Category Archives: Consumer Behavioral Research

Auto Dealerships Adapt to Reverse Showrooming

March 22, 2018Applied Management, Automobile Industry, Business Management, Business Model, Consumer Behavioral Research, Economics, General Motors, Management Research Study, University of South FloridaTodd Benschneider

Todd Benschneider – University of South Florida
October 7, 2013
Reverse Showrooming Trends Benefit Automobile Dealerships
A current trend in consumer spending known as “showrooming” has deterred many retailers from investing in additional brick and mortar stores. “Showrooming” consumers first visit storefront locations to try on sizes or look at samples; however, those shoppers purchase the goods later through the website or from a lower priced competitor. Long term trends of declining incomes from storefront locations have influenced large chains to reevaluate the return on investment that storefronts will generate in the 21st century. The widespread arrival of mobile technology magnified storefront spending gaps, as many tech savvy consumers now use price comparison apps to reduce the time and fuel spent in pursuit of the lowest prices.

In contrast to showrooming, a new retail trend is emerging as a byproduct of social media; a new breed of reverse showroom shoppers are arriving in stores ready to purchase. In reverse showrooming, a potential customer is exposed first to the new product online by a mention or recommendation from a friend’s social media post, often the posts include price and store location. The recommendation leads the reader to believe that their friend had done the price research for them which prompts the shopper to visit the storefront and make a similar purchase. Research found that while 41% of social media users browse online; they however made the purchases at a store. Further contributing to the growing trend, are recent changes in sales tax laws which eliminate tax savings previously available through online purchases.

Retail automobile sales are an industry uniquely suited to gain from these reverse showrooming trends. Car dealerships have been protected from showrooming behavior; because licensing, financing and insurance regulations require customers to verify proof of identity, sign legal documents and finalize title transfer at brick and mortar franchises. As a result, every internet automobile shopper essentially becomes a reverse showroom buyer.

The internet car shopping experience allows customers to gather comparative information such as fuel economy, safety and reliability ratings without facing the pressure many shoppers can perceive while visiting a dealership showroom to collect brochures and pricing. Buyer’s aversion to interpersonal confrontation may have previously limited automobile sales. In response to customer aversion to dealer showrooms, auto manufacturer websites have responded with new website tools allowing shoppers to build and price each model to exact specifications and locate a match on a dealer’s lot.

Initially many automobile dealerships cursed the arrival of the internet for providing confidential cost information to buyers, which resulted in reduced profit margins. The internet further leveled the playing field by providing buyers a new negotiation tool, email, which allowed consumers to email requests for written proposals in order to create bidding wars among many dealerships. Recently however, dealerships have adapted to this new age of self-service sales, by reducing sales staff, trimming advertising budgets and reducing inventory carrying costs.

Today many dealerships carry lower ratios of stocked inventory per unit sold then in the pre-internet era. This is now possible by capitalizing on website tools that allow customers to effectively imagine what their dream car will look like in combinations of interior and exterior colors, without the need to stock every color combination. The shopping process is further streamlined once the preferred vehicle color and equipment is selected, buyers can simply drive a similarly equipped vehicle at the dealership to test the ride and handling. Once customer selection is confirmed the dealer can transport the exact unit from storage lots within days. To further facilitate the new process, manufacturers have provided assistance to diminished profit margins with generous contributions to dealer compensation through sales quota bonuses.

Many dealerships have survived the arrival of the Web 2.0, those franchises have done so by developing finance and insurance departments that offer cost-effective services that are less effectively shopped through the internet than the car itself. Auto loans, leasing terms, insurance and service contracts have costs dependent on variables such as credit scoring and their vehicle specifics; the combination of these factors become difficult to build accurate proposals in email correspondence, and give dealerships the ability to finalize pricing after the buyer has an escalated level of commitment, which results in greater opportunity to close the deal with higher profit margins. Additionally, increased buyer commitment allows sales managers to focus on the handful of customers present to purchase rather than pinpointing serious buyers from the dozens of casual shoppers browsing from the pre-internet era.

I have watched 15 years of adaptation of the automobile sales process, and see that it would have been difficult to predict shoppers arriving with mobile devices and apps capable of locating specific cars, calculating pricing, estimating trade values and providing interest rates, based on what other buyers obtained on similar vehicles. These customer to customer comparisons are in essence the foundations for what later evolved into social media.

Today, retailers can find ways to make reverse showrooming work to their advantage by utilizing funds available from reduced advertising costs, carrying costs, and labor costs. Armed with these liberated resources retailers can reinvent themselves and create web commerce portals that serve company objectives rather than becoming the idle servants of web demand. We need to prepare a vision to enhance the Web 2.0 tools to our advantage and prepare for a future of unimagined supply chain models made possible through instant mobile spending and speedy shipping options. Survival has always required adaptation, and unlike print media, the automobile industry remains many generations away from the social extinction.

Fitbit, IPO Superstar Struggling for Survival

February 19, 2018Applied Management, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Economics, Fitness Technology, IPO, Management Research Study, Marketing Strategy, Muma College of Business, Start-Up Ventures, Technology, Triple Bottom Line, University of South Florida, Venture CapitalTodd Benschneider

Todd Benschneider, Qingqi Meng, Jesse Rubin, Lisa Velesko, Xueying Zou

University of South Florida
February 3, 2018

Company Overview

Fitbit was founded in 2007 in San Francisco, California by James Park and Eric Friedman with a vision to help people lead healthier, more active lives by empowering them with data to reach their fitness goals. Since its founding, Fitbit has become the leading global wearables brand and its products have helped users track and get motivated for everyday health and fitness. Fitbit offers an innovative lineup of popular activity trackers including the Fitbit Surge, Fitbit Blaze, Fitbit Charge 2, Alta HR, Alta, Fitbit Flex 2, Fitbit One and Fitbit Zip, as well as an accessory line featuring the Fitbit Ionic smartwatch, Fitbit Flyer wireless headphones and Fitbit Aria and Fitbit Aria 2 Wi-Fi Smart Scales. Fitbit products are carried in 46,000 retail stores across 78 countries around the globe. Fitbit’s platform delivers personalized experiences, insights, and guidance through leading software and interactive tools. The success of these functionalities has grown the Fitbit social community to over 25 million active users in 2017. The International Data Corporation (IDC) forecasts that the wearables market will nearly double by 2021, leaving the door open for Fitbit to grow and continue its market leading footprint in this category.

Founders

James Park, who serves as the CEO and President of Fitbit, was a Harvard dropout with a computer science background. He was also co-founder of two tech startups, Windup Labs and Epesi Technologies, prior to founding Fitbit. His second startup, Windup Labs, an online photo-sharing company, was acquired by CNET Networks in 2005. James then went on to serve as the director of product development at CNET. James’s diverse background in tech startups also included a stint at Morgan Stanley where he built trading software and developed trading strategies for the bank.

Eric Friedman serves at the CTO of Fitbit. He was a co-founder of both Epesi Technologies and Windup Labs with James Park, and served as an engineer manager at CNET following Windup’s acquisition. Eric earned both his undergraduate and masters degrees in computer science from Yale University.

Neither Park nor Friedman had any manufacturing experience when they came up with the idea to create a wearable product that would change the way people move. They had attended and spoke at the TechCrunch50 conference in 2008, hoping to get 50 preorders. Instead, in one day they received 2,000 pre-orders for the product launching their idea into a true product that had real demand. They had spent several months in Asia looking at suppliers and, according to the founders, nearly crashed and burned seven times (Marshall, 2016). They were already serial entrepreneurs at this point, which gave them an advantage as they traversed the struggles of launching and perfecting a new product.

Financing History

After its founding in 2007, Fitbit went through several rounds of successful seed funding. Funding came primarily from venture capital firms to fund its high growth as an early stage fitness technology company. The founders were able to raise an initial four hundred- thousand dollars from friends and family to get their idea up and running, but the cash ran out quickly (“Fireside Chat with Fitbit”, 2017). In October 2008, Fitbit closed on its first round of Series A funding, raising $2 million in venture capital from True Ventures, SoftTech VC and several angel investors. This was the company’s first round of institutional funding and the company reportedly met with 40 VCs only to be rejected by all of them (“Fireside Chat with Fitbit”, 2017). Two years later, in September 2010, Fitbit closed a Series B funding round of approximately $9 million. As the company continued to innovate and introduce new products to the market, its need for additional capital also continued. In January 2012, Fitbit raised an additional $12 million in a Series C funding round from its existing investors Foundry Group, True Ventures, SoftTech VC and Felicis Ventures.

A little more than a year later, in September 2013, Fitbit was looking to raise additional capital at a $300 million valuation and secured $43 million in Series D funding from Qualcomm Ventures, Sapphire Ventures and SoftBank Capital, along with its existing shareholders Foundry Group and True Ventures. Only six years after its founding, the company had grown exponentially and raised nearly $66 million in seed capital to fund its operations, innovation and growth and was on its way to going public. Finally, in June 2015, Fitbit completed its Initial Public Offering (IPO) on the New York Stock Exchange at $20 per share, raising $731.5 million in capital. The IPO was comprised of 22,387,500 million new shares offered by Fitbit for a total of $447.75 million in fresh capital for the company and 14,187,500 million shares offered by the selling shareholders. This was the largest ever IPO at the time for a company dedicated to wearable technology. On its first day of trading, the shares of the company popped by 54% and again by 20% on the second day of trading on high demand and trading volume on the NYSE. It is important to note that Fitbit took advantage of the Jumpstart Our Business Startups Act (JOBS Act) of 2012 and registered as an “emerging growth company” (revenues less than $1 billion). This action eased the financial disclosure requirements, thus lowering the cost of going public. Just five months after the IPO closed, Fitbit and its shareholders once again went back to the capital markets and registered a follow-on offering in November 2015.

Unfortunately, market demand for the company’s shares had declined when the follow-on was initiated, which led to the offering being downsized from 7 million to 3 million new shares plus 14 million shares being sold down by current holders. Fitbit was still able to raise $87 million in fresh capital at a $29.00 per share offer price to use for potential acquisitions, working capital and other general corporate purposes, including research and development, sales and marketing activities, general and administrative matters and capital expenditures. Fitbit has not raised any additional equity capital since 2015, but instead has seen its stock price slide to under $6 per share as of January 2018 and its market cap drop from over $6 billion at IPO to under $1.5 billion.

