Revving Up Auto Branding

Anjan Chatterjee, Matthew Jauchius, Hans-Werner Kaas & Aurobind Satpathy - McKinsey Detroit

Why do two almost identical cars experience radically different fates in the marketplace? Think brand equity.

US car companies spent more than $50 billion on marketing in 2000-more than any other US industry and upward of 200 per cent of the total global net income of the top five automakers. Yet from 1996 to 2000, while the marketing costs per vehicle of the Big Three auto companies increased by 87 per cent (to an average of $2,900 per car sold), their combined market share dropped by more than four percentage points, representing $15 billion in lost revenue for 2000 alone. More spending is not the answer. The industry cannot turn the tide until it addresses a deeper problem: the loss of brand identity.

In recent years, the number of car makes and models has grown in every product segment. At the same time, the once vast gaps in quality, performance, safety, fuel efficiency, and amenities have all closed significantly. Although, variations in quality and performance persist, the remaining possibilities for differentiating products, and thus achieving competitive advantage, revolve around styling and other intangibles and the emotional benefits they confer on the customer. But instead of attempting to convey these benefits, carmakers spend 55 per cent of their marketing budgets-$24 billion a year-on rebates and incentives. Price has become, in many cases, the main reason for choosing one brand over another-the classic trap of a commoditising industry and the destroyer of healthy profit margins.

What sets brands apart?

The industry itself has proved the dollar value of a great brand. Consider the fate of "badge-engineered" vehicles-cars and light trucks sold into the same market by two different car companies, often with little but a nameplate to differentiate the products.

Such vehicles can meet dramatically different fortunes. Workers at the General Motors and Toyota joint venture NUMMI (New United Motor Manufacturing Incorporated) plant in California build the Toyota Corolla and the Chevrolet Prizm side by side, for example. Toyota designed both models, and the differences in their components and trim are minor. Both vehicles receive high marks from Consumer Reports, and comparably equipped midrange models have similar price tags. Yet the Prizm requires up to $750 more in buyer incentives to support its sales. Even so, only one-quarter as many Prizms are sold, and their trade-in value depreciates much more quickly (Exhibit 1). Toyota's name on the Corolla attracts customers, while the Prizm is lost among the offerings on a Chevy dealer's lot.

What accounts for such preferences? Marketers have long understood that consumers are influenced by the emotional connections they form with products-and with manufacturers, dealers, and other owners. Our study¹ confirms the idea that consumers attach significantly greater importance to relationship and emotional benefits than to a car's functional attributes, at least when they meet minimum standards or don't fall far short of the competition’s. Nevertheless, those intangible benefits are the weakest links in the automakers' performance ratings. Companies that act on all of the elements of brand affiliation-that is, the emotional relationship, the purchase process, and product attributes-build an advantage that competitors find hard to duplicate.

 
¹A proprietary survey of 1,277 auto consumers who owned, among them, 43 brands, produced by nine manufacturers, in five product categories. The survey, conducted by Hase/Schannen Research Associates in the third quarter of 2000, was supplemented by data from other market research firms, financial analysts, and news reports.

To tap these wellsprings of brand attachment, the auto industry must move from traditional product-based marketing to a conscious and organised brand-based strategy. Once, the product was the brand (think of the Ford Model T or of Volkswagen's original Beetle). Today, companies must position each car within the entire suite of products that bear a given nameplate and understand consumer likes and dislikes so deeply that these tastes shape everything from the car's design to its first appearance in an ad to the service department's after-sales performance. Every consumer touch point represents both an opportunity and a danger. Making the most of all touch points can reinforce an already powerful brand, help build an obscure or struggling brand, and limit the harm from a damaged one. An objective assessment of the opportunities and dangers at every touch point is also the basis of an efficient allocation of spending.

To most consumers, for instance, Toyota's products (like those from some other manufacturers) embody consistent quality and fuel economy. Toyota and its rivals must capture the loyalty of consumers by demonstrating the emotional benefits conferred by consistent quality and fuel economy: the assurance that products won't let consumers down or will make them look and feel smart and self-assured. Likewise, people are drawn to the BMW as "the ultimate driving machine," though they may choose a model with a small. engine and automatic transmission. Among strong brands such as BMW and Mercedes-Benz, a common theme unites all models and gives even the least glamorous of them a certain aura.

Strong companies know that one weak model can tarnish the larger brand-thus when a model falters, they modify or withdraw it. Four years after the Honda Odyssey minivan received a chilly reception at its debut, for example, the company introduced a totally redesigned vehicle. Most carmakers keep poor performers on the market much longer in hopes of recouping their investment. Honda's approach seems to be more successful: the Odyssey now sells at a premium over list price, while its North American competitors must use discounts or rebates to sell minivans.

