Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Carmakers Use Dynamic Pricing to Raise Margins
Transcript
- Lucas: So let's talk about an industry that's historically been allergic to dynamic pricing — car dealerships. For decades, the model was simple: manufacturer sets the MSRP, dealer haggles with the customer, and the final price depends on who blinks first. Luna: Right, the dance. The 'let me talk to my manager' routine. It's almost a cliché. Lucas: Exactly. But that's starting to crack. We're seeing more automakers — especially in the EV space — experiment with true dynamic pricing. Tesla's been the most aggressive. In early 2023, they cut prices on the Model Y by roughly 20 percent in the US. Then they raised them. Then cut again. Luna: It felt like watching an airline manage seat inventory. One week you buy, next week it's cheaper. Lucas: Which created real buyer anxiety. I remember seeing forum threads where people who just bought a Model Y were furious — they felt punished for buying early. And that's the risk of dynamic pricing in a non-commodity good. With a plane ticket, you expect fluctuations. With a car, which is a major purchase, customers assume stability. Luna: But isn't the alternative — the traditional dealer model — already a form of dynamic pricing? Just opaque and inconsistent? Lucas: That's the key insight. The old system is dynamic too, but it's personalized and hidden. Two people can buy the same car on the same day and pay thousands different, depending on negotiation skill. Tesla made it transparent but volatile. Ford's trying a middle ground. Luna: Tell me about Ford. They had that big price drop on the F-150 Lightning, right? Lucas: Yeah, in July 2024 — so two years ago now — Ford cut the Lightning's starting price by up to $10,000, depending on the trim. They cited improved battery costs and factory scale. But it was also a response to slower demand. The Lightning was selling well initially, but then competition from the Chevy Silverado EV and Rivian R1T heated up. Luna: And that's classic supply and demand pricing. Lower demand, lower price. But Ford still uses dealers. So the actual transaction price can still vary. Lucas: Right. Ford doesn't control the final price. They set a new MSRP, but dealers might add markups or discounts. Some Ford dealers were adding $10,000 markups on the Lightning early on. Then when demand softened, those same dealers were discounting. Luna: So the dealer network introduces friction. The manufacturer wants a consistent pricing strategy, but the dealer wants to maximize margin on each sale. Lucas: That tension is why some automakers are exploring direct to consumer models. Tesla, Rivian, Lucid — they bypass dealers entirely. That gives them full control over pricing. They can adjust MSRP overnight, no negotiation, no inventory holdbacks. Luna: But they also have to eat the cost of holding inventory. Dealers absorb that. Lucas: True. And dealer franchise laws in many states make it illegal for manufacturers to sell direct. So legacy automakers can't easily switch. They're stuck with a system that's deeply embedded. Luna: So where does that leave the consumer? Are we better off with transparent dynamic pricing or opaque haggling? Lucas: I think most people prefer transparency. Studies show that consumers feel more satisfied with a fair, upfront price — even if it's higher — than a negotiated discount. The anxiety of not knowing if you got a good deal is real. Luna: Yeah, that's the 'winner's curse' feeling. You win the negotiation, but you wonder if you left money on the table. Lucas: Exactly. So the ideal might be a system where the price adjusts dynamically based on real-time demand, but the customer sees one firm price — no haggling. That's what CarMax tried years ago with no-haggle pricing, but it was fixed, not dynamic. Luna: Right. And CarMax's prices were often higher than what you could negotiate at a traditional dealer. So they appealed to a specific segment — people who value time and certainty over the lowest possible price. Lucas: That's the trade-off. Dynamic pricing can optimize revenue for the seller, but it can also alienate buyers if it feels arbitrary. One thing that helps is giving customers a rationale. When Tesla cut prices, they framed it as 'we're passing on cost improvements.' When they raised prices, they cited supply constraints. Luna: Does that actually work? Or do customers just see a company changing prices on a whim? Lucas: There's evidence that price changes with a clear explanation are better received. A study from the Journal of Marketing found that when companies cite cost increases, consumers perceive the price hike as more fair. But if the explanation is vague — 'market conditions' — it backfires. Luna: Interesting. So the framing matters as much as the number. Lucas: Absolutely. And that's where software-defined vehicles come in. Modern cars are basically computers on wheels. They can receive over-the-air updates. Some automakers are exploring feature-based pricing — you buy a car with hardware for heated seats, but you pay a subscription to activate it. Luna: That's a whole other can of worms. BMW tried that with heated seats and got massive backlash. Lucas: They did. But the concept is that dynamic pricing could extend to features, not just the base vehicle. Imagine a car whose price fluctuates based on how many miles you drive, or the time of day you charge. We're not there yet, but the architecture is being built. Luna: Before we go further — and this ties in — I want to mention something. We're able to dig into these topics because of a small group of listeners who support the show directly. There's no ads, no sponsors. It's just listener-funded. Lucas: Yeah, that's right. If you've gotten value from these conversations — maybe a pricing insight you used at work, or just a better understanding of how businesses work — consider chipping in. It's literally what keeps us going. You can find us at buy me a coffee dot com slash fexingo. Luna: And it really helps. Even a few dollars a month makes a difference in covering production costs. Alright, back to cars. Lucas: So where do we go from here? I think the next frontier is real-time pricing based on inventory and demand data. Some dealers already use software that adjusts prices daily on their used car lots. But for new cars, it's still rare. Luna: What about subscription models? Like, instead of buying a car, you pay a monthly fee that includes insurance and maintenance? That's a form of pricing too. Lucas: Definitely. Volvo's Care by Volvo program was an early example. It's a subscription that includes the car, insurance, maintenance, and roadside assistance. The price is fixed monthly, but the company can adjust the subscription fee over time. That's dynamic pricing on a longer time horizon. Luna: And it removes the transaction cost of buying and selling. Customers like the simplicity. Lucas: The challenge is that most people still want to own their car. The subscription model hasn't taken off as expected. But for EVs, which have lower maintenance costs and rapid technology changes, it might make more sense. Luna: What about the used car market? That's already dynamic. Prices change daily based on demand, mileage, condition. Lucas: True. Carvana and Vroom built whole businesses on dynamic pricing of used cars. They use algorithms to adjust prices in real time based on market data. But they've struggled with profitability. The used car market is incredibly competitive. Luna: Right. So dynamic pricing isn't a magic bullet. It's a tool that works well in some contexts and poorly in others. Lucas: Exactly. For automakers, the key is finding the right balance between flexibility and trust. If you change prices too often, you erode confidence. If you never change them, you leave money on the table. Luna: And the technology to do it is advancing fast. With connected cars, manufacturers know exactly how many units are on lots, how fast they're moving, and what competitors are charging. They can optimize in ways that weren't possible ten years ago. Lucas: I think we'll see more automakers move toward a hybrid model — a base price that's stable, but with dynamic add-ons or financing rates. And as the transition to EVs continues, the pricing playbook will keep evolving. Luna: One thing's for sure: the days of the sticker price being the final price are numbered. Lucas: Yeah. Whether that's good for consumers or not depends on how transparent and fair the new system ends up being. But the old model is definitely cracking.