Board of Directors

Fitbit’s board of directors is comprised of two insider executives and five outside directors. According to Investopedia, the average corporate board size is 9.2 members, so Fitbit may have fewer advisors on its board than its competition. It is important that the founders and company executives surround themselves by intelligent individuals who can help guide the company through its growth and a period of increased competition. Moreover, as the competition in the wearables space increased significantly since the company went public with the introduction of the Apple Watch and other comparable devices, the company will need sound advice for staying competitive. The following table shows the individuals that make up Fitbit’s current board of directors and the important reasoning behind some of their selections as a board member:

Board Member	Joined Board	Background	Reason for Board Selection
James Park	Day 1	CEO and President of Fitbit	Chairman of the board
Eric Friedman	Day 1	CTO of Fitbit	Executive Officer of the board
Christopher Paisley	January 2015	Executive Professor of Accounting at Santa Clara University. Christopher also sits on the board of 4 corporations in addition to Fitbit	Extensive board and operational experience
Laura Alber	June 2016	Current President and CEO of Williams-Sonoma	Extensive retail industry, merchandising, and operational experience
Jonathan Callaghan	September 2008	Founder and Managing Partner of True Ventures	Extensive experience with technology companies
Glenda Flanagan	June 2016	CFO Whole Foods Market	Extensive experience with leading consumer and health-related brands and expertise and background regarding accounting and financial matters
Steven Murray	June 2013	Partner at SoftBank Capital	Extensive experience with technology companies

FITBIT’S GROWTH CURVE

Fitbit’s formation in 2007 was inspired by the fitness potential of the 2006 release of the Nintendo Wii. Park theorized that exercise data could be harvested from the Wii game sessions and the resulting feedback metrics would create friendly competition among friends on metrics for health and fitness accomplishments, capitalizing on the social appeal of video game scoring. At eighteen months, the company had released its first fully functional prototype: the Fitbit tracker, which took second place at the 2008 TechCrunch50 conference. Because of the publicity of Fitbit’s second place finish among a field of respectable competition, the young company received a surprising 2,000 preorders for the $99 clip-on device. With those pre-orders, a successful track record from previous ventures and that technology award, Fitbit had gained enough credibility to attract a variety of venture capitalists (Marshall, 2016).

The first $2 million in venture capital came within two months of the TechCrunch50 publicity allowing the founders to quickly select a production location in Singapore and contract a manufacturer to build the devices. Their initial prototype, a simple pen sized pod which collected motion activity through a gyroscopic sensor like the one found in a Nintendo Wii controller, contained an integrated Bluetooth transmitter and onboard memory. Park was confident this simple design would prove easy enough to mass produce. However, the design and arrangement of the components did not translate well into mass production, causing several complete redesigns before Fitbit had a product that was compatible with an assembly line manufacturer.

Despite promises that the 2,000 preorders would be filled by December 2008, the deadline proved impossible to meet and the first Fitbit’s did not ship until September 2009, nearly two and a half years after the company’s formation and nine months behind schedule. In the remaining months of 2009, 5,000 additional units were sold. In the first year of distribution, reports of software accuracy problems surfaced, several exercise researchers found that Fitbits activity algorithms greatly overestimated the calorie burn rates, resulting in low levels of weight loss success among Fitbits earliest customers. (Koch, 2016).

Core Vertical Operations

Fitbit’s original business model disrupted a market of more sophisticated fitness devices, such as heart rate monitors from Polar, Garmin and Magellan. The fitness market of 2007 was served by complex sports watch and chest strap combinations, together they measured exercise intensity and estimated the calories burned by monitoring the electronic signals of heart rate and broadcasting the readings to a sport watch for data storage, then were uploaded by a micro USB cord to a PC for processing and storage. The technology in those heart rate monitors was evolving in 2009 as the Fitbit finally arrived on store shelves, with competing fitness trackers offering more precise GPS features to record distances traveled during exercise. Those emerging sports watches combined the distance data along with a user’s height and weight data and the resulting heart rate to provide workout intensity information and more precise calorie burn estimates (Koch, 2016).

The disadvantages of the heart rate monitor technology of Fitbit’s competitors was that the device sensors required a wide elastic belt to be worn around the chest, which many users found awkward and uncomfortable and regardless of how well these transmitters fit, they often lost signal during exercises involving twisting motions (Kerner, 2017). Fitbit’s one-piece solution simplified calorie burn estimates by utilizing pre-calculated burn rates based on physical motion, factoring in the wearer’s weight and age, which was surprisingly accurate at estimating calorie burn rates almost as precisely as the more sophisticated heart rate system. It is through this minimalistic hardware and multi-day battery life combined with sophisticated software that Fitbit chose to build their first vertical.

A third area of Fitbits design advantage was its freedom from GPS and cellular connections, the competitors in the heart rate and GPS systems were only marginally accurate at measuring distances, and in doing so they consumed considerable battery power; in addition, most the competing GPS watches required an overnight recharge for every three hours of activity monitoring. The amount of hardware and sophisticated technology in Fitbits competitors also added to the costs with a 2008 price range of between $300 and $800 per device. The combination of awkward chest straps, inconvenient recharging times and high price limited the market appeal of those original GPS fitness trackers to serious athletes and extremely health conscious consumers (Seitz, 2016).

Fitbit’s superior solution simplified fitness trackers, because the designers realized that heart rate and distance were not an absolute requirement to estimate calorie burn for casual exercises. Fitbit’s proprietary technology used a more energy efficient pedometer that detected motions generated by walking and combined that multi-sport motion sensing technology. The Fitbit software could decode the detected movements and estimate what type of exercise was being performed, and estimate the number of calories being used, the wristbands were capable of storing days’ worth of data to later be uploaded to their website for analysis and initial studies found that Fitbit’s projected calorie burn was nearly as accurate at calculating the calorie conversions made by more sophisticated hardware used by Garmin and Polar (Huang, 2016).

In comparison, Fitbit’s simplified wristband motion trackers could also easily be worn around the clock to provide a more comprehensive overview of total activity, including sleep data. The system’s energy efficiency allowed the wristbands to last up to five days between charges and the accompanying fast-chargers could recharge the Fitbit in less than an hour. The comfort and convenience of this revolutionary design combined with the simple technology allowed the devices to sell for a fraction of the price of existing fitness monitors. Fitbit’s original business model also planned for an additional revenue stream created by premium website services such as long-term data storage, charts and analysis for an annual subscription cost of $50, this plan would allow sustainable income after market saturation was eventually reached. All of these competitive advantages created a new vertical product in the health and fitness technology market and Fitbit was the first name that any consumer thought of if considering an inexpensive and simple calorie and exercise tracker (Koch, 2016).

Building substantial height to its core vertical, Fitbit pioneered a corporate wellness sales division, a move that has kept the company ahead of its competitors in the workplace wellness marketplace. These partnership’s competitive advantages have been sustained by Fitbit’s unique customization of user data to comply with the recently passed Health Insurance Patient Privacy Act-HIPPA (Seitz, 2015).

Unmet Market Need Aim & Missed Opportunities

Today, Fitbit continues to face tough competition from the Apple Watch and new fitness technology that offers precision level EKG quality heart rate hardware. Apple was quick to acquire the company who created this technology, with hopes of integrating it into a new market of heart conscious consumers. The future possibilities for the Apple Watch include sending 911 notifications if the user’s heartbeat stops or sending an alert to a user when one’s pulse indicates a warning of an oncoming heart attack. The technology could also prove valuable in solving crimes by alerting authorities the precise time and location of a murder or fatal accident. If Apple pioneers such lifesaving technology in an affordable package with a multitude of companion features, it would be safe to assume a dimmer forecast for Fitbit’s market niche (Feel the Beat of Heart Rate Training, 2017).

Competitive Advantage

Fitbit’s key early advantage was being the first wearable fitness tracker to market. James Park seized the opportunity to address the unmet market need, developing the first few models that set the bar across the market and Fitbit soon became a household name. The simplicity of the initial out of the box setup and continuous wear and convenience made Fitbit the device of choice with consumers looking for daily encouragement to reach personal health and fitness goals.

With over 25 million current Fitbit active users, Fitbit’s community has become the largest activity tracking population. New consumers are also attracted to join the Fitbit community to chat and challenge brand-loyal friends. Maintaining an active online community has been essential for Fitbit’s most recent technical developments. The more people who track their fitness, find opportunities for improvement and provide feedback, the better the next generation product can be. However, it didn’t take long for tech industry giants to catch up and surpass a device, which was once only a pedometer, with their own patented technology (Entis, 2017).

Today, Fitbit’s greatest advantage is its affordable price. Consumers can purchase a new Fitbit for only $100 compared to the lowest grade of the Garmin watch, the Forerunner, which costs $105 and the original Apple Watch priced at $179. This advantage will continue to attract people interested in tracking their health who don’t want to break the bank on GPS satellite accuracy and smartphone compatibility. As Fitbit adds new features to its product set, as done with its newest model, the Ionic, the price gap is slowly closing and the entrance of $25 rivals from several Chinese manufacturers is squeezing the profits in the market (Lashinsky, 2016).

An additional threat to Fitbit’s future growth is the entry of conventional watch companies such as Timex and Casio offering less expensive $30 competitors in addition to luxury brands such as Tag Heuer, Seiko and Ferragamo that offer integrated activity tracking sensors into conventional jewelry timepieces. The entry of the conventional watchmakers eliminated one common complaint of prospective Fitbit buyers, since many users do not choose to wear a simple rubber wristband in place of or in addition to a conventional watch (Seitz, 2016).

Unique Products and Services that Create Barriers to Entry from Competitors

Fitbit has been able to defend its position as a market leader through its design simplicity. No competitor has managed to offer novice fitness consumers a smoother transition to integrate a tracking device into their daily routines. The loyalty of Fitbit’s existing customers is reinforced by the storage of historical weight and fitness history through the supporting website and phone applications. If a current user switched brands, they would lose the integration of historical charts and graphs comparing current fitness progress to their own previous levels. Additionally, Fitbit has captured the first mover advantage in corporate wellness programs and has maintained that position through a well-developed Health Information Privacy Law department that protects its corporate clients from employee lawsuits. The base model Fitbit’s simplicity also provides competitive advantages in the corporate wellness market, since its lacks GPS and heart-rate capabilities which eases employee fears of health condition discrimination or inappropriate employee location tracking (Farr, 2016).

Home Office and Distribution

Headquartered in San Francisco, California, the company has expanded its distribution around the world after nearly a decade of development. In addition to North America, Fitbit has a presence in Latin America, Europe, the Middle East, Africa and Asia Pacific with offices in large cities including Boston, Dublin, Hong Kong, Shanghai, Seoul, Tokyo, New Delhi and Singapore.

