The luxury goods market in the United States has been steadily increasing over the years (Euromonitor, 2017). This can be contributed to the upward spiralling of personal disposable income (Trading Economics, 2018) which make luxury goods more accessible, as well as the shift in consumer preferences towards more conspicuous consumption (Kapferer, 2012).
Consumers are in the position to afford luxury, and the marketplace has responded by offering various options to consumers. The luxury car industry in the U.S makes up part of this market and is the second largest for luxury cars in the world, making up 7% of sales in the total automobile industry in the U.S. Current leaders include Mercedes-Benz with a market share of 16.4%, Lexus with 16%, BMW with 15.
1% and Audi with 10.1% (Statista, 2017a). While initial sales were contributed to the demand for sedans, improvements in technology, competition and a shift in consumer preferences has resulted in manufacturers increasing their product variety.
In 2003 Porsche responded to the changing market and launched its first luxury SUV, the Cayenne, which proved to be successful with 276,000 units being sold (Porsche, 2014). Luxury car manufacturers have since started manufacturing extended product lines to cover SUV’S and crossovers. As a result, sales of luxury sports cars increased by 25%, and SUV’s increased by 20% (Statista, 2017a) with two of the top players, Mercedes-Benz and Lexus contributing their growth to sales of SUV’s (Research and Markets, 2017). This essay will critically discuss the importance of product assortment in the luxury car industry in the U.S.
A. This will be demonstrated using examples of key players in the industry to highlight the advantages of having a higher varied product assortment, as well as some of the limitations that need to be considered; even more so because this industry is part of the luxury market. A good product strategy in the automobile industry is considered as an important variable that contributes to market responses and performance (Cusumano and Nobeoka, 1992).
Jake Fisher, the automotive engineer from Consumer Reports, argues that luxury vehicles need to differentiate themselves regarding their superior and premium product to show that they have value beyond prestige (Elliott, 2009). Product assortment is part of a product strategy which consists of the width, length and depth that reflects the total set of products that a company offers for sale. The width includes the different product lines that are offered, the depth includes the different variants within a product line, while the length includes the number of items in each product line (Jobber and Chadwick, 2016). Proper management of a company’s product assortment can contribute to competitive advantage (Ramdas, 2003) by satisfying consumer’s wants and shaping consumer’s preferences (Simonson, 1999).
Luxury automobile manufacturers aim to capitalise on a brand’s already established strength by entering new segments or ‘white spaces’ by increasing their product width to offer more variety (Dasey, 2015). Increasing product length and depth is also a strategy used by some manufacturers to increase growth through more model options (Ibid, 2015). Manufacturers are increasing their products to serve the demands of consumers. This increase in product variants has many advantages and proves to be successful for various luxury automobile companies. Considering the diversity in consumers tastes and preferences, an increase in the number of choices available would allow consumers to choose from a variety of options which increases the possibility of a consumer finding exactly what they need (Gourville and Soman, 2005). This benefits consumers when making a high involvement purchase like buying a luxury vehicle as it gives them enough of options to make a good decision (Kahn, 1998). This, in turn, would result in customer satisfaction and help increase market share especially if the company offers more than their competition (Ibid). Up until 2016 BMW was the top-selling luxury automobile car in the market and contributed their growth to the availability of new products and proliferation of their product lines.
They made use of their different varieties of sizes, body styles and engines to compete with competitors Mercedes-Benz, Audi and Lexus (Levin, 2015). In 2015, Karl Brauer, senior analyst at Kelly Blue Book, an automotive research company, commented: “They’ve BMW mastered the art of spinning multiple models off a single platform, which is what every automaker has to do these days to remain competitive on costs and pricing.” Similarly, in 2015, companies Cadillac and Lincoln realised their lack of variety and attempted to increase their market share by developing additional models (Levin, 2015). The luxury market at times cannot rely on their prestige or brand name to connect with consumers and thus consider growing by moving into new markets (Reddy et al., 2009). With a larger assortment of products with new product lines and varieties, manufacturers can gain market share by entering different market segments (Moorthy, 1984). For example, BMW aims to enter a sports utility segment in the market in 2018 with its X7 SUV model which will serve as their flagship utility vehicle (Dasey, 2015). Manufacturers can also use different product lines to enter a broader market by launching more affordable luxury options to consumers (Nueno and Quelch, 1998) Mercedes-Benz launched their CLA model in 2013 while Audi launched their A3 model in 2015 both of which were significantly lower in price than their previous models to tap into a broader market (Forbes.
com, 2015). Higher varieties can also ensure that a product fits the unique needs of consumers which could result in a strong loyalty towards the company (Kahn, 1998). With different alternatives to choose from within the same company, customers often become ‘de facto brand loyalists’ (Schultz and Bailey, 2000). These loyal customers in-turn would become brand advocates and influence other potential buyers (Kahn, 1998). Therefore, this brand loyalty can be related to building and maintaining market share (Train and Winston, 2007). BMW has maintained a higher brand loyalty than its competitors (60% compared to the average 42%-48%) one of the reasons being that their consumers to choose the same brand as their next car. An additional product line can be manufactured due to product improvement through innovation.
