Hey GM! Prices Are Set by the Market


General Motors Cuts Prices on 80 Percent of Its U.S. Models

Remember the “new” Toyota Production System thinking:

Profit = Market-Set Price (minus) Your Costs

The “old” approach (still apparently endorsed by many companies) was:

Price = Desired Profit (minus) Your Costs

Under the old approach, a company would attempt to increase profits by increasing their price.

The TPS innovation was to accept that prices are set by the market and the only thing you can control is your costs. That's how you increase profit, by focusing on your costs.

Has GM finally realized that the market values their product less than what they had been charging? The good news for GM is that, from a supply/demand perspective, that lower prices should increase sales volume. Then again, if they're reducing base costs and cutting incentives, then the “real price” hasn't changed.

The question: Can GM embrace lean/TPS and reduce production costs enough to be profitable? Or will they continue to blame their “legacy costs?”

Toyota is able to charge more because the market values Toyota's quality and reliability. Some analysts say the “value gap” is much larger than the “cost gap” that GM is always blaming. In other words, if GM did as good of a job as Toyota, GM would be able to charge as much for their vehicles (the market would allow the higher pricing, really) and GM would be more profitable.

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  1. Luke Van Dongen says

    GM has attempted to get out of incentive marketing, only to return to one scheme or another a couple of times in the past year. It looks like they are finally realizing that true market value is no where near MSRP. If reducing prices closer to true market value will help to quelch the incentive game, I’m sure this will bode well for the domestics as a whole.

    The other motivator in this scenario is likely GM’s excess capacity. Because they have so much capital tied up in plants and equipment, not to mention pools of labor (who get paid whether they are working or not) they need to find some way to keep everything working in the absence of real demand for their products. It’s the only way they can improve productivity in the short term.

    It will be interesting to see how consumers react to the lower prices. Maybe they are willing to sacrifice some of Toyota’s quality and reliability for a lower priced vehicle. The absence of “Red Tag” and Employee Discount schemes will make it much more simple for consumers to do comparisons and to work out their own value equation.

  2. […] = Market Price – Cost (the lean view of the value equation as highlighted by Mark Graban in a previous post), it follows that there are only 2 ways to improve profits: reduce controllable costs, and add […]

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