But how does Fitbit expand markets and sell their products in other regions? Take China as an example. Fitbit formally entered the Chinese market in June 2014, following its sales footprint in 42 countries around the world. But why did Fitbit choose to enter the Chinese market in 2014? Fitbit studied the research reports on the health status of Chinese consumers.

In fact, the future health of the Chinese people deserved attention. China’s overweight population has risen from 25% in 2002 to 38% in 2012 and this number reached 50% by 2015. In terms of body fat index, on average, Chinese are not as overweight as Westerners, but the incidence of diabetes in Chinese people is as high as 11%, similar to that of the United States. Furthermore, people categorized as obese now accounts for 11% of the total population. Fitbit can help Chinese consumers become healthier, because it has a lot of measurement functions, such as the number of steps walked, steps climbed, heart rate, quality of sleep, and other personal needs involved in fitness. Fitbit’s products function for sports, diet, sleep and weight management and include peripheral systems to help people build healthier lives (Koch, 2016).

In addition, Fitbit’s products are now manufactured in Shenzhen, China, an area that is quickly becoming the technology manufacturing region of the 21st century (Entis, 2017). Fitbit also opened a flagship store in Tian Mall. Additionally, conventional distribution channels such as Amazon, sporting goods stores and most large department store chains all carry Fitbit products. The primary mission of the Chinese team is to broaden Fitbit’s brand awareness so that everyone knows what Fitbit is, how it helps people live a healthier and happier life.

Diversity

Unlike the wide array of applications, functionality and color provided by their wearable trackers, Fitbit is guilty of lacking diversity in the workplace. Like many tech software companies, Fitbit perpetuated a serious gender imbalance in favor of men. The firm took memorable heat from the press in 2015, as their all male Board of Directors generated attention. Even though women dominate the wearable activity tracker consumer base, Fitbit didn’t see it necessary to include females on their board or in leadership positions. The media isn’t the only source reporting misrepresentation. There is a clear consensus among employee reviews on job sites like Glassdoor and Indeed that expose the company as “extremely white-washed” with very little opportunity for growth for minorities that manage to make it in the door. Unfortunately, lack of gender and cultural representation is an all too popular trend in STEM industries and tech software companies in particular.

Recently, Fitbit has made notable strides to diversify its workforce. Two women have succeeded retired board members, while two more have moved up into Vice President roles. As for the inclusion of minorities, Fitbit has yet to demonstrate progress toward their promise to attain an ethnically proportionate workforce. We are hopeful that the firm’s welcome to fair hiring is genuine and Fitbit can create a more inclusive company and culture.

Sustainability

Today’s most successful new companies clearly published policies and strategies to achieve the Triple Bottom Line results. Like their stances on diversity and global responsibility, Fitbit’s formal policies on sustainable business practices are also non-existent. We can conceive the attention extended to healthcare and fitness, but what about the well-being of the environment? From what we can gather on Fitbit’s consumer output, their products are relatively easy to recycle. Once users decide to give up a wearable tracker or upgrade to the newest version, they can either sell or donate the device. But soon, these old technologies will become obsolete. Their capabilities will prove to be outdated and inaccurate, rendering the whole device useless. In the case that the bracelets are not in reusable condition, there is no solution to keep them from piling up in landfills.

This is where a true opportunity lies for Fitbit. Like the Apple take back system, Fitbit can receive old devices at their end of their life to disassemble into separate, reusable parts. Though this prove an initial cost for Fitbit, they can deliver a new sustainability platform to their consumers and save on usable electronic parts in the long-term.

Competitor

Apple Watch

Fitbit Ionic vs Apple Watch Series 3: Design

There’s no doubt that the Fitbit Ionic lacks a conventional aesthetic appeal; however, it won’t burn your eyes off. Recently Fitbit has been focusing on integrating style into their designs. The Ionic contrastes the Blaze’s angular look, and while we found it grew on us during testing, it’s sure to put a lot of people off.

On the other hand, the Ionic is impressive in how it crams a whole bunch of technology into a slim, lightweight case. You’ve got GPS, NFC, enough battery for four days of life and multiple sensors in a 50m waterproof square. Like the Blaze, there are three buttons on display here. You can use the display to touch your way around Fitbit OS, but if your hands are wet or if you’re in the water you may have an easier way around with some tactility.

With excellent clarity in both low light and glaring sunshine. You’ll get the Ionic in three flavors: a silver watch case with a blue/grey band, a graphite grey case with a charcoal band and a “blue orange” case with a slate blue band. But in case you’re not down with stock bands, you’ll also be able to purchase some nice accessories. There are two-toned breathable sport bands for purchase in three colorways as well as handcrafted Horween leather bands in midnight blue and cognac.

However, Apple watch keeps a design that’s nearly three years old, but the watch is easier on the eyes. Take apple watch series 3 as an example, it stills provide several models to users to choose. There are two different case sizes (38mm and 42mm), three different materials (aluminum, stainless steel and ceramic) and a whole lot of different colors. With the Series 3, you can get the LTE in the whole range, but non-LTE only comes in aluminum. There are also endless band options, from the low-end nylon and sport bands to high-end Milanese Loops and leather bands.

The major differentiator between these two is in the build. If you’re looking for something to complement every outfit in your wardrobe, and you have no problem with collecting an army of bands, the Apple Watch wins. Apple watch offers very limited styles for users to select, if people who want to have different styles smartwatch, Fitbit absolutely a better choice.

Fitbit Ionic vs Apple Watch Series 2: Battery

For as long as the Apple Watch has been around, it’s gotten about a day of battery life. Sometimes it’ll do less, but most of the time you get about a day – a day and a half to two days if you make deliberate efforts to avoid high consumption apps. With a mixture of both LTE and non-LTE features in the Series 3, you should still get around that, but using the call feature will cut it dramatically. In fact, Apple quotes only an hour of continuous talk time on the Watch.

The Ionic, Fitbit, will net people up to five days of battery life, or up to 10 hours when using GPS or playing music. That’s decent from such a slim device with as much power and many features as it has. If you have to make your decision based on battery life, the Fitbit is the clear winner here. Those extra days mean it’s much more viable as a sleep tracker too.

Fitbit Ionic vs Apple Watch Series 3: Price

The Apple Watch Series 3 has a wide range of prices, starting as low as $329 without LTE, $399 with the cellular connection, and then climbing up further depending on your choice of materials. It really depends on what you’re looking for, and how chic you’re willing to go. Bands will cost you at least $50, but again climb up into the hundreds. The Ionic, on the other hand, goes on sale for $299.99 on 1 October. You’ll also be able to purchase some bands for $29.99 to $59.99. Thus, Fitbit could easier to get access into market.

Fitbit Ionic vs Apple Watch Series 3: Fitness

There is usual standard of Fitbit fitness features, like Smart Track, VO2 Max and Sleep Stages. The Apple Watch, on the other hand, doesn’t officially recognize as many workout modes as the Ionic. For instance, it doesn’t have a mode for weights or interval training. The Apple Watch also doesn’t automatically track your workouts like the Fitbit does for running, heart beat tracking.

The Ionic is only the second Fitbit to utilize GPS, after the Surge, allowing it to match the Apple Watch in this regard. In our test we found the data of GPS to be pretty on the money, and it didn’t take too long to actually lock on either.

Finally, Fitbit is debuting Fitbit Coach on the Ionic. It’s basically a new version of Fit star, giving users a curriculum of workouts, the company says will tailor to your personal needs the more you use it. With watch IOS 4, the Apple Watch does some light personalized coaching, but it’s mostly on how to close your rings, giving Fitbit the nod here.

Fitbit Ionic vs Apple Watch Series 3: Smart features

Speaking of ecosystems, the Ionic is Fitbit’s best go yet at creating one. There’s an app store here, which Fitbit refers to as a ‘Gallery’. It debuted with just apps from Pandora, Starbucks, Strava and Accu Weather, but that has grown, adding apps from the likes of The New York Times, Nest and more. Apple has had a head start in getting developers in tow, and it’ll take a bit for Fitbit to catch up.

There’s 2.5GB of space for you to either store offline music from Pandora or from your own library. However, since the Ionic doesn’t have cellular capabilities, people can hardly stream music without your phone around.

Fitbit Pay is that company’s foray into payments, thanks to its purchase of Coin. You can take your American Express, Visa or MasterCard and link it up to Fitbit Pay, as well as debit cards from “top issuing banks”. You can link up to six payment cards to Fitbit Pay, while you have a limit of eight on Apple Pay.

While the Ionic plays some good catch up in the realm of music and NFC payments, the maturation of Apple’s ecosystem gives it a bit of a nudge here. However, as Fitbit gets more time to get major apps up and running, Apple may have a serious competitor to worry about, LTE or not, especially as more Pebble developers join Fitbit’s budding platform.

Fitbit vs Garmin

Both have their obvious strengths, but how do their wearable platforms match up? We’ve broken it down to hardware, features, apps, fitness and sports tracking to see whether it’s Garmin or Fitbit that comes out on top.

Garmin vs Fitbit The Hardware

Fitbit has actually been creeping into the world of smartwatches for a while now, with its Fitbit Blaze and Fitbit Surge acting as introductory “fitness watches”, but that doesn’t change that Fitbit got where it is today because of its fitness trackers like the Charge, Alta and Flex.

While the fitness trackers are the spine of Fitbit, its flagship is the Ionic. It’s a big riposte to the Apple Watch, with an app store that’s still growing, contactless payments and more. It’s the most fully featured Fitbit yet, as it pools together smartwatch-like features with both 5ATM water resistance and built-in GPS – features that previously were limited to select Fitbit lines. It’s also built for the future, intended to eventually have features like sleep apnea and atrial fibrillation detection.

As for Garmin, well, things are a little more complicated, such is the depth on offer. In terms of fitness trackers, the headliner is currently the Garmin Vivosport – its latest attempt to compete with Fitbit. While it’s got GPS, heart rate monitoring and VO2 Max, it’s also got a bit of a small and overly sensitive display. It also offers more basic options like the Vivofit 4 that focuses solely on those standard fitness tracking features. So steps, calories, distance and standing hours.

It’s the little things that separate these two. For example, Fitbit will generally provide users with more stylish wearables and much more customization, while Garmin’s devices tends to lean towards a masculine look. To offset this, of course, you’re given a host of physical options to choose from.