BMW, Honda, and Toyota, among other companies, begin with a strong brand that imparts sales momentum to each model. Brands that are weak-because their products have acquired a reputation for shoddy workmanship, their designs are not evocative, or their models bear little relationship to one another-cannot pursue this top-down approach. But a company stands a good chance of selling more cars and, step by step, of rehabilitating the brand if managers take pains to match each model to the consumer segments most likely to be interested in it, identify and overcome the obstacles that keep browsers from becoming purchasers, and emphasise both the functional and the process and relationship benefits of the model in question.

How people buy

Studies have shown that consumers move through the purchase process predictably. In choosing a car, for instance, they typically start by considering five or six models, adding some and dropping others as they proceed. The number of vehicles narrows as consumers move from awareness to familiarity to consideration to the test drive and, finally, to purchase. Brands pass through a "purchasing funnel" in which products are subjected to new requirements at every stage of the selection process. By crafting the brand-management effort to deal with these requirements as they unfold within each market segment, companies can overcome obstacles to purchase (Exhibit 2).

 
Brand managers who emphasise their models' common identity will capture more customers at each point in the funnel. Therefore, CNW Marketing/Research, an independent firm specialising in the automobile market, can say that 93 per cent of US car buyers who "considered" a Mercedes in 2000-that is, had narrowed their choice to a Mercedes and no more than two other brands-eventually bought one. This is the industry's most effective conversion rate; it means that Mercedes had to attract just 107,000 prospects for every 100,000 cars sold. By contrast, for every 100,000 people who bought an Oldsmobile or a Mercury, more than 500,000 people had to be persuaded to consider the car. Isuzu, by this measure among the worst-performing current brands, had to attract nearly 1 ,300,000 prospects to sell 100,000 cars.

Such inefficiencies are rooted in the marketing budget. Up to 90 per cent of the carmakers' spending is devoted to the first stage of the purchase process (in the form of mass advertising) or to the last (incentives and rebates). What is left over goes into direct mail, special events, press relations, worldwide web-based marketing, and so on. These underutilised tools are well suited to reaching people at the crucial middle stages of the purchase process, when a consumer's inclinations are confirmed or resisted. They are also far more efficient than mass advertising or incentives and rebates. Our analysis suggests that companies could cut their mass-advertising costs by as much as 15 per cent-delivering more than $2 billion a year to the bottom line-by eliminating their least productive mass-market campaigns while redirecting part of the savings to more targeted efforts.

The key is using focused market research to determine why a particular consumer segment loses interest in one vehicle while maintaining interest in another. Carmakers can then act to unplug that bottleneck by offering, say, a special options package (for instance, a powerful audio system and low-profile wheels) to younger shoppers at an early stage of consideration or by staging invitation-only test-drives for new models. Brands that become familiar to people early in their lives are more likely to be purchased by them when they first buy cars and thus subsequently. That is why Ford Motor, for example, has invested in driver-training companies in the United States and Canada: the company wants as many people as possible to learn to drive at the wheel of a Ford.

The road to active brand management

Consumer behaviour may be strongly emotional, but influencing it takes data and discipline. The purchasing funnel is a source of information about consumers and a device for interpreting it. Four phases of active brand management-the targeting of high-potential consumer segments, the isolation of purchase bottlenecks, the expansion of the range of consumer benefits, and a concentration on consumer touch points-rely on this data.

Target high-potential segments

Market segmentation is a prerequisite for any branding effort, though few companies apply a bone-deep understanding of the customer to each product offering and market encounter. Japanese carmakers-having captured baby boomers with reliable entry-level products in the 1970s and having moved upscale in lockstep with boomers ever since-are masters of targeting.

Ford likewise focused on boomers in relaunching the F-150 pickup in the 1990s. Breaking with tradition, the design team started not with a set of product features but with the styles, needs, and values-identified through consumer research-that motivated its target market. (The team identified 30 distinct segments and suggested ways to attract each.) Design and marketing decisions flowed from that early market understanding. Rather than mimicking the product's brawny rival (the Dodge Ram pickup), the team chose a sleeker look with a roomy cab and amenities to appeal to young families. The success of the F-150, and the holistic approach that created it, influenced subsequent product-development efforts.

Isolate purchasing bottlenecks

Each car model we studied encountered a bottleneck in the purchase process (Exhibit 3). Research shows, for instance, that 87 per cent of shoppers for sport utility vehicles (SUVs) are aware of the Chevy Blazer, the best-known car of its kind. But among people actively considering the purchase of an SUV, a lower proportion-12 per cent lower-took the Blazer out for a test-drive than the best-in-class Ford Explorer. Additional research made the problem clear: increasingly affluent and demanding SUV buyers liked the Blazer but simply did not want to own a Chevy.

 
For the makers of another leading SUV, the bottleneck appeared further downstream. This model, seen as unique and as the most fun to drive of the cars in our study, appeared on the highest percentage of buyers' shortlists for purchase. But only 11 per cent of those people went on to buy that brand, while 15 per cent ultimately bought an Explorer.

