Empirical Study : Brand Elasticity in Mass Market

Primarily, right Product (having attributes which meets or exceeds consumer’s needs – both emotional & functional) and right Price (delivering value = perceived benefits {emotional & functional} >= price tag) are key ingredient for successful car recipe. Affordable, reliable and consistent After-Sales-Service is key to sustainability. For example -Renault Duster was runaway success, in medium run before competition came in, and Kwid did what Hyundai fail to deliver with Eon, despite Renault having relatively slim footprint across India. Resurgence of Tata Motors as a result of HORIZONEXT strategy is another example.

In spite of having all three vital ingredients mentioned earlier, sometimes companies do felt constrained in selling product in higher price band, because of brand inelasticity across mass market price band – ₹ (0-35) Lakhs. While going through 2017 data set we saw an interesting trend. Companies which have presence in ₹ (0-5) Lakh price segment find it difficult to make a mark in 15+ segments. That gives a glimpse of relation between elasticity of brand over price range. Here Tata and Mahindra have played it safe by introducing value for money (VFM) UVs in ₹ 15-20 Lakhs price bracket, undercutting competitor’s price by huge margin. VFM, how? Consider this, on paper, a fully loaded 140 BHP Mahindra XUV 500 (W10 AT AWD) is priced at ₹ 18.93 Lakhs (Ex-Showroom) and similarly sized and equipped 150 BHP Skoda Kodiaq being sold at ₹ 34.5 Lakhs (Ex-Showroom), in territory of entry level luxury brand. Both have similar fancy features like sunroof, electric seats etc, Skoda is enriched with exquisite features like panoramic sunroof, adaptive cruise control, self-park etc. Yes, XUV 500 sells 10 times more than Kodiaq and in flesh (metal) Kodiaq is much nicer. But the crux is Skoda is still able to sell Kodiaq for 35+ Lakhs, and it is significant because revenue it generates is only 5 times less than XUV 500, not 10 times less as in case of volume.

Volume Distribution across Price Range (Ex-Showroom)

Globally Skoda occupies bottom rung in VW’s brand hierarchy, even below VW. However, numbers suggest that Skoda is more accepted as a premium brand than the parent VW in India. If you leave Polo, it’s Skoda that always had an upper hand in premium segments– Octavia/Jetta, Superb/Passat, Kodiaq/Tiguan.

Maruti Suzuki in past had tasted some sort of failure with Vitara and Kizashi in 15 Lakh+ segment. Both were promoted as pure Suzuki vehicle, by shedding Maruti name all together, a strategic effort for brand differentiation, except for sales channel. Both were available only as CBU with petrol engine, that could be the reason of failure, but Honda was able to sell Civic and CRV in relatively good numbers in the same period with petrol only engine. Moreover, in India, people in general recognize the “S” logo of Suzuki as Maruti only. Suzuki as a brand is still not strong; this is further corroborated by relatively lack of recognition of its two wheeler business, where Suzuki alone is used as brand name.

So, Maruti Suzuki tried a different approach. It began experimenting with sales channel. Rather than launching a sub brand, it has started sub brand of sales channel called NEXA, portrayed as premium channel to sell premium product, seems innovative. If you observe carefully, you will notice that none of the product sold through NEXA channel has Maruti written on it, anywhere. What difference one could observe at NEXA is the ambience, however, staff at regular Maruti showroom are equally courteous and diligent throughout sales cycle and offer similar purchase experience too. Neither Baleno nor Ignis, sold through NEXA, seems premium over Dzire and new Swift. Current product mix seems to be misplaced across sales channel. Also potential buyers need to visit two different showrooms for products which fall in similar price band. Has Suzuki succeeded in creating premium brand image with NEXA? Super success of Brezza, a lifestyle oriented product, sold through regular Maruti showrooms, raises question on efficacy of a separate and expensive to maintain NEXA sales channel.

Another case in point is Hyundai. It tried multiple times in ₹15 Lakh+ segment, but was never successful, whether Santa Fe or Sonata or currently on sale Tucson and Elantra. Each one had an upmarket interior and felt premium. Still potential buyers in respective segment were not willing to pay premium price asked by Hyundai.

That is why in recent past Toyota was planning to launch its budget brand Daihatsu in India. Reason is obvious, gaining volume without diluting brand.

Revenue (Conservative estimates) Generated in Each Price Band  

₹ (15-35) Lakh price band is though low on volume but it is high revenue generating zone, see Ford. Below table also shows the white space for each of the manufacturer. Going by prevalent trend and potential buyer’s aspiration, it seems the best way to fill these gaps is with aggressive looking, well-equipped and aggressively priced diesel SUV or to certain extent a MUV, sedan will sure struggle for volume though.

The figures provided below are conservative estimates for illustration purpose, calculated based on base price (excluding GST/Excise/VAT/Dealer Margin) of each model, diesel and petrol variant considered separately and actual figures based on particular variant of model might vary.

Classic Example When a Good Product Fail to Sell Itself : VW Phaeton (2002-2016)        

Some say Phaeton (2002) was the best VW car made ever, the then technological marvel of over-engineering excellence. It shared its platform with uber-luxury Bentley Continental Flying Spur and Audi’s flagship model A8 and priced slightly less than A8. In 2002 VW had set a production target of 20k annually but production run that lasted 15 years, only 84,253 were produced. It bombed in the US market and they have to pull out from the US within 2 year of its launch. Reason – VW logo. VW name itself stands for “People’s car”, loosely can be translated as an affordable car.  Brand conscious Americans never accepted VW phaeton but Audi A8, despite being similar car under the skin did well in same period. This shows how much brand identity is critical and no matter how good a product is, it can’t sell itself.

Hypothesis

Simply taking an SUV route to make headway into the ₹15 Lakh+ segment too didn’t work well for Hyundai! Is this an indication that to get the brand to make headway in 15+ segments:

  • Follow “Value for money” strategy of Tata or Mahindra by undercutting price of competitor by huge margin?

OR

  • Relegate ₹ (0-5) Lakh tight budget segment into sub brand, just like Nissan-Datsun?

OR

  • Create a premium (not luxury) sub-brand exclusively for India, something like Tata Racemo?

OR

  • Is there another way?

Can Suzuki go to an extent to experiment on these lines? It has a lot at stake in India, as roughly 50% volume contribution comes from India. Current generation of electric cars will face similar challenge from mass market adoption perspective, as they won’t be able to deliver value by fitting into the existing price band which is psychologically ingrained in mind of potential customer.

(The article is written by Rohan Rishi. You can connect with him at emailrohanrishi@gmail.com)

2 thoughts to “Empirical Study : Brand Elasticity in Mass Market”

  1. Product differentiation is the key to success within each price segment. 2019 will be an interesting year to watch out for hoping all cars will be equipped with airbags and ABS. Automatic diesel hatchback with ABS and airbags within 0-5L would be a great product, similarly, such sub4m within 5-7L would be a great product.

  2. Skoda and VW are both mass-market brands in Europe with Skoda being looked upon as cheap due to eastern Europe production. In India, brand image has little influence, footprint or distance to dealership matters. Renault did not see much success with its own products except Kwid. Dacia products are very cheap in Europe due to Romania production and Renault uses the badges for countries approach. Skoda had developed a huge fan base in Kerala over the years. Foreign brands should push for bringing in more automatics in mass-market segments. That is the natural progression towards EVs in 2030 which will be automatics anyway.

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