Garmin vs Fitbit: Sports Tracking

Not only can you track the likes of running, trail running, hiking, cycling, swimming, skiing, rowing, triathlon training and more, but you can also do this with the in-built GPS or Garmin’s UltraTrac, which conserves battery to keep tabs on your activity over longer distances. Heart rate is also a mainstay within the higher end of Garmin’s range, giving you ample insights into heart rate zones and heart rate variance.

Garmin vs Fitbit: Price

As always, price is something you have to consider, too. While the notable members of Fitbit’s range begin at $99.95 and max out at the $299.95 mark, that barely makes a dent in Garmin’s family. While there’s the $299.99 Vivoactive 3, if you want the latest from the Fenix or Forerunner series, your wallet will be roughly $500 lighter, and that’s a big financial commitment to consider alongside the ecosystem and general features on offer.

Garmin vs Fitbit: The Apps

Take Fitbit, which, while maybe not providing the most detailed after workout metrics in the business, still manages to offer one of the more rounded fitness platforms. This is particularly the case for beginners, who are able to dive into trends, dedicated workouts, sleep tracking and social aspects, such as linking with friends and challenges.

With the Ionic, Fitbit has also launched an app store. It was rough going at first, with only a couple of apps, but the store has gradually grown over the past couple of months, with the likes of The New York Times, Philips Hue, Yelp and more joining the fray.

As for Garmin, you’ll be dealing with Connect, the home of your activity, and ConnectIQ, the store for you to pick up apps and new watch faces. As with Fitbit, we have a comprehensive look on how to run better with Garmin Connect and a Garmin Connect IQ app store guide, but we’ll skim through the highlights here.

The companion app, which is compatible with all Garmin devices and available on desktop, offers you a place to plan, track and review your workouts. So, whether you’re preparing for a marathon and setting monthly goals or simply looking to beat other runners’ best times in local areas, the platform has you covered.

When compared to its Fitbit counterpart, more serious exercisers will find little comparison – Garmin gives you an incredibly detailed look at your activity once you dive past its handy Snapshots, while also allowing you to upload data to the likes of Strava and understand elements like heart rate zones. Even better, Garmin has recently updated ConnectIQ to be more convenient to use for beginners, with an easy-to-digest home screen filled with your stats and metrics.

Geographic area

China’s overweight population has risen from 25% in 2002 to 38% in 2012 and this number reached 50% by 2015. In terms of body fat index, on average, Chinese are not as overweight as Westerners, but the incidence of diabetes in Chinese people is as high as 11%, similar to that of the United States. Furthermore, people categorized as obese now accounts for 11% of the total population. Fitbit can help Chinese consumers become healthier, because it has a lot of measurement functions, such as the number of steps walked, steps climbed, heart rate, quality of sleep, and other personal needs involved in fitness. Fitbit’s products function for sports, diet, sleep and weight management and include peripheral systems to help people build healthier lives (Koch, 2016).

In terms of sales channels, Fitbit understands that online sales in China are very important. Following Best Buy, which uses Jing Dong is its online distributor, Fitbit products have started distribution with Jing Dong. In addition, Fitbit’s products are now manufactured in Shenzhen, China, an area that is quickly becoming the technology manufacturing region of the 21st century (Entis, 2017). Fitbit also opened a flagship store in Tian Mall. Additionally, conventional distribution channels such as Amazon, sporting goods stores and most large department store chains all carry Fitbit products. The primary mission of the Chinese team is to broaden Fitbit’s brand awareness so that everyone knows what Fitbit is, how it helps people live a healthier and happier life.

Factors that Contribute to Innovation

Fitbit’s products pioneered cross-brand compatibility with devices that seamlessly interface with nearly all brands of smartphones and tablets on the market, a key advantage which contributed to their early revenue growth. Today, many smart wristbands and watch products remain limited to either the Android or Apple systems, an obstacle which alienates those consumers who have both types of devices in their household, and while there are also many products that are compatible with both the iOS and Android operating systems, most fitness systems continue to ignore the Windows system users. Fitbit in comparison, has managed to build long-term loyalty by creating products that can be simultaneously operated on IOS, Android and Windows systems, so that their consumers can be assured that the Fitbit app will always be compatible with their future choices in smartphones. The founders philosophy can is evident by their open source access to fitbit servers to allow third party developers to create unique interfaces to the users data files because as founder James Park stated “In an open market, we can better cooperate with local partners. After all, they know more about the local market than we do.” (McNew, 2015).

In addition to their hardware interface versatility, Fitbit’s strategy is aimed at encouraging an open software platform, because Fitbit believes that more innovative ideas can be better exploited through openness and absorption. According to a developer, Fitbits platform has a port opening of the application works in both directions, Fitbit users cannot only send their data through Fitbit to a third-party application. If a user thinks a third-party app is great, they can also send data from a third-party app to Fitbit. For example, a male consumer is very concerned about his diet. He found a great application for eating and drinking, and he was able to import third-party applications into Fitbit via its interface. He can see and record calories on the Fitbit and so on (Schwahn, 2017).

In addition, Technology is a key factor of Fitbit innovation. Since 2009, it has released 15 different products, each of which is an update to the previous one. For example, Fitbit One, released on September 17, 2012, is an updated version of Fitbit Ultra with a more vivid digital display. It has independent clips and separate charging lines and wireless synchronization. Fitbit One is the first wireless activity tracker to synchronize with Bluetooth 4.0 or Bluetooth smart. Wireless synchronization is currently available on iOS and Android devices. Fitbit One can record several daily activities, including but not limited to the number of steps, distance, floors climbed, calories burned, active minutes and sleep efficiency (Jary, 2018).

Competitors in the same field are also important aspect of Fitbit’s innovation processes. Apple, for example, released the Apple watch series 2 in September 2016. The Apple Watch series 2 has better waterproof features, can be worn when swimming or surfing, and can support up to 50 meters of water pressure. Fitbit also took immediate steps. Fitbit Flex 2 was released on 2017, replacing the original Flex, the lowest end of the Fitbit wristband line. This is the first model that was waterproof with swimming tracking. The tracker can be worn on the wrist, pendant or carried in a pocket. When receiving a phone call or text message it provides alerts movement alarm and vibration functions (Jary, 2018).

Entrepreneurial Improvements

To stay competitive in the wearable tracker market, Fitbit needs to aggressively invest in hardware research in addition to integrating additional richness to their software platform in order to maintain consumer loyalty. Low price is no longer a guaranteed winning strategy in the fitness market, with the differences between style and performance rapidly shrinking, Fitbit needs to enter another business vertical that sets its products apart. We recommend a steady progression into a closely neighboring market of medical devices. We propose Fitbit aim to align with various medical associations to discover best healthcare practices and create apps for physical treatments fighting illness and disease. If the highly accurate heart rate monitor can identify specific exercises performed by the readings of active heart rates, why can’t it detect palpitations and arrhythmias?

Along with alerts to potential health irregularities, Fitbit should develop software to allow consumers to easily share their tracked data with their healthcare professional. Organizing this data to be analyzed by physicians can open a dialogue with patients to work toward their goals in a safe, customizable fashion. Breaking into healthcare software opens the door to high potential revenue growth, if Fitbit is the first to curb this market.

Unmet Markets and Missed Opportunities

In 2014, just four years after Fitbit’s initial distribution, advancements were made in optical heart rate monitoring technology, now Garmin and Polar are producing similar activity trackers at a similar price points. While emerging technology would soon drive additional demand for wristband fitness trackers that increases the size of the pie, it will also breed new competitors who were better positioned to capitalize on consumers with special concerns for heart health along with athletes desiring deeper training feedback metrics.

These advancements in heart rate monitoring technology allowed those serious athletes and health-conscious consumers to abandon their chest strap transmitters for a single unit, rechargeable wrist monitor that integrated real-time pulse-rates along with 24-hour wear ability (Cook, 2017). As a result, Fitbit’s previous competitive advantage of one-piece simplicity was disrupted. To compound Fitbit’s new competing technology, they failed to license the technology in time to be the first to market with the new optical heart rate and activity wearables. Instead, a new competitor, Epson, led the optical heart rate integrated monitors a full year prior.

Fitbit’s first entry in the new market, the Charge HR, missed its planned holiday 2014 release date, instead arriving late to market with an underwhelming level of fanfare in January 2015 (Seitz, 2016). The Charge HR was quickly overshadowed by an improved Apple Watch only three months later. As with many Apple products, the features of their new watch were widely publicized through a big budget marketing campaign, which was the first to educate mainstream consumers on the benefits of wrist worn heart rate monitors. However, Fitbit did outmaneuver one of its main competitors, Polar, which lagged a year behind Fitbit in its release of a pulse monitoring wristband (Lashinsky, 2016).

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Data Analytics: Influences of Gross Film Revenue Across Three Decades

December 9, 2017Applied Management, Automobile Industry, Business Management, Business Model, Consumer Behavioral Research, Data Analytics for Business, Earnings Management, Economics, Executive Leadership, Management Research Study, Marketing Strategy, Muma College of Business, Technology, University of South FloridaTodd Benschneider

Data Analytics: Influences of Gross Film Revenue & Opportunity Analysis

December 6, 2017

Todd Benschneider, Austin Deno, Leigh Harris, Sarah Lassiter, Lisa Velesko
Table of Contents

Problem Significance: 3-4

Data Source & Preparation: 4-5

Variable Selection: 5

Preliminary Analysis: 6-8

Models: 8-12

Insights: 12-13

Problem Significance:

Several societal trends can be mined from the data captured in consumer spending patterns of the film industry, especially a comparison of different genres of films which indicate rising and falling patterns of popular fiction. Films, more so than television, literature, or music, closely correlate with upcoming trends by using a responsive pull towards consumer tastes in fiction-fantasy and most accurately reflects the psyche of a generation and its ever shifting emotional underpinnings. The nimble demand responsiveness of filmmakers has become astoundingly proficient at catering to the emotional voids that drive the fiction market and are reflected with clarity in the ever changing mix of successful films. Through the unspoken demand for clearly defined types of storylines, these quickly produced films reveal a meaningful cross-section of a society’s unfulfilled drives and highlights which particular aspects that a society’s members yearn for in their own life situations.

In addition to trending popularity of varying scripts, other valuable economic indicators can be harvested through reverse engineering techniques to capture the downward trending genres that clarify the contextual changes that indicate which previous underlying drives have since been fulfilled through sociological evolution. Marketing professionals are wise to take note of the peaking decline of each passing trend, as those peaks and valleys encapsulate at a macro level of measure, the unspoken barometers reflected in the overall mood of a culture.