This would benefit those consumers that tend to ignore features of previous choices and look for more features in other choices (Feinberg, Kahn and McAlister, 1992). This is reflected in the luxury automobile industry as most consumers tend to purchase top-of-the-line models (Statista, 2017b). Product innovation can further be used to aid in upselling or cross-selling within a company’s product assortment (Kumar, 2015). Lastly, according to Jaguar’s design head, Ian Calum, luxury automobile consumers want continuity with the look of cars as it aids in recognition (Gibbs, 2015). To develop recognition, more than one product is required. A wider number of products would help companies to create a consistent design that aids in recognising the product and differentiating it with competitors (Karjalainen and Snelders, 2010). When discussing the importance of product assortment in the luxury car industry, apart from the advantages, it is crucial to discuss the limitations that need to be considered while implementing a product assortment strategy, especially in a luxury market. To be considered luxury, a brand must have the characteristic of being exclusive (Nueno and Quelch, 1998).
A brand can lose its luxury character if there is an over-diffusion of the brand (Giacalone, 2006). Expanding production to increase demand the way manufacturers like BMW did can result in the dilution of the brand. Further, if a luxury company seeks to expand into broader segments like Mercedes-Benz and Audi did by introducing a cheaper variant, then the brand risks losing its exclusivity. In relation to the ‘rarity principle’ of luxury brands, with more consumers owning a brand due to increased numbers of products available, the prestige component of the brand can get eroded (Phau and Prendergast, 2000). Apart from the limitations of product assortment from a luxury brand point of view, there are others to be considered. A large assortment of products can negatively impact a company as much as it can benefit it.
The increase of variations of models that BMW and Mercedes-Benz manufactured as a strategy to increase their growth over the years was reported to have stopped working. The New York Times (2017) claimed that they now have more models to offer than they do buyers. A large assortment of products can also cause a choice-overload effect. This occurs when a consumer is overwhelmed with the number of choices available that it results in confusion or frustration (Gourville and Soman, 2005).
It can cause a consumer to feel dissatisfied and annoyed to the point that they choose not to make a choice (Huffman and Kahn, 1998). Too much choice could also cause consumers to settle for what is easily available through ‘simplified choice rules’ or delay the purchase by taking too long to decide (Kahn, 1998). According to Xavier Mosquet, the head of the auto practice at Boston Consulting Group, even though BMW has a broad range of products, consumers feel that they are similar and do not have much differentiation (Stock, 2015). If consumers feel that there are not enough differences within a product line, then they perceive it to contain duplication which further negatively impacts decision making (Kahn, 1998). Cannibalization is another limitation to be considered with product assortment.
It involves competition of products within a firm’s own product line (Moorthy, 1984). Here, sales of one product is gained from the ‘cannibalization’ or the loss of sales of another product (Mason and Milne, 1994). This could potentially have an impact on the market share of the company as seen with BMW in 2017. According to the New York Times (2017), Shujaat Siddiqui, the general manager at a BMW dealership in Ohio stated, “BMW customers are just moving from one model to another.
BMW’s goal was to increase market share, but it turned out to be a bit of cannibalization.” As a result, BMW currently holds the third position in terms of sales with a 15.1% market share as compared to their initial position as the market leader (Statista, 2017a) There is a limit to how much a company can offer while remaining profitable. Increased assortment can increase production costs past their practical limits if not too careful (Smith, 1956). Another challenge for the luxury market like the automobile industry is how to maintain profitability while facing the pressure to produce new products by continuously innovating and catering to consumer’s desires for exclusivity (Nueno and Quelch, 1998). In 2016 BMW’s profit margins fell after investing in newer technology and changes to vehicle models sold. The luxury car industry need not always use an increased product variety to be successful. What is required instead is proper management of the product assortment which would overcome the limitations.
Mercedes-Benz was known for ‘the Mercedes strategy’ which set them apart from competition. This strategy involved producing a full range of vehicles for niche markets in every category while maintaining production levels to grow (Forbes.com, 1997). Similarly, Aston Martin manufactures only 7000 cars a year to meet demand and maintain exclusivity (Davis, 2015). Another consideration to be kept in mind is how the product assortment of the company works with other elements of the marketing mix as products cannot sell themselves. A wide product assortment would require promotion in terms of advertising to differentiate the different car models available (Smith, 1956). A key to managing luxury brands like those in the luxury car industry would be to balance product line management, communication management, channel management and service (Nueno and Quelch, 1998).
To conclude, the luxury car industry in the U.S. needs to maintain a balanced product portfolio by taking into considerations the effects in terms of the advantages and limitations that such a strategy has. A balanced product portfolio is fundamental to growth in terms of market share and profitability (Nueno and Quelch, 1998).
Responding to consumers demands for new and innovation products while maintaining exclusivity and being coherent with the other marketing elements would ensure success.