Introduction
Among the US car manufacturers, General Motors is one of the most influential market players that distributes such vehicle brands as GMC, Chevrolet, Cadillac, and Buick. Although the company uses a market-based pricing strategy to align with the competitors, it increases revenue by offering exceptional quality products and serving premium sector customers.
Although the company has extensive plans for the development of electric vehicles, today, they are producing only one model of e-cars Chevrolet Bolt EV (General Motors, 2020). Building such types of cars is a challenge due to the high manufacturing costs caused by the battery price. A cost-based pricing strategy is, therefore, inefficient for electric vehicles, as it increases the price far above their value and prevents customers from purchasing them. Value-based prices have the potential to promote sales and reduce costs per unit. Moreover, the battery costs are expected to decrease in the future, making the development of EVs a significant investment.
Cost-Based Versus Market-Based Pricing Strategy
A cost-based pricing strategy has been adopted for many years as it provided a solid justification for setting price levels. The approach assumes that the price level should consist of the total manufacturing expenditures per item and the added revenue. However, modern market theory and practice prove its inefficiency under the competition. The reason for this is that this approach applies the costs per unit plus revenue model when, in fact, units cost change with the quantity sold, and this amount directly depends on the price level (Nagle & Müller, 2018).
It is impossible to establish the level of sales and fix the price based on it when it is the price that determines the purchases. When the company sets higher prices aimed to cover production expenditures, the costs per unit tend to increase.
The cost-based approach is particularly flawed in the case of technological innovations, such as electric vehicle production. The manufacturing of such products usually requires significant investments in research and design, which can be minimized by selling more items. Moreover, emerging technologies tend to become steadily cheaper when they are demanded on the market. That is why companies reduce prices on innovative products to promote sales and attract future consumers.
Given the flaws of the previous model, modern strategies tend to make prices value-oriented. An adequate pricing approach should focus on the price that the consumers are willing to pay for the item that possesses particular qualities. That is why it should not significantly exceed the price level of the competitors offering similar products.
Nagle and Müller (2018) highlight that the strategies should not only adapt prices to the customers’ purchasing willingness but “raise customers’ willingness-to-pay to a level that better reflects the product’s true value” (p. 5). That is why the optimal price strategy should base on the combination of the value-based competitors’ adjusted prices.
Strategic Implications of Prices for General Motors on the EV Market
Despite high manufacturing costs, many automobile companies have entered the electric vehicle market during the recent decade. Although such cars are less profitable than petroleum-fueled vehicles, such companies as General Motors still pursue manufacturing due to imperfect competition.
According to Matsushima and Khanna (2018), the strengthening of environmental regulation forced the automobile giants to improve the fuel economy of their cars. Moreover, companies tend to reduce prices and get lower revenues for these vehicles (Matsushima & Khanna, 2018). The technologies used in EV manufacturing are new and require significant investments and increased expenditures per unit.
The batteries for electric cars constitute the majority of production costs (Kochhan et al., 2017). Nevertheless, the number of such vehicles grows due to several reasons. Apart from environmental regulation, the companies predict a decrease in technology costs and, thus, aim to win on the market before it happens.
General Motors tends to employ the pricing model that prevails on the EV market for its Chevrolet Bolt EV. Despite the increased costs, they cannot set the prices too high as they would become uncompetitive. The discussed car has a similar set of features as its competitors, including Fiat 500e or Hyundai Kona Electric.
With the battery capacity from 60 to 66 kWh, and a range of 239 miles it offers substantial value to the consumers (2020 Chevy Bolt EV). To compensate for the reduced price level (starting at $36,620), the company has designed a Premier model that several premium options. Thus, General Motors applies market segmentation to fit into the competition with the base price but to increase revenue using the premium class goods.
Pricing Model for Chevrolet Bolt EV
Cost Structure of Chevrolet Bolt EV
This analysis includes the data for the currently sold models of Chevrolet Bolt EV provided by Lutsey and Nicholas (2019). The scholars claim that the price structure of Chevrolet Bolt EV consists of such components: Battery pack, EV powertrain, vehicle assembly, and indirect costs. The price for the battery pack was calculated for the specific model of reported $160 per 1 kWh and comprised $10,560 for a 66 kWh battery (Lutsey & Nicholas, 2019). Other components of the powertrain, vehicle assembly, and indirect costs were considered average for the vehicle category and class offered by Lutsey and Nicholas (2019).
Thus, the total cost structure for Chevrolet Bolt EV was calculated as follows:
- EV Powertrain: $10,560 (battery pack) + $3,449 (other components)
- Vehicle assembly: $12,600
- Indirect cost (including research and distribution): $10,584
Thus, the total approximate cost of production of one Chevrolet Bolt EV comprised $37,193, which is slightly higher than the basic price of a car. The calculations might differ from the real costs as the analyzed data concerning the overall costs of EV production without the specification of a particular company or model (apart from the battery pack price). It should be noted that the indirect costs used for research, design, and promotion can become substantially lower with the increase in sales, justifying a relatively low price level.
Price of Chevrolet Bolt EV Premier
Given the specificity of the EV market, the primary goals of the companies are to promote sales of electric cars and to win the consumers before the predicted cost decrease. Due to such purposes, a cost-based pricing strategy is inapplicable here as it would set the price on a higher level than those of the competitors. Even a moderate revenue of 5% will increase the price up to $39,052. That is why the focus should be made on reducing the eight indirect costs, which currently comprise $10,584 per unit.
Setting the price around the current costs ($37,000) will maximize sales, lower indirect expenses, and make the car profitable for the company. Moreover, General Motors works on technological improvements that would make the batteries cheaper in the future (General Motors, 2020). That is why such price levels would help to promote the car and attract customers, creating a competitive advantage in the future.
Conclusion
Due to high manufacturing expenditures for Chevrolet Bolt EV, the cost-based pricing strategy is inapplicable, as it would decrease the sales of the car. The offered price level is derived from the competitors’ rates and the value of the item for the consumers, and thus cannot be significantly higher than the costs. The current paper proposes to set the prices at a lower level than the cost-based model would expect. The reason for this is the high proportion of indirect variable costs, such as research and design, that will decrease per unit as the sales grow, generating profit for the company.
References
2020 Chevy Bolt EV. (2020). Web.
General Motors (2020). How we’re making EVs affordable. Web.
Kochhan, R., Fuchs, S., Reuter, B., Schickram, S., Sinning, M., & Lienkamp, M. (2017). An overview of costs for vehicle components, fuels, greenhouse gas emissions, and total cost of ownership update 2017. Research Gate, 1-26.
Lutsey, N., & Nicholas, M. (2019). Update on electric vehicle costs in the United States through 2030. International Council on Clean Transportation, 1-12.
Matsushima, H. & Khanna, M (2018). Revealing auto-manufacturers’ implicit pricing strategy under the reformed CAFE standard: A reduced form approach. Proceedings of 2018 Agricultural & Applied Economics Association Annual Meeting.
Nagle, T. T., & Müller, G. (2018). The strategy and tactics of pricing: A guide to growing more profitably. Routledge.