In the industries of entertainment and media, consumer spending directed towards different types of fiction produces great insight into the long-term patterns of emotional and economic wants, that are as useful to producers of consumer goods, as they are to providers of entertainment. It is imperative for businesses to be on the forefront of any trend.

Our data set summarizes three decades of consumer spending trends on tales that potentially reveals early predictors of future spending behaviors. It is through the trend forecasting of these patterns of film revenue data, that a business can be on the forefront of meeting changing consumer tastes, whether that firm creates new movie plots, automobiles, or widgets. With insight into the deepest desires of the society around it, a business can tailor its marketing message to align its product with a representative cross-section of every consumers vision, of not who they are, but instead, what they want to be. Few other data sources can provide the insights into the self-identity of fantasy characters as well as film plots and with this three decade dataset, we expect to gauge the tipping points of long term trends and witness the rebounds that those tipping points predicted.

Our team viewed the movie revenue data from the perspective of a movie merchandiser, evaluating which unreleased movies in production would provide our firm with its highest return on investment for movie-themed posters, toys, clothing and related merchandise. The highest budget films command the highest royalty percentages and also require the greatest undiversified commitment of our manufacturing lines to individual movie projects. Because of the risk and profitability factors affiliated with marketing the high budget prospects, our team instead drilled down into the data looking for the more cost effective prospects. Films that maximize the return on investment allow our firm to utilize a more diversified portfolio of projects with more promising cash flows.

With this goal in mind, we chose instead, to use regression models to dig deeper into other categorical data from the set, hoping to find other actionable predictors that could be valuable on a shorter time-line. With that goal, we evaluated the given variables in search of the most significant predictors to cinematic success to determine the confidence of future investments.

Data Source & Preparation:

The data set was originally gathered from IMDb and then sourced directly from Kaggle using 6,820 movies from 1986 to 2016 and includes details such as budget, gross revenue, the production company, country of origin, director, primary genre, movie name, motion picture rating, date released, runtime, IMBd user score, lead star, IMBd user votes, writer, and year released.

Not all movies contained information regarding the budget of the movie. Those were removed as it was critical in our analysis to be able to collate the relationships for complete data points, especially in regards to budget. We also investigated the relationship between profit and return on investment between gross and budget independently.

Tableau and Excel were first used to identify the greatest amounts in each respective variable. This allowed us to postulate our first level of filtering. R was then used to plot data using histograms, box plots, and scatter plots to consider outliers, run regression models, multicollinearity and direct correlations, identify R-squared and adjusted R-squared, along with Aikaike Information Criterion (AIC) and Bayesian Information Criterion (BIC), to determine goodness of fit, utilized numeric and qualitative predictors, and with interaction. Charts in Tableau were generated to visually verify the interaction effects. Tableau, Excel, and R were all used collectively to ultimately determine the strongest correlation, interaction, numeric, and qualitative predictors in using the variables.

Variable Selection:

Response Variable: In our effort to uncover the driving forces behind blockbuster films, we questioned what causes box office achievement. There are far too many flops in show-business; artistic potential is drowned out, consumer trends are completely misinterpreted, and lucrative investments are wasted. We must review success in cinema and provide a supportive study to investors in major motion pictures to appease the masses and create a stable platform for performers, thereby providing a concrete analysis of how gross revenue is determined. We therefore selected “Gross”, defined by our IMDb source as “gross revenue at the box office” as our response variable for all data modeling in this study.

Predictor Variables:
In order to evaluate the best variables to test against our response variable, we created a correlation table (below) to test the relationship amongst the quantitative variables. We focused on which variables could have a strong effect in deciding gross. The motive in tracking down the most determinant variables is so the investor can later account these factors into their decision to support a film.

Correlation Chart	Budget	Gross	Runtime	Score	Votes
Budget	1	0.680033	0.313064	0.073579	0.451467
Gross	0.680033	1	0.253273	0.229552	0.642904
Runtime	0.313064	0.253273	1	0.417031	0.359817
Score	0.073579	0.229552	0.417031	1	0.470648
Votes	0.451467	0.642904	0.359817	0.470648	1

To no surprise, the correlation that stood out the most was between gross revenue and budget with .68003256. This correlation suggests that a higher budget movie will most likely fund a movie that generates more revenue. As we believe budget is the heaviest deciding factor in funding the crucial elements for a financially successful film, we regard it as our primary predictor variable which our other qualitative and quantitative variables will be matched against.

The second highest correlation was found between “gross” revenue and “votes” (that is IMBd viewer reviews on a scale from 1 to 10) at .642904. We can justify this correlation two-fold. First, more “votes” logically means more tickets were purchased to watch the movie in theaters. Second, a high number of votes can drive consumer demand, influencing movie-goers who have not yet viewed the film to either watch or avoid depending on how positive the review was. While our first conclusion is provided after the fact of viewership, the second has the potential to boost viewership, making this variable causal. However, since we cannot account for whether “votes” were causal or coincidental, and since the standard error in a simple regression with gross is very large, we decided not to make it a popular predictor variable in our study. Derived from the votes, we deemed “scores” as unacceptable variables in our models because we cannot control the scores that are given by the reviewers.

As “runtime”, the final quantitative variable which refers to the length of the film expressed in minutes, has a relatively moderate correlation with “gross” at positive .2532733, we must take into consideration what this logically means. The correlation expressed as runtime increases, gross revenue also increases. We know that this statement has a limit because if movies were formatted into countless of hours, we cannot logically expect the popularity to rise accordingly. In support we also can see from a simple regression that, like the “votes” variable, “runtime” standard error at 52262 is unacceptably high.

As far as qualitative data, we opted to use both primary “genre” and motion picture “rating” as major predictors of gross, as supported by their high multiple r-squared values. We determined these were likely predictors of movie success based on consumer taste.

Finally, we decided not to use the production company, country of origin, director, movie name, date released, and year released as these factors would be completely out of control of the film investors. This is due to the variables being too widely diverse to classify accurately since they are spread so thinly across the data.

Preliminary Analysis:

Following our variable selection, we began looking at patterns surrounding the relationships between revenue and movie genre and motion picture rating. It’s important for investors to stay current on consumer trends in order to predict where the big money will be made in the film industry.
Hypothesis Testing:

Hypothesis 1:

Since the Action genre and PG-13 rating have the highest gross revenue out of all movies, it is logical to assume that these types will also generate the highest return on an investor’s funding once the production hits the theaters. We have solid evidence that this is true because budget accounts for over 47% of the prediction of a high grossing movie.

H0: Action genre and PG-13 rating have the highest return on investment and an Action PG-13 rated movie will generate the most dollars per dollars invested.
Ha: Action genre and PG-13 rating do not have the highest return on investment.

Genre:

After realizing high correlations between gross and motion picture genre, we dove into separating genres to see which classifications raked in the most at the box office. We found that the movies with the highest gross revenue were Action with
a combined total of over $708 million. By seemingly no coincidence we also noticed that Action movies
had a higher total budget than all other genres. Since budget has a strong linear correlation with gross, we can assume that Action will produce the highest return on investment than any other genre.
Rating:

We similarly compared motion picture ratings to gross revenue to identify that PG-13, R, and PG, respectively, generated the most revenue over the course of the 30 year history and looked at the gross revenue and budget within each sector.

Hypothesis 2: Since popular actors have a strong influence over consumer taste, we can assume that starpower has a significant effect on gross revenue. Since high budget is needed we can also assume that as budget increases, more coveted actors can be casted, resulting in a very popular, high grossing film.

H0: Movies with budgets in the upper 3rd quartile will have a significant relationship between star and gross.
H1: Movies with budgets in the upper 3rd quartile will have no relationship between star and gross.

Star: We attempted to identify the correlation of stars to gross revenue by exploring the total number of movies that they been the lead in and the sum of the gross revenue for those movies using Tableau. We believed that particular stars would impact the budget and also impact the gross revenue. Frequency of a star being in movies could also lead to their popularity and consequently generate more box office revenue as consumer-demand increased to see that star. In running a regression model, there were specific stars, such as Chris Pratt(1), Daisy Ridley(1), Ellen DeGeneres(1), Felicity Jones(2), Heather Donahue(1), Jennifer Lawrence(8), Louis C.K(1), Neel Sethi(1), Paige O-Hara(1), Quinton Aaron(1), Sam Neill(3), Sam Worthington(4), Scott Weinger(1), and Taylor Kitsch(1) that had significant influence as interacted with budget to predict gross revenue. With all but Jennifer Lawrence being listed as the star in less than five films and most less than two, as indicated by the number next to each star, we determined that there were additional factors driving this further, such as co-star, if the movie already had a cult following, was a book first, etc. We did run a sample test using Jennifer Lawrence and Will Smith to note that, at least for these two stars, there was a positive correlation between gross revenue and budget as depicted in the scatterplot below.

Models:

Model 1<-lm(d$gross ~ d$budget)

The correlation chart was a basic look at the significance between gross revenue at the box office and film budget. We soon affirmed our prediction that the correlation between budget and gross was causal by running a simple regression. With a multiple r-squared value of .4624, this model shows that 46.24% of gross revenue can be explained by the budget. Budget also has a very low p-value (2e-16), proving to be a significant factor in predicting a high gross. A higher budget movie has greater potential to purchase the necessary artists, talent, and advertising to create a higher grossing product.
Model 2<-lm(d$gross~d$budget+as.factor(genre), data=d)

Using the as.factor for genre we are able to build a second model that explains how a movie budget and genre affects the revenue of a movie. This model had a slightly higher adjusted R-square with .4691. This model also shows that out of all the genres, the most significant ones were Action, Adventure, Animation, Comedy, and Horror. This indicates that these five genres will be more impactful on the revenue of a film with knowledge of the budget of the film. However, without knowing the budget, Comedy, Drama, and Horror have the most significant impact on gross revenue.
However, we know that correlation does not translate to causation. We carefully curbed our analysis with a linear regression model, placing “Gross” as the response variable and “Budget” as a factor of “Genre”. We used budget as a control because we want to know how the effect of dollars invested in a movie, and more specifically movie genre, would be returned. To our surprise, Action was not the most significant factor, Animation was, as confirmed by a lower p-value and a higher coefficient. In fact, the regression explained that with a hypothetical budget of $0, an Animation movie would produce $22.2M more in revenue than an Action movie. This was an astonishing and valuable discovery. We noted that Action, Adventure, Animation, Comedy, and Horror all had significant influences.
Model 3<-lm(d$gross~d$budget+as.factor(genre)+d$budget*as.factor(genre), data=d)

For our third model we adjusted it to show a model that explains gross revenue with the budget and genre of the film and the interaction effect between budget and genre. This model was slightly better with an adjusted R-Square of .4696. The model showed that a specific genre budget has a slight effect on gross revenue. Budget is more significant for the Action, Comedy, Drama, and Horror genres.

