, Persaud, & Lichti, 2009). In aiding a potential car buyer, salespeople should make sure to make clear the differences between their product and those of the competition. After identifying needs and performing a search for information, consumers actually purchase the product. A customer who ends up satisfied with the product can be a very valuable asset to the company. Satisfied customers tend to become loyal and spread positive word-of-mouth, which, in this age of social networking, is incredibly important. If Smart advertises that its product can achieve great gas efficiency but customers notice that it is unable to do so, they can share their experiences online. These easily accessible, documented first-hand experiences are likely to make potential future purchasers think twice before purchasing a Smart car believing it will deliver great gas efficiency. As such, marketers must be careful to build realistic expectations. Smart cars have created value for consumers by providing a vehicle that is relatively fuelefficient, provides customizability through its replaceable body panels, allows for easy parking, has a distinctive look, and is fairly affordable. 1

4 Determinant attributes & competition The Smart car has a number of determinant attributes that set it apart from competing makes and models. Currently, the Smart car s competing models include small hatchbacks such as the Mini Cooper, Mazda 2, Ford Focus, Toyota Prius, and Honda Insight, to name a few. A determinant attribute is a product or service feature that is important to consumers and in which competing brands are perceived to differ (Grewal, Levy, Persaud, & Lichti, 2009). For example, the Smart car differs from the competition by offering easily-interchangeable body panels in unlimited paint colours, which is not an available option offered by any of its competitors (Smart, 2012). Another determinant attribute is its size relative to the competition. The Smart car is about eight feet long and less than 5 feet wide which is half the size of a traditional car (West, 2012). The average hatchback can seat four adults but vary in the leg and head room they provide (Cotta, 2007). The small size of a car appeals to the functional needs of consumers who want to easily park their vehicle in an urban centre and move through tight traffic conditions (Grewal, Levy, Persaud, & Lichti, 2009). Moreover, the price of the Smart car is relatively cheap compared to its competitors, thus, making it another determinant attribute. The Smart ForTwo is among the cheapest cars in America (Valdes-Dapena, 2007). The base price of the car is $10,990 whereas competing models such as the Toyota Prius and Honda Insight have a base price of $23,050 and $18,200, respectively (Supercars.org, 2012). Finally, the Smart car was engineered as an environmentally conscious car. It has achieved green status as it has an anticorrosion undercoat and powder coating on its steel body, as well as moulded plastic panels to reduce emissions, both of which appeal to the psychological needs of consumers who want to reduce their carbon footprint (Grewal, Levy, Persaud, & Lichti, 2009). Hence, the Smart car represents a value to consumers as it is more affordable than the competing makes and models, is compact, offers a unique aesthetic appearance, and is environmentally friendly. Though the Smart car has many great features, it also has certain attributes that could be of concern to consumers. For example, safety can be an issue since a car as small as the Smart car will likely not be able to withstand crashes with larger vehicles. Heavier cars are inherently safer than smaller ones (About.com, 2012). Hence, the competing models would be deemed safer by consumers than the Smart car since they are larger. Moreover, the seating capacity, which is limited to two people, could be a serious deterrent to some buyers. Therefore, consumers may prefer a car with seating for four. Lastly, both Toyota Prius and the Honda Insight provide greater fuel efficiency than the Smart car which indicates long term savings for consumers (Supercars.org, 2012). Refer to Appendix B for further comparisons between the Smart ForTwo and its competitors. 2

5 Differences between the Canadian and U.S car markets Despite their proximity and the many shared aspects of culture between Canada and the United States, their car markets and their population preferences in cars are vastly different. Canadians have traditionally enjoyed small cars, so much that the Smart car was sold in Canada for 4 years before its introduction in the US and that Mercedes-Benz introduced its B-Class model, a small family car, in Canada, but has yet to do so in the US (LeBlanc, 2011). According to the Globe & Mail, sales of subcompacts in Canada have been growing overall and sales of newly introduced subcompacts such as the Ford Fiesta have been rocket-like (Cato, 2011). One reason for the popularity of small cars over large cars in Canada is price. Due to the differences in the Canadian and American economies, the same car can cost significantly more in Canada than it does in the United States. For example, according to the Globe and Mail, in February 2011, the GMC Yukon cost 22% more in Canada than it did in the United States, even though the exchange rate was near parity (Will, Woe Canada, why are cars cheaper in the U.S.?, 2011). Since large cars already tend to be more expensive than small cars, Canadians are more likely to buy small cars simply because they are more affordable. The reason for cars being priced so differently in the two countries despite the exchange rate being at or near parity is the relative size of the two markets. The Canadian market is significantly smaller than the American market which is largely as a result of the difference in the population of the two countries. As such, Canadian dealerships must price their product slightly higher in order to make up for the loss in volume (Will, Woe Canada, why are cars cheaper in the U.S.?, 2011). Another reason for why Canadians prefer smaller cars as compared to Americans is that small cars tend to be more fuel efficient. The price of fuel in Canada is significantly greater than it is in the United States, largely due to taxes (Mann, 2011). Overall, it makes it more financially feasible for Canadians to purchase small, cheap, cars and have to spend less money fuelling them than they would larger, more expensive, and less fuel efficient cars such as the ones popular in the United States. This is a stark contrast to the taste of Americans, who, according to a 2007 study, are likely to forfeit a few miles per gallon rather than purchase a car as small as the Smart car (Jones, 2007). For many Americans, the trading off comfort, size, power, and usefulness for savings on gas does not seem worthwhile. Furthermore, the fact that large cars are and fuel prices are relatively cheaper than they are in Canada makes it much more financially feasible for Americans to continue to purchase large cars, at least until gas reaches unaffordable prices. Beyond affordability, for many Americans, when driving a small car on roads full of larger, more powerful vehicles, safety becomes a serious concern (Pinchin, 2008). All these aspects come together to explain why it is harder for a vehicle like the Smart car to be tougher to sell to Americans. A larger, more SUV-like version of the Smart car 3