Shoppers were being turned off by their treatment at the hands of the salespeople and by the showrooms' appearance. Weaknesses in the process and relationship sides of brand management were keeping people from moving beyond short-listing the vehicle.

One alternative is suggested by Saab, which uses remote brand-information centers, special events, and invitations to selected prospects to test-drive its vehicles. Thus Saab has reduced traditional sales pressure to "buy now," though sales in France rose by 33 per cent.

Expand the range of consumer benefits

Relationship and process benefits are often the keys to unlocking bottlenecks in the car purchasing funnel. Saturn, for instance, is famous for its low-key, no-haggling sales policy-its greatest brand differentiator since entering the market in 1990. Saturn's innovative sales process addressed two classic bottlenecks, occurring between consideration and short-listing and between short-listing and purchase.

To convey a fuller range of benefits at a number of points along the funnel, carmakers can use special events to promote interaction with a brand before consumers make contact with dealers. Some carmakers hold events such as the Jeep Jamboree-back-country festivals where thousands of enthusiasts reinforce one another's commitment to the brand and go on to evangelise the unconverted. Carmakers can also communicate with the consumer on-line at the company website, refurbish their showrooms, train their sales forces to satisfy more demanding upscale buyers, and deliver demonstration models to the homes of people reluctant to visit dealerships. Our study of one manufacturer suggests that such efforts could cost $15 million but would pay for themselves in about three years-and sooner if the company targeted its efforts at freer-spending market segments.

Concentrate on consumer touch points

The auto sector, perhaps more than any other, has seen an explosion in the number, variety, and depth of information sources available to consumers. Publications, product placements, "buzz" campaigns, and sponsored and independent websites influence buyers at different points in the purchase process. Rather than broadcast a scattershot message in case a likely buyer might be paying attention, marketers must adopt something like the just-in-time approach that is best practiced on the manufacturing side of the business. They must recognise that different consumer segments respond differently to each model at each point of the purchasing funnel-and must choose their medium and message accordingly (Exhibit 4).

 
More than half of all car buyers in 2000, for instance, used the Internet to help them make their purchase decision. That gives original-equipment manufacturers a new tool for observing the customer relationship and for influencing the consumers' brand experience before and after purchase. Yet almost every major auto maker's consumer website is a one-way electronic brochure; only vague attempts are made to create dialogue.

Likewise, direct mail is seldom used to its full potential. When tied to a print advertising campaign or other promotional efforts, direct mail can explain benefits to particular consumer segments and establish a base of likely prospects. Mercedes, at the introduction of its M-class SUV, developed a series of eight mailings to a cross section of affluent US households, many of which had a history of Mercedes ownership. The initial mailing, sent out when the company's first US plant was under construction, described the program's progress and included the Mercedes three-pointed-star emblem as a gift. Recipients who returned a survey were given additional information about the cars' development. That campaign produced a self-selected list of 100,000 prospective customers and helped Mercedes sell out its first run of the M-class.

A new brand of brand management

The move to just-in-time marketing involves significant changes across the business system, from product development to marketing to retailing to after-sales service. Active brand management requires more than the consistent development of sound products, painstaking consumer research, and expensive advertising and promotion-activities that are already on every car company's "to do" list.

To compete in the cluttered car market, companies must rely less on armies of marketing specialists-people individually focusing on everything from data analysis to media buying-and more on integrators of products and the way they are marketed. As the general managers of the brand, these integrators should have broad authority, an understanding of the profit drivers, and access to direct-marketing resources (for example, more targeted advertising channels, such as customer kiosks or interactive TV) insofar as customers prove to be receptive.

Historically, car companies have counted on strong leaders to provide a unifying vision. Think of Henry Ford, Honda founder Soichiro Honda, or, Bob Lutz, who championed Chrysler's most successful products of the 1990s. Each defined, for a time, the products that made his company's brands strong. Ferdinand Piech at Volkswagen and Ford's Wolfgang Reitzle have sought to play similar roles. To date, however, only Soichiro Honda can be said to have transformed his personal vision into a dynamic brand and an enduring company ethos. Henry Ford's Model T didn't change with the times and was ultimately bypassed. Lutz's product vision for Chrysler didn't survive his tenure there.

Obviously, it is dicey to depend on one person to capture the essence of the times, to inspire a breakthrough product family, and-equally challenging-to dissolve a large corporation's ingrained habits and turf mentality. Rather, great brands in every industry should be built on customer relationships. Features, benefits, and prices can be duplicated; emotional connections cannot. A deep connection with customers sustains Apple Computer even in hard times; Sony wins hearts with its innovations and style; the public associates American Express with security and personal attainment.

Brand equity can be squandered, however. Companies that put their names on products contravening their brand image, usually pay a price-a lesson IBM learned from its debacle with the PCjr and Coca-Cola from the instant outcry against its old bottle's new contents. Both companies, no slouches when it comes to branding, quickly recognised their mistakes. Auto executives have been slow to do the same. Unless the industry changes its ways, it will have many more failures to ponder.