Model 4<-lm(d$gross~d$budget+as.factor(rating)+d$budget*as.factor(rating), data=d)

For our fourth model, we looked at gross revenue with the interaction between budget and rating. This helped us narrow our data to find the most significant rating for gross revenue as budget increases. This model had an adjusted r-square of .4736. Out of all the different ratings, rated R and G movies were the most statistically significant.

Looking at just the adjusted r-squared and the AIC/BIC; the fourth model was the best predictor of increasing gross revenue. However, the rating to budget interaction was only slightly better than the genre to budget interaction. Both our third and fourth model narrowed down our data because they took into consideration the genre and rating with respect to budget of the film. These two qualitative variables were the most significant in predicting the gross revenue outside of just the movie budget. In joining the interaction together, PG-13 and Horror had the highest and only interaction, with a slightly higher R-squared but higher AIC and BIC, therefore prompting us to return to the previous model and generating the below chart to illustrate our findings.

Confidence Interval Testing:

With the information we gathered from the regression models, we now have an in-depth look at the effect of budget on genre and rating as they relate to gross revenue. However, these findings contradict our earlier hypotheses. To examine our original assumptions, we performed confidence interval testing.

First, we subsetted the data by creating a new dataframe with only Action genre movies rated PG-13. Then we created another variable, ROI, by implementing the ROI formula using budget and gross data sets. We took a summary of the data discovering the mean ROI for PG-13 Action movies was .1666255 or 16.67%, which seems reasonable. If an investor was to invest $100,000, they could expect an average gross return of $116,000 after the movie hits theaters. With a sample size of 468, we used the normal distribution and with 97.5% confidence to determine that the range for ROI on this type of movie would fall between .0899811 and .4232491. This is a fairly large range. But we can say confidently that the largest return on investment should be 42.32%.

Using the assurance of strong significance, and high coefficient strength of our regression models, we will use the same confidence interval testing on an R rated Horror film to test the strength of our first null hypothesis. We performed the same subsetting technique to attain a dataframe of only R rated Horror movies to gather a set of 173 movies. After removing two extreme outliers, the mean ROI was pinpointed at 2.6610 or 266.1%. The testing gave us 97.5% confidence that the range of expected ROI should fall between 113.89% and 646.1%.

Concluding, R rated Horror movies have a 97.5% confidence in producing a high of 646.1% ROI compared to the maximum potential of 42.32% of a PG-13 Action movie.
We can view this practically and justify the logic in Horror movies having the highest total ROI. When looking at the data it seems that horror movies can be made with relatively low budgets and yield much higher profit. Movies like Paranormal Activity and The Blair Witch Project (the two outliers we removed before confidence interval testing) are prime examples of this phenomenon. The Blair Witch Project cost only around $15,000 to make, but made $107,918,810 in box office revenue, a 7,193% ROI. This data will allow us to make the most informed decision in consideration for investing or merchandising.

Insights:

In analyzing the data, we uncovered that budget had the strongest significance and correlation to gross revenue. Genre as a factor of budget, nor rating, influenced the gross revenue more than the budget itself but were highly significant subfactors. Ratings of “R” and “G” along with genres of Action, Comedy, Drama, and Horror, had the highest significance when factored with budget to gross revenue, as depicted in the charts above.

As score and and votes would come after the fact, an investor or merchandising company looking to predict which movies would gross the highest revenue and consequently have the potential to yield the highest returns on product related to that movie, we would look to an “R” or “G” rated movie that is an Action, Comedy,Drama, or Horror genre specifically. This can be demonstrated by the movie “The Hangover,” which led to a major economic impact in Las Vegas.

In conclusion, while we have familiarized ourselves with the tools and theories of data mining for business applications, the most important lesson we have learned, has been to view data insights with cautious skepticism. We are confident that our regression analysis was accurate and that our data source appeared reliable; however, few of us are prepared to wager our professional reputations by advising a CEO to allocate millions of dollars of investor capital into the actionable insights that we are recommending. In the actual practice, we would be recommending finding alternate sources of similar data sets to verify these conclusions. In addition to our newfound perspective on the practical values of data mining, we are now prepared to temper future data sourced predictions with a managerial “P-Value”, named the “Group 6 N-Value” to represent common sense and intuition. We therefore recommend, that when proposed data sets lead us down a path of assumptions based on high P and Adj R sq values, but contradict our own personal “N-Values”, we should first pursue additional data sets and alternate models to demonstrate, without doubt, that those high statistical probabilities are indeed replicable and justifiable in the abstract science of strategic management and consumer behavior.

Pharmaceutical Price Points – Pricing the EpiPen

July 4, 2017Applied Management, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Economics, EpiPen, Executive Leadership, Industry Regulation, Management Research Study, Marketing Strategy, Muma College of Business, Mylan, Pharmaceuticals, Triple Bottom Line, University of South FloridaTodd Benschneider

Marketing Case Study: Pharmaceutical Price Points – Pricing the EpiPen

Todd Benschneider – University of South Florida – Dr. James Stock

June 29, 2017

Introduction

Mylan Pharmaceuticals gained front page notoriety in 2016 for its part in sweeping allegations of price gouging and Medicaid abuses among large pharmaceutical companies. Consumer backlash to the rising costs of healthcare fueled a hailstorm of media attention, spotlighting Mylan’s unprecedented price inflation of several older generic drugs. The Mylan product at the forefront of the debate was the EpiPen; an emergency treatment device that assists patients in self-administering adrenaline (epinephrine) during severe allergic reactions. The device had grown into a household brand over the 30 years since its introduction and EpiPen’s brand loyalty provided the foundations for one of the industry’s most successful, and now most questionable, brand revitalization campaigns ever launched. The marketing vision began in 2007 when Mylan Pharmaceuticals purchased the rights to the EpiPen brand inside a $6.6 billion packaged deal of 434 generic drugs from Merck Pharmaceuticals. Shortly after the acquisition, Mylan began increasing prices by increments of 10% per quarter until the EpiPen’s price had grown by over 600% in ten years that followed (Darden).

Mylan management defends the increases, claiming to have invested over $20 million in product and distribution chain improvements since acquiring the product (Koons). The firm’s executives cite that former owner Merck’s initial price of $94 per package generated a comparatively low 8.9% net profit in 2007. Defendants of the price increases also argue that price adjustments were necessary to create a sustainable supply chain of the lifesaving medicine (Lee).

The combined sum of those arguments were unable to pacify the critics after an investigative report by Ben Popkin of NBC news revealed that “from 2007 to 2015, Mylan CEO Heather Bresch’s total compensation went from $2,453,456 to $18,931,068, a 671 percent increase. During the same period, the company raised EpiPen prices, with the average wholesale price going from $56.64 to $317.82 per pen, a 461 percent increase, according to data provided by Connecture.” In a historical pricing perspective of the brand, Bresch’s salary increases alone increased the cost of manufacturing the EpiPen by nearly $5 per package; which, when contrasted to Merck’s original pricing, would have cost the product nearly its entire profit margin. The attention garnered by the compensation of CEO Bresch, along with the observation that over 40% of Mylan’s annual profits were now being generated by the EpiPen price increases, compounded Mylan’s public relations woes as a symbol of management’s greed, drawing nationwide criticism on executive pay excess and pharmaceutical anti-trust laws (Bastick).

Today Mylan has arrived at a strategic crossroads in its marketing vision. The firm’s 90% market share of epinephrine injectors will certainly be jeopardized if revised pricing fails to satisfy expectations of corporate responsibility, and the potential loss of the EpiPen market could cost stakeholders $847 million in annual earnings (Ubel). In addition, the brand collapse would generate a multi-billion dollar capital value loss of resale value of the brand. Since EpiPen’s patents will soon expire, Mylan’s original plan to sell off the division for a fast profit would be hampered by the devaluation of the EpiPen brand name, rendering the manufacturing facilities, goodwill and marketing capital worthless to prospective buyers.

Background

Unlike other pharmaceutical structure pricing bands, the EpiPen injector pricing was relative to the mechanical engineering patents contained within its dosing syringe system, rather than the chemistry of its medicine. The generic hormone solution inside the applicator has been widely available for years at prices less than $2 per dose; however, the precision, spring-loaded application syringes cost approximately $35 to manufacture. Critics claim that excessive marketing spending under Mylan’s management inflated the total cost to manufacture, market and distribute the device, from $80 to as much as $450 per package (Popkin). EpiPen had enjoyed a unique advantage in the drug market, because its mechanical design the EpiPen had been protected through engineering patents which were outside the pharmaceutical anti-trust regulations of the FDA (Darden). In addition, the arrival of new entrants to the market had been limited by the historically low profits earned by these injection devices (Lee).

The patents alone however, did not allow for a market domination, Pfizer had patented a rival product, the Adrenaclick, which was released for exclusive distribution through Wal-Mart in 2010. The new entrant, however, faltered due to limited brand awareness and its restrictive distribution exclusivity to Wal-Mart stores. In two years following its introduction, Adrenaclick failed to capture more than a 7% market share, despite selling at a price point of 1/3^rd that of the EpiPens. In 2012 the maker of Adrenaclick sold off its manufacturing equipment and the product temporarily left the market, under the assumption that the timing was not right to continue challenging the EpiPen for market share (Bastick). Internationally EpiPen competed against a French rival the “Auvi-Q” which was sold in Europe at around $100 per package; however, Auvi-Q initially chose not to apply for U.S. distribution due to possible U.S. patent overlaps with some of EpiPen’s design. The continued existence of this international competition in the injector market remains the driving force behind why EpiPen prices in Europe have remained near their original 2007 prices, at around 1/5^th the price of EpiPens sold in the U.S.