6 would likely sell well in the United States because it meets the American population s need for safety, space, and power, while still providing the fuel-efficiency and customizability of other Smart cars. Success in Canada The success of the Smart car with Canadian consumers can be attributed to a number of factors. It can be attributed to increased environmental awareness among Canadians, higher gas prices, and a shift in buyers sensibilities (Laturnus, 2007). A 2007 Globe and Mail poll indicated that 26 percent of Canadians consider the environment to be the top issue facing the country and 62 percent were willing to accept slower economic growth as a trade-off for reducing global warming (Tancock, 2007). Therefore, Canadian consumers are willing to make purchasing decisions that will contribute to environmental sustainability, such as the Smart car. Moreover, as mentioned earlier, Canada s gas prices are higher than U.S. due to higher taxes. Naturally, Canadian consumers are now making car purchases based on fuel efficiency to avoid high gas prices. Finally, there has been a shift in buyers sensibilities such that a large car is now simply unnecessary to a Canadian consumer (Tancock, 2007). Canadians are sensible consumers and will purchase products that are practical, such as the Smart car, because of its mobility in high traffic cities such as Vancouver and Toronto. Another possible reason for the Smart car s success is because of the timing of its release. When the Smart car was introduced in Canada, it was considered unique and stood out amongst competitors in the market due to its size, appearance, fuel efficiency, and affordability. Canadian consumers will likely buy Smart SUVs or Smart cars that are larger and use gasoline rather than diesel. As discussed earlier, a concern that consumers may have about the Smart car is its size and how it will withstand against a larger vehicle in a collision. For consumers who are really concerned with safety, they may prefer Smart cars that are larger since larger cars are inherently safer. By giving consumers the option to purchase a slightly larger version of the Smart car, such as a Smart SUV, in Canada, Smart will likely attract many new consumers who were previously unwilling to purchase due to safety concerns. Further, as outlined earlier, since the Smart ForTwo only fits two adults, consumers may prefer a car with higher capacity. Hence, offering the Smart SUV in Canada would expand Smart s market in Canada since more consumer preferences would be met. Canadian consumers would prefer gasoline over diesel because gasoline is more efficient than diesel for shorter distances at lower speeds, which is what the Smart car is meant for (Roy, 2010). Furthermore, diesel is not as well suited to colder climates where diesel vehicles can experience start-up issues during winter. Lastly, diesel prices have increased beyond the price of gasoline and the price of diesel engines tends to be greater than gasoline engines. Offering gasoline 4

7 engines would allow for cost savings for the consumer and would likely be widely accepted (Will, The pros and cons of a diesel engine, 2011). 5

8 Appendix A The consumer decision making process Note that the table below was adapted from Marketing by Dhruv Grewal, Michael Levy, Ajax Persaud, and Shirley Lichty published by McGraw-Hill Ryerson in Need recognition This step involves the consumer s recognition that they have an unsatisfied need and want to go from their needy state to their desired state. 2. Information search This step involves the consumer s search for information about the various options that exist to satisfy their needs. 3. Evaluation of alternatives Functional needs: Functional needs relate to the performance of the actual product. Psychological needs: Psychological needs deal with the personal gratification that consumers associate with a given product. Internal search for information: An internal search for information is based on past experiences and knowledge of the product or the manufacturer of the product. External search for information: An external search for information is based on the experiences of external parties such as friends, family, and information resources such as the Internet and magazines Factors affecting information search: Comparison of the perceived risks and benefits of the search: The consumer must decide whether it is worth their time and effort to conduct an extensive search for information. For example, for many consumers a low cost product such as pop does not require an extensive search for information whereas a more expensive product, such as an automobile, does. Locus of control: A person s locus of control refers to whether they feel they have some control over the outcome of their actions (internal locus of control) or whether the outcome is controlled by external factors (external locus of control) affects the amount of time spent in searching for information. Actual or perceived risk: The actual or perceived risk associated with a product can be broken down into three types: 1. The risk that a product will not perform as expected is known as performance risk; 2. The risk that a product will require extensive financial outlays both at purchase and post-purchase is known as financial risk and; 3. The risk associated with how a person s product purchase is perceived by friends, family, and strangers is known as psychological risk. Type of product or service: More time is spent searching for information related to specialty products/services, such as an automobile, than a shopping or convenience product/service, such as apparel and small food items, which are made much more regularly. Determinant attributes: Determinant attributes are features that are important to the 6

