pricing the prius
I visited a Toyota dealership over the weekend and was surprised to find what seems, at least on the surface, like a serious case of mispricing. The Prius, Toyota’s popular hybrid car, has a long waiting list of future buyers. In order to get a new Prius you have to wait 6-12 months. The demand is overflowing. If you want a Prius immediately, you can buy one of the dealership’s predriven or used cars. The problem is that the standard price for a new Prius runs somewhere between 24 to 28k, but the same dealership sells a used Prius for 30k. That’s right, the used car actually costs more than the new car.
I asked the dealer about the mispricing. His explanation was that Toyota has a national, standard price for the Prius. No matter where you go in the country, you can buy a Prius for the same price. In some places, like Glencoe Illinois, 24k for a fuel-efficient hybrid seems like a deal. In other places, getting a Prius would be more of a strain. But because of Toyota’s no-haggle pricing scheme, the price remains the same everywhere. As a result, in my area there are not enough new hybrids to go around and the dealership, in order to meet demand, buys used hybrids and sells them at a higher rate. The fleets they’re getting them from are actually selling them back to Toyota for the same price at which they bought them two years ago! From this perspective, buying a Prius two or three years ago was the best car buy you could have made. If you paid cash for it, the car cost you nothing. If you happen to be one of the lucky few at the top of the waiting list, you could buy a new Prius and sell it the next day for a profit.
So why does Toyota use this pricing scheme? Wouldn’t it be better (more efficient) to allow prices to fluctuate geographically? Or is there some other advantage to the uniform pricing scheme that outweighs the potential losses?
That’s right, the used car actually costs more than the new car.
I suppose if you have to wait a year for a new one, but can get a used one right now, then …
Kieran
June 30, 2008 at 2:27 pm
Plus, up here, new Priuses cost $40k. With an exchange rate hovering around 1.00, that’s quite a premium for living on this side of the border.
tina
June 30, 2008 at 3:45 pm
Are you sure it was a Prius? We just bought one and haggled over it! It is a pretty spiffy car…
fabiorojas
June 30, 2008 at 3:48 pm
No, it was definitely the Prius. I looked into buying one both here and in Utah and I got the same story both places (although I didn’t see any new Prius cars being sold used in Utah).
brayden
June 30, 2008 at 3:52 pm
It behooves Toyota to maintain a “no haggling” policy in spite of other inefficiencies such a policy may cause, in order to sustain a brand reputation that is amazing. Isn’t this idea somewhat obvious? Is there an economics argument against it?
w
June 30, 2008 at 4:08 pm
Brayden, by “no haggling” do you really mean “no additional dealer markups?”
Toyota’s marketing has actually been quite interesting — as I understand it, they’ve used “option” content variations on their hybrids to adjust prices to market conditions quite a bit; the option packages that buyers can’t effectively avoid (since while Toyota isn’t as hardcore as Honda with no-factory-option trims, their options are much less optional than with European makes where special orders are more normal) amount to added manufacturer markups without (following w) the brand reputation stigma of simply adding a supplemental sticker increasing the price by a few grand. In the case of dealer markups, the manufacturer may be indifferent as to who collects the surplus (queuing consumer or dealer) but would prefer not to promote the perception that its dealers are treating consumers “unfairly.”
Part of the issue is that persistent excess demand isn’t a very common problem in the new car market; MSRP is usually a ceiling price limiting the damage to “suckers,” and manufacturers do effectively vary prices regionally by localizing incentive programs.
Around Madison, which is pretty much Prius Central, for a while you couldn’t get ‘em w/o Xenon headlights and nav systems and whatnot; then as the tax credit was phasing out they got ‘de-contented’ a bit to moderate the net selling prices (and recall had cash on the hood for part of last year).
Around the auto world, there’s been some speculation that with supplies limited by battery production bottlenecks, the US is being redlined in favor of the Eurozone — that is, allocations are thin and leaning towards base models. I don’t know that the story really makes a lot of economic sense, as the panoply of fuel-efficient car alternatives in Europe means that Toyota couldn’t exert such only-show-in-town market power as they might in the US.
Tom Bozzo
June 30, 2008 at 5:58 pm
By “no haggle” they mean that the price is set, depending on the number and kind of additional content you get. The system works pretty much like a menu. There’s a set price for the base (somewhere around 24k) and then additional prices for add-ons. Perhaps this is specific to my local dealer, but he was pretty proud of the fact that they didn’t mark-up anything and that if they did they could lose their Toyota license.
brayden
June 30, 2008 at 6:03 pm
You may be getting a combo of a Toyota-level no-markup policy and a dealer-level no-haggle policy. It would be interesting to see if the no-haggle part is a result of Prius-specific demand making prices non-negotiable downward; talk to ‘em about a Tundra, maybe?
It’s tough for manufacturers to impose prices on dealers — the Scion brand, for instance, has Saturn-esque no-haggle pricing as a policy but small print notes that dealers can set their own prices — and allocations of cars are a (or the) major lever.
Tom Bozzo
June 30, 2008 at 6:15 pm
but he was pretty proud of the fact that they didn’t mark-up anything and that if they did they could lose their Toyota license.
That’s what he said, anyway, and I totally believe him. ;)
Kieran
June 30, 2008 at 6:16 pm
I think having haggle free pricing could still be done on a geographic basis. But it still strikes me that they are not raising the price of the new Prius. I know many people who’d spend much more to get one. You figure that there’s a premium not only because of reduced gas expenditures but also for “eco-friendly” appeal. People will pay a lot for the latter. Could argue it’s part of a long term strategy to develop dominance in the market, I suppose.
mikemcbride
July 1, 2008 at 7:27 am
Mike, that was my impression. In my area they could easily charge 35-40k for a Prius. I’m sure that originally the plan was to create a price that would allow them to dominate the market, but they’re already dominating aren’t they?
brayden
July 1, 2008 at 12:42 pm
We bought a Prius from a Ford dealer two weeks ago, it was $27k (2007 ex fleet vehicle with 25,000 miles). We went to a dealer last weekend and bought another (2007) for $28k (they wanted $29k, they split the difference). Another dealer had one of the fleet cars for $31k. It’s supply and demand. The demand is high, the supply is low. We ended up getting a 2007 with a base 2 package for $28k (they split the difference). In a year we would have spent another $12,000 on gasoline alone for the two cars we had. A fill-up on the Prius is 10 gallons of high test for 500 miles. Good deal I say :)
Lisa
August 5, 2008 at 11:59 pm