Much of Merck’s pre-2007 decisions for U.S. price points near the $100 mark were justified by the international price competition of the French Auvi-Q. Merck management believed that if U.S. market profits grew too lucrative, that Auvi-Q would challenge its U.S. patent rights, generating a legal battle that would cost years of EpiPen’s profits along the way. In addition to Auvi-Q, a new rival was introduced to the U.S. market in 2005 named Twinject which was marketed at a lower price point, at the time, than the $90 EpiPen. With pricing influenced by anticipated market competition of 2007, the 25 year old EpiPen line had been generating less than $17 million in profits from about $200 million in sales. Even Mylan executives had initially planned to spin off the EpiPen line from its new portfolio purchased in the Merck deal (Koons). However, CEO Heather Bresch saw a golden opportunity for the product and persuaded the board of directors to use EpiPen as a sample case for the future marketing of its generic brands. Mylan took on a revitalization marketing campaign and set its sights on capitalizing on the remaining untapped profits from its captive mechanical syringe market (Koons).

Pricing the EpiPen was a great challenge, since strategies in drug pricing are deeply complex; pharmaceutical makers are faced with a more complicated marketing landscape than manufacturers of retail goods. Prices for the same drug can vary widely from one country to the next, for example an EpiPen is priced in Great Britain at $69, in Germany at $190 and in the U.S. at $600. This variation among pricing processes reflects the complexities of distributing a product to meet a variety of competitors and price-influencing criteria in each market. For example in the U.S. the FDA along with private insurers utilize a market driven price allowance, in the spirit of capitalism, a drug maker can charge nearly any price for its products, a policy that is intended to draw new entrants into the market and drive prices down and quality up. In comparison, many European countries require an approved “reference pricing model”, which dictates the fair insurance reimbursement value of a drug is based on the costs of its alternatives. Some countries such as France include negotiable “price band” restrictions that cap the maximum price the drug can be sold at as an allowable percentage over the lowest price which the company sells the drug in other nations. Because of these price regulations some pharmaceutical firms choose not to distribute their products in highly regulated markets such as France and Switzerland (Rankin).

In 2009, the anticipated arrival of new entrants to the market became a reality when French rival Auvi-Q applied for North American distribution. Auvi-Q was expected to challenge EpiPens U.S. patent rights; however, Auvi-Q withdrew from the U.S. market entry after a series of safety recalls crippled their brand’s market value, they too believed the timing was not optimal to challenge the EpiPen for market share. Bresch’s strategy flourished by the subsequent delay of new competitors to the market and EpiPen found a growing market, even at much higher prices. The CEO’s belief was, that through an increased profitability of the mature market, Mylan had created an incentive for competitors to join with their own rival products in the final years remaining, until 2025, when the EpiPen patents would expire. The resulting lucrative margins created by the new higher prices would provide an improved resale market for the EpiPen division or the future licensing of its technology (Koons).

Mylan expected that the new players in the market would quickly drive EpiPen prices back to near its original $90 per package through price wars. During the eight year period of price increases, EpiPens previously stalled sales volume, even grew by 67%. Mylan had successfully expanded the existing market by lobbying for revisions to school medical restrictions which had prevented school staff from administering the shots to students in emergencies. With the restrictions lifted, Mylan further lobbied for tax subsidies to donate free EpiPens to schools, increasing goodwill and lowering corporate tax burden by $600 per package rather than the $100 per package deduction which would have been captured in the previous price formula. The theoretically deductible donations allowed Mylan to pay an effective 20% U.S. corporate income tax rate in 2015, saving it nearly $100 million in tax liabilities (Lee).

Bresch’s short-term strategy was directed at harvesting larger profits in the U.S. market through price increases, brand recognition and distribution expansion for several years until competitors could mobilize new products. From Bresch’s long term perspective, once that competition arrived to the market, Mylan could sell off the EpiPen brand and its soon expiring patent protection to the new competitors. However, in the eight years that followed the campaign launch, the anticipated competitive price pressure never materialized, as both Auvi-Q and Twinject suffered public relations problems and financial difficulties during the recession which caused both competitors to withdraw from the U.S. market by 2014. Capitalizing on the limited competition, Mylan increased prices by about 10% per quarter per year, gradually bringing the price from $90 per pair of EpiPens to over $600 per pair.

Alternatives

Mylan executives forecasted the introduction of EpiPen rivals by 2010, however the recession and other unforeseen regulatory factors delayed the arrival of that competition by nearly a decade. Bresch defends Mylan’s aggressive pricing strategy, justifying the tactics by capitalizing on the opportunity to harvest an additional $600 million per year in profits for every year that competition failed to materialize. Executives such as Bresch could claim a fiduciary obligation to the investors to exploit market gaps for shareholder gain and to pad the company cash reserves to fund new drug products (Koons).

In addition, Mylan leadership claims that they did not believe that they were creating a public safety crisis of affordability, because the allergic reactions could be just as effectively treated with an economical alternative which utilizes a $2 syringe and $5 vial of epinephrine. They pointed to the low switching costs of those alternatives and pointed to the examples of emergency responders that had converted back to dosing patients from syringes in addition to the arrival of free clinics which guided the uninsured on the creation of their own emergency kits for a fraction of the cost of a preloaded EpiPen (Rankin).

Mylan’s leadership could not have reasonably anticipated the market’s reluctance to self-dose from conventional syringes. Bresch initially believed that the primary competitive advantages envisioned for the EpiPen were limited to small children who could not administer epinephrine through syringes and to schools which were only protected from legal liability by using the EpiPen or an approved similar device (Koons). Regardless of price, consumer’s fear of incorrect dosing or injecting air into their bloodstream stalled the advancement of self-administered syringes (Bastick). The media scrutiny chose not to address that the EpiPen price should have little effect on affordable healthcare since it is viewed by medical practitioners as a simple convenience, rather than a medical necessity (Lee).

The lack of mounting competition for the past decade could not have been foreseen by management either, as three attempts at injector market entry by other firms failed due to poor timing or marketing. The introduction of a generic EpiPen competitor by Israeli firm Teva Pharmaceuticals was also denied by the FDA in 2016 further diffusing competitive influences. However, in late June of 2017, the FDA approved the next major player in the epinephrine injection market, Adamis Pharmaceuticals introduced their own injector under the brand name “Symjepi” a cheaper alternative to Mylan’s EpiPen, but expected to price higher the Adrenaclick (Bastick). Auvi-Q has also been approved to market their rival injector beginning in 2017 and Adrenaclick and Twinject have announced their returns to the market.

In response to consumer backlash and the coming arrival of generic substitutes, Mylan has announced that it will release a generic version of the EpiPen priced at around $300 per package of two. Analysts suspect that Mylan will continue to donate the EpiPen brand version to schools for a write off of $600 per package to maintain their tax savings and continue to promote the EpiPen brand to those whose insurance allows for brand name premiums. Despite the announcement, Mylan has not been quick to launch the distribution of its half priced generic alternative (Bastick).

Proposed Solution

The arrival of the new competitors, the aging patents, along with the media scrutiny makes a clear case for drastically reducing the EpiPen price. It stands to reason that competition among new firms will drive prices back down to the mid-$100’s per package or possibly even lower by 2025. The inevitable loss of EpiPen’s mechanical patent protection will soon render the brand’s competitive advantages obsolete. The EpiPen brand appears to have run its lifecycle and while the marketing tactics of Bresch succeeded at capturing an astounding quantity of remaining value from the brand; a change of course is needed to salvage the remains of Mylan’s public image and diffuse additional conflicts with lawmakers. The negative publicity around the EpiPen pricing is a driving force that pressured lawmakers to fine Mylan $465 million in 2016 for exploiting a regulatory misclassification to increase Medicaid reimbursement rates. It is likely that regulatory backlash will begin impacting the future FDA cooperation of Mylan’s other products. Continued friction between government regulators and Mylan could delay the FDA approval of more profitable new products and increase scrutiny into other areas of taxation and accounting regulations.

According to Porter’s five forces, over the next 10 years, EpiPen will suffer the fate of many other mature, low technology products which survived by the slight advantages of their distribution chain efficiency and became unable to grow and generate premium profits through technology advantages. For a firm such as Mylan, their interests would be best served by directing their focus toward the development of new products rather than expending administrative resources on the low-margin, maintenance of a supply chain distribution in a mature market.

Recommendations

Selling off the EpiPen brand and facilities to rival Teva Pharmaceuticals seems to be the most logical course of action. Teva’s acquisition of a widely recognized brand such as EpiPen would gain them access to the U.S. market which had recently been denied to them by the FDA’s rejection of their competitive product. The brand development value to Teva appears to exceed the future earnings potential of the EpiPen division to Mylan and could allow the firm to negotiate a premium sale price. However, there is some friction remaining between the leadership of both companies after Teva’s 2015 failed takeover attempt of Mylan.

The logical course of action, would be to advise Mylan’s CEO, Bresch, to contact leaders at Adrenaclick, Teva and Adamis to locate the highest bidder for the sale of the EpiPen brand prior to Mylan’s own launch of the generic version. By leveraging Teva’s offer, Mylan may be able to tempt either Adrenaclick or Adamis to pay a similar premium price for the brand. In addition, by delaying the generic marketing launch, a new competitor could capture the generic market by utilizing their own marketing campaign budget already allocated toward their entrance to the market. By allowing the new entrants to control the price band, the strategy could allow the entrants to more efficiently gain control over the adrenaline injector market, allowing the fewer remaining players to enjoy greater profit margins. It should be expected that EpiPen’s $800 million in annual profits will soon diminish back near the $18 million level of 2007 in the face of international competition and public scrutiny.

Conclusions

Mylan’s success at capturing untapped profit potential from a low-profit, mature market provided a valuable case study in both brand management strategies and an application of SWOT metrics. While the long-term brand potential remained limited, CEO Heather Bresch demonstrated great insight by capitalizing on EpiPen’s remaining market strengths and leveraged those strengths through marketing to exceed all foreseeable expectations of profit potential for the lackluster brand. Some analysts calculate that Bresch harvested more than three times the profits from EpiPen in the 10 years at the end of its patent protected lifecycle than the profits from all of the other companies combined, that owned the product along the 35 years that EpiPen was on the market (Koons).

The negative press would likely have been unforeseen by anyone, since the catalyst for the media scrutiny was originally aimed at Turing Pharmaceuticals and its outspoken CEO Martin Shkreli for their price hikes on lifesaving AIDS treatments. Mylan’s own negative press exposure was viewed by many as unjustified collateral damage, which brought an unfavorable spotlight on Bresch’s strategy and may have accelerated the entrance of new competitors which had been waiting patiently to exploit the optimum timing to reduce switching costs for consumers (Lee).