9 The evaluation of alternatives step involves examining and assessing the available information about alternative products. 4. Purchase and consumption Product is purchased and consumed buyer and on which competing brands or stores are perceived to differ. Consumer decision rules: Consumer decision rules are the criteria that consumers use to efficiently select from amongst several alternatives and include the following: 1. Compensatory decision rule: The compensatory decision rule is at work when a consumer who is evaluating alternatives considers good characteristics to be the trade-off for bad characteristics. For example, for a certain consumer car performance may make up for the price of the car. 2. Non-compensatory decision rule: The non-compensatory decision rule is at work when consumer decides from amongst alternatives on the basis of certain characteristics, irrespective of other ones. For example, for a certain consumer, no matter how well a car performs and how good it looks, if the price is too high, a certain consumer may choose not to purchase it. 3. Decision heuristics: Mental shortcuts that help narrow down consumers choices. For example, a potential car buyer may choose one brand over another simply because of one brand s reputation for reliability. Some products are purchased ritually, in that the purchase is driven by life events, while many are purchased based on the value it represents to consumers. 5. Post-purchase A purchaser can be either satisfied or dissatisfied with their product purchase. Satisfaction with a product can lead to positive word-of-mouth and brand loyalty, which are important to companies. Dissatisfaction, otherwise known as post-purchase dissonance, is the psychologically uncomfortable state produced by an inconsistency between beliefs and behaviours that in turn evoke a motivation to reduce the dissonance. 7

10 Appendix B The Smart ForTwo compared Smart ForTwo standout features: Where the competitors stand out: Interchangeable body panels Safer due to larger size and more durable Ease of parking and manoeuvring construction in urban settings Better fuel efficiency (Toyota Prius & Honda Affordable Insight) Environmentally friendly Greater storage and seating capacity manufacturing process More suitable for long distance travel Competitive fuel efficiency Smallest car available in Canada Unique appearance 8

11 Works Cited About.com. (2012). Are Smart Cars Safe and Economical or Just Small? Retrieved from About.com: Cato, J. (2011, August 5). The top 10 car trends: what the numbers tell us. Retrieved February 28, 2012, from The Globe and Mail: Cotta, R. (2007). The Consumer Guide to Compact Cars. Retrieved February 29, 2012, from Consumer Guide Automotive: Grewal, D., Levy, M., Persaud, A., & Lichti, S. (2009). Marketing. Toronto: McGraw Hill Ryerson. Jones, R. (2007, June 12). Americans not very big on very small cars. Retrieved February 28, 2012, from MSNBC.com: Driver's Seat: Laturnus, T. (2007, November 22). Mercedes launches Smart car 2.0, the Fortwo. Retrieved February 28, 2012, from Staight.com: LeBlanc, J. (2011, September 23). Oh Lord, won t you buy me a (small) Mercedes-Benz. Retrieved February 28, 2012, from The Toronto Star: Wheels: Mann, B. (2011, March 9). Canada gas prices higher than U.S. because of higher taxes. Retrieved February 29, 2012, from MarketWatch Blogs: Pinchin, K. (2008, February 16). Big Like America. Retrieved February 29, 2012, from The Daily Beast/Newsweek: Roy, R. (2010, November 22). Are Gas Engines Now More Efficient Than Diesel? Retrieved February 29, 2012, from Popular Mechanics: Smart. (2012). Smart Expressions. Retrieved February 29, 2012, from Smart: Supercars.org. (2012, 1 1). Most Fuel Efficient Cars: Top 10 List Retrieved February 28, 2012, from Supercars.org: Supercars.org. (2012). Most Fuel Efficient Cars: Top 10 List Retrieved from Supercars.org: 9

12 Tancock, K. (2007). Is Canada eco-friendly? Surprising ways we are...and aren't. Retrieved February 28, 2012, from Canadian Living: we_areand_arent.php Valdes-Dapena, P. (2007, September 6). Smart ForTwo among cheapest cars in America. Retrieved February 28, 2012, from CNN Money: West, L. (2012). Are Smart Cars Safe and Economical or Just Small? Retrieved February 29, 2012, from About: Which? (2008, November 11). Running costs 'most important' for car buyers. Retrieved February 28, 2012, from Which?: Will, J. (2011, March 11). The pros and cons of a diesel engine. Retrieved February 28, 2012, from The Globe and Mail: Will, J. (2011, February 3). Woe Canada, why are cars cheaper in the U.S.? Retrieved February 29, 2012, from The Globe and Mail: 10