Top 10 mistakes when preparing a model launch and how to avoid them
19 June 2019
Sonja Nehls, Head of Car To Market & Consulting
When preparing to launch a new model to the market, manufacturers not only focus on new car sales, but also take into account the future used car market. More often than not there are trade-offs, which residual value managers will identify, seek advice on and address internally. Autovista Group considers what can go wrong from a residual value (RV) perspective when launching a new model and suggest ways to avoid such mistakes.
1. Overambitious volume planning
Residual value performance starts already with the overall volume planning for a model. Being too optimistic in that respect will most directly harm RVs due to oversupply on the future used-car market, which results in extended stock days as well as low selling prices. A good indicator for reasonable volume planning is the segment share gained by the previous generation and other models in the brand line-up. This, in combination with a look at increased or reduced competition in the segment, will support achievable volume planning.
2. Massive share of short-cycle business
Short-cycle business mainly refers to dealer registrations and rental cars. Those cars will return to the used car market very quickly, sometimes after just a few days, and compete with both new models and young used cars. As-good-as-new models are available at a considerably lower price than new cars and large amounts of these vehicles will directly put residual values under pressure. While dealer and rental registrations are certainly necessary to have enough demo cars available and to gain visibility in the market, the major share of volumes should always be sold into the private and true fleet channels.
3. Excessive discounts
The same rationale as for short-cycle registrations holds true for excessive discounts on new models. Discounting puts pressure on the residual values of young used cars and, subsequently, older models too. If I can buy a brand new model, configured to my liking, at a 30% discount, I would expect to pay considerably less for a 12-month-old used car. The worst-case scenario is when a manufacturer promotes large discounts for a recently launched model directly in the car configurator. From a residual value perspective, it is recommended to set appropriate list prices and more or less stick to them. This will also help the brand’s overall list price credibility and residual value performance.
4. Increasing list prices, expecting used car prices to follow accordingly
Increasing list prices will not automatically result in higher RVs. Only a fraction of the higher list price will be reflected in the residual value as buyers will not be willing to pay the premium compared to the previous generation or other comparable models. Furthermore, high list prices will lead to lower %RVs, which are an important indicator for leasing companies.
5. Poor standard equipment level and option structure
Meeting the demand of used car buyers also means offering the right equipment. Over- or underequipped models are less likely to appeal to used car buyers. Also, large numbers of similarly equipped models, e.g. from non-user-chooser fleets, reduce the remarketing potential. Well-structured trim lines and/or packages covering the most demanded features in the segment will ensure good marketability. It is advisable to manage the equipment mix of units going into large fleets to be heterogeneous enough and to cover the most demanded features in the segment.
6. Forget about total cost of ownership – TCO
The depreciation of a model represents the major share of its total cost of ownership (TCO). It is complemented by running costs, servicing and wear as well as insurance costs. The TCO determines leasing rates and also has a crucial role to play in attractiveness for the used car market.
7. The model fails to meet customer expectations
The emotional appeal, interior attractiveness, driving dynamics, practicality and brand image of the model itself are the strongest drivers of customer demand. Typically, models with a timeless design will have a more stable RV development. However, depending on the segment and also the market, more extravagant models with a ‘love-it-or-hate-it’ design can be a huge success, as evidenced by the Range Rover Evoque and Nissan Juke for example. It is just a bit more risky to get this right. The interior design and quality of materials also need to match the product promise and, depending on the segment, practicality and ergonomics are key to a successful remarketing position. Simply put, a model and its specifications need to fit to the target group’s needs and expectations.
8. Global design serves all countries
Customer expectations and tastes can vary massively across countries and continents. Manufacturers should ideally adjust their product offering to local circumstances. For Asian manufacturers for example, it can be crucial to have a research and development centre in Europe that ensures models are tailored to both European regulations and consumer tastes.
9. Neglect residual value management towards the run-out of a model
New models will see an RV uplift compared to their predecessor. This uplift can be expected to be roughly between 5 and 9 percentage points but cannot be indefinitely high. Harming the predecessor’s RV performance with massive discounting - or pushing units into the short-cycle business - will therefore also negatively influence the new generation’s RVs. A high RV uplift for the launch of a new model often indicates a poor RV development of the previous generation.
10. Disregard the possibilities of optimising residual values proactively
Successfully marketing a model to leasing and fleet customers mainly depends on favourable residual value forecasts. Identifying and addressing remarketing risks even before the launch of a model - and obtaining reliable RV forecasts early enough - can prove key in selling more cars more profitably.
In the end, it all comes down to the simple principle of supply and demand. Manufacturers will be able to establish and maintain a strong residual value performance when the demand on the used car market is met by the right amount and mix of models, with the appropriate specs and a concept that is in line with customer tastes and expectations.
For more information about the benefits and the scope of Car To Market studies and how they support upcoming model launches, please contact:
Sonja Nehls, Head of Car to Market & Consulting (T: +49 (0) 69 80 88 39 74)