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While Ford is not the only automaker targeting consumer car preferences, it is the only
one with a vice president heading a unit on revenue management. Ford is also notable for its combination of three technology tools to sell the right car with the right mix of features to the right customer at the right price. It uses one tool to determine the car with the optimum package of features most likely to appeal to consumers in a specific market. Another tool, pricing software technology from Manugistics, determines which sales-promotion campaign should be offered on each car in each market. A third tool puts Ford dealers in the driver's seat to order the inventory most likely to wheel off their lots. With this knowledge in hand, Ford can gear its production, sales, and marketing to get the biggest bang for the buck. "There is a clear link between what customers want and what we build," says Lloyd Hansen, the spear head behind the project . "The problem has been finding it." Ford believes revenue management is that missing link and has the most leverage in industries with low profit margins. That's what makes it so critical in the auto industry, where pretax profit margins have historically averaged only about 3 percent," says Hansen. "If better pricing tools and processes can improve revenue by just 1 percent, and raise historical margins to 4 percent, bottom-line profits would grow by 33 percent. Because the improvement is essentially all cash, the increase in cash flow and market value is even higher. Very small improvements in revenue can have a huge impact on bottom-line results."
"Ford's revenue-management strategy helps at the margins," says Sean Egan, managing director of Egan-Jones Ratings Co., "but the company needs to address some fundamental problems. We would derive much greater comfort if, rather than attempting to manage the last couple hundred dollars on each sale with a revenue-management strategy, Ford produced fresher products at a reasonable price." Ford is only 18 months into its revitalization plan," counters Hansen. "To date, we have seen substantial progress in all key elementsquality, revenue, and cost performance. Our bottom-line results, however, are still not where they need to be, and more improvement is planned. The most important part of our recovery plan is the launch of an unprecedented 65 new Ford, Lincoln, and Mercury products in the next five years. "In the U.S.," he adds, "this product-led transformation begins with the new F-150 pickup, followed by two new minivans this fall and six cars next year. These products have been designed and packaged around customer wants and needs. They give us huge confidence in the future."
financing rate," says Hansen. "The model will project the effect on sales from that incentive program. It allows us to determine the best incentive program to offer in each market." For example, according to the model, customers who buy Ford Explorers are motivated by low-rate financing programs, not cash rebates. Customers of the Ford Focus and the Crown Victoria are tempted more by cash back. Evidently the model picked up on the credit-availability problems of younger drivers and the dislike of interest payments among the elderly. The next tool Ford is wielding is the Package Optimizera Web-based market-research tool marketed by Morepace International Inc. that packages the best mix of options to appeal to customers in a particular market. "We've seen a lot of revenue improvement by selling features like DVD entertainment systems, heated and cooled seats, and navigation systems," says Hansen. "Those are 'high-want' items in certain markets, but you need to know which markets." "We do an Internet survey of people in a simulated free-demand situation in which they are asked to build their ideal vehicles within the constraint of prices they can afford," says Paul Malboeuf, Senior Vice President of Morepace, a market research firm. "We survey anywhere from 500 to a couple thousand people per region, then analyze the data to recommend the most profitable combinations." The last piece of the revenue-management strategy is currently being rolled out to dealers as Ford's new Smart Order system, a Web-based tool that dealers can use to select the optimum inventory. "Forty percent of inventory turns over in 30 days, while 45 percent sits there for more than 90 days," says Hansen. "By helping dealers figure out what to order based on profit margins, customer preferences, and the most appealing price, dealers can close sales much faster." Several Ford dealerships recently engaged in a pilot study of Smart Order. "I was one of the guinea pigs," says Michael Kennedy, president of John Kennedy Ford, in Philadelphia. "Every month we buy a certain number of cars from Ford, all different lines with different features. Smart Order guided me to slice and dice my orders according to a wide range of features to get the optimum level of inventory. Kennedy says the system allowed him to decrease floor-planning costsa ratio of inventory to dealership space over timeby 25 to 30 percent.
"Ford is digging deeply to determine where it should spend its marketing and incentive money. If it spends $200 less per vehicle, that's an extra 30 cents in earnings. Ford and other big automakers are plagued by retirement benefits promised to union workers. It's just a lot harder for them to cut costs. Ford realizes that market share is not as critical as profit per vehicle," adds Tadross. "The problem is that the competition doesn't always agree." But Ford division president Steve Lyons says the revenue-management system is designed to deal with competitors' pricing actions, no matter how severe. "In the case of the loyalty discount," he explains, "[the pricing model] gave us the impetus to sit tight, let them get a short-term boost, and resist giving away the sun, the moon, and the stars. Next month they'll struggle and we'll have the right product at the right price."