The public relations opportunity that Mylan probably missed was to demonstrate an empathy toward the uninsured by launching a parallel campaign to provide a package of free EpiPens a year to the uninsured or low-income underinsured customers, rather than their chosen direction of providing “$100 off” coupons that were limited only to those with commercial health insurance. Mylan’s disregard for the underinsured struck a nerve with the low-income masses and fueled the media frenzy that surrounded the executive pay scandals. The public relations damage to Mylan’s brand value and the resulting lack of political cooperation that will follow could be estimated to cost several billion dollars in the coming years as lawmakers begin to apply their own pressure by withholding cooperation and avoiding any compromises that appear to benefit Mylan.

Exhibit 4. Expert Financial Analysis

Martin Zweig Analyst Commentary on Recent Financial Performance of Mylan: Guru Score 62%

P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. MYL’s P/E is 38.62, , while the current market PE is 19.00. Therefore, it passes the first test.

TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. If a company does have a high level, an investor may want to avoid this stock altogether. MYL’s Debt/Equity (128.91%) is not considered high relative to its industry (152.29%) and passes this test.

SOURCES

“10 New Years Resolutions for the Pharmacy Industry”. 2017. Medreps.com

https://www.medreps.com/medical-sales-careers/10-new-years-resolutions-for-the-pharma-

industry/

Bastick, Erin. 2017. “EPA Approves EpiPen Rival”. Formulary Journal.

http://formularyjournal.modernmedicine.com/formulary-journal/news/fda-approves-epipen-rival

Lee, Jaime. 2016. “Mylan CEO defends EpiPen strategy, questions pricing model in the U.S.” MMM

Online. http://www.mmm-online.com/commercial/mylan-ceo-defends-epipen-strategy-questions-

pricing-model-in-the-us/article/576448/

Koons, Cynthia. (2015). “How Marketing Turned EpiPen into a Billion Dollar Business”. Bloomberg

Business Week. https://www.bloomberg.com/news/articles/2015-09-23/how-marketing-turned-

the-epipen-into-a-billion-dollar-business

Mattingly, Joseph. 2017. “Drug Price Wars, Episode VII: The General Assembly Awakens”. Mattingly

Report. https://www.mattinglymanagement.com/2017/02/generalassemblyawakens/

Popkin, Ben. (2016). “Mylan’s CEO Pay Rose over 600% as EpiPen Prices over 400%”. NBC News. http://www.nbcnews.com/business/consumer/mylan-execs-gave-themselves-raises-they-hiked-epipen-prices-n636591

“Pricing the EpiPen: This is Going to Sting”. (2016). Darden Business Publishing University of Virginia.

https://cb.hbsp.harvard.edu/cbmp/product/UV7186-PDF-ENG

Rankin, Peter. 2014. “Global Pricing Strategies for Pharmaceutical Product Launches”.

http://www.pharmaceticalpricing.com Sourced:

https://www.crai.com/sites/default/files/publications/Global-Pricing-Strategies-for-

Pharmaceutical-Product-Launches.pdf

Ubel, Peter. 2017. “What is Maddening About Pharmaceutical Prices”. Forbes.

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prices/2/

Zweig, Martin. 2017. “Mylan Guru Performance Assessment”. NASADQ.

http://www.nasdaq.com/symbol/myl/guru-analysis/zweig#anchor2

Marketing: AccorHotels – Leveraging Online Content

July 2, 2017Applied Management, Business Management, Business Model, Consumer Behavioral Research, Management Research StudyTodd Benschneider

AccorHotels Case

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

University of South Florida

26 June 2017

Dr. James Stock

AccorHotels Case

Over the past decade, technologies like smartphones and the internet have evolved rapidly. These advancements have ushered in new ways for consumers to buy from and communicate with businesses. AccorHotels, one of the most renowned hotel corporations in the world, is trying to find ways to keep up with the new demand for online presence and e-reputation. Olivier Arnoux, SVP Customer Experience and Satisfaction, has two weeks to present a plan for integrating a digital platform strategy into Accor’s brand image.

AccorHotels

50 years ago, owning and running a hotel consisted of a completely different dynamic which relied on travel agents, connections, and customer feedback cards. Today, the hotel industry has evolved into its very own beast. Consumers are informed, you can book a hotel with a click of a button, and you can customize your experience as you like. Today AccorHotels has over 4,000 hotels, 570,000 rooms, and is located in 95 countries.

As the dynamics of the hotel world changed, so did the leadership. In 2013 AccorHotels appointed Sebastien Bazin as its fifth CEO in 8 years. With Bazin AccorHotels embarked on a new strategy that was asset-light in certain markets but at the same time actively buying new properties in emerging markets. The new strategy separated AccorHotels into two business units with separate balance sheets: HotelInvest and HotelServices. Accor’s hotels spanned all the major market segments – economy, midscale, and luxury/upscale. The major focus was on midscale which had a combined portfolio focus of 45%, economy was second with 39% , and luxury/upscale was 16% (Dubois). With all of the changes AccorHotels has tried its best to keep up, the analysis of their 50 years to today shows the extensive changes in the lodging industry.

AccorHotel’s 50 Year Perspective of the Lodging Industry

Imagine the business landscape of the lodging industry during Accor’s entry to the market in 1967, in contrast to the data rich industry of today. Across that 50 year divide, Accor has successfully adapted to countless changes in the ways that customers interacted with hotels and how those hotels generated profits. Nearly every aspect of the host to guest exchange has changed since 1967, customer preferences have evolved through many changes in value perception as well as the emotional processes which influence prospects to choose one hotel over another.

Convenience was a driving factor in the late 1960’s, but a convenient payment infrastructure remained absent for another 20 years. The lack of a remote payment system limited a hotel’s ability to collect reservation deposits. While credit cards were in use by 40% of U.S. households in 1967, their utilization for telephone reservations was restricted by the banking regulations of the day. Credit Card Companies required card imprints and physical signatures on those imprints, a process that limited a hotel’s ability to enforce cancellation fees (Durkin). The lack of a practical remote payment method created a “first-come, first-serve” market where fewer than 20% of hotel rooms were, on average, booked by reservation in years prior to 1970 . Since the internet would not arrive until three decades later, guest communications were handled by mail or a phone call from the customer’s home to the exact hotel branch. Centralized nationwide 1-800 reservations centers would not become widely used until the late 1980s (Bearne).

Mobile phones remained an additional two decades away from improving communication convenience for travelers, so hotel customers stopped along the travel route to make calls to the hotel from a payphone to cancel reservations if there was a change in their travel plans. Because of these logistical obstacles many hotels routinely rented rooms out from under those who held reservations once the recommended 6:30pm check-in had passed. The limited communication and payment options contributed to a hotel market that was driven by its location, billboards and highway visibility. In comparison, 45 years later the mobile phone tapped into the internet and instant access to price and vacancy were found with just a few finger swipes, no matter where the customer was located. In fact today many travelers double check advertised room rates and make modifications to their reservation “online” while they are waiting “in-line” to pick up their keys from the desk clerk (Benschneider).

1970’s: Sales Pressure Success and the Leverage of the Escalation of Commitment

From the 1960’s through the 1980’s, the typical traveler would choose a hotel after arrival to their destination, often stopping for pricing and room availability at several hotels prior to making a decision amongst those local competitors. In that period of the industry, location, brand reputation, lobby appeal and desk clerk’s salesmanship were the influential factors that differentiated local competitors. Interpersonal sales skills were greatly valued traits in desk clerks throughout the 70’s. In those years, desk-clerk sales practices for mid-level to luxury brands included a tour of the hotel and a visit to the room prior to the presentation of the exact rate quote for that room.. Sales bonuses were a standard employee incentive practice, paid in proportion to the desk clerk’s prospect to guest conversion ratios in addition to their average “room-price” booked. Consumer criticism about wide deviations paid between guests reflected the low bargaining power of hotel guests and prompted regulations requiring maximum rate cards to be posted on the inside of each room door (Bearne).

The sunken time investment required to get a precise rate quote and hotel tour deterred those tired travelers from comparing more than two or three hotels. Much like the car buying process today, deliberate sales tactics stalled the customer at the front desk for as long as possible before quoting the nightly rate, if the customer balked at the rate, savvy desk clerks were trained to ask the prospect for memberships and organizations they might belong to, that might “entitle” them a “preferred rate”. If the customer interview revealed them to have “no qualifying memberships”, the clerk would further detain the guest by “paging a manager” to request an “unprecedented one-time rate discount”. Research of the period studied the buying behaviors and documented, that through the psychological “escalation of commitment principle”, that each minute a guest remained in the hotel past the 10 minute mark, the odds exponentially climbed that the guest would agree to the rate, succumbing to the inertia of the stop, rather than continuing down the road to compare rates at the next hotel. Oftentimes, the guest would relent to the convenience of location, renting from the third hotel even when they preferred the first. The stresses of driving back to find the first hotel again in an unfamiliar city without navigational guidance outweighed the benefit of renting a better room. The convenience appeal of renting from the current hotel rather than the next stop hotel on the guest’s comparison list allowed larger margins as the bargaining power of consumers was very limited in comparison to modern online price comparisons (Harrington).

Late 1970’s – Advances in Telecommunications Improve Bargaining Power of Consumers

Simple long distance telecommunications technology similar to fax transmission networks provided the infrastructure for the growth of travel agencies in the late 1970s. These agencies enabled reservation cancellation penalties by accepting the cash or check payment locally, while guaranteeing payment to the destination hotel through a commercial line of credit. The technology spawned the arrival of discount programs for travelers who prepaid. Travel agencies popularity also grew in popularity through the arrival of more affordable airline travel. A travel agency’s main products featured intricately designed “travel packages” which bundled specific hotel and airline combinations. Travel agency services dominated the long-distance travel and tended to direct the guests to those hotels which offered the largest agent commissions, regardless of brand recognition, location or lobby appeal (Bearne).

Airline travel was considered a luxury product at the time, a service with enough margin to provide handsome commissions back to the travel agents, allowing those successful travel agents to enjoy respectable earnings potential until the mid-1980s. The bundling of hotel reservations into airfare packages allowed airlines to circumvent the FAA regulated minimum airline rates which contained large profit margins to prevent price wars between airlines. Until airline deregulation in 1978, airlines routinely offered kickbacks to hotel chains in exchange for discounts on bundled room rates to package into their travel services, these discounts allowed airlines to circumvent the regulated minimum seat prices and undercut competitors to gain market share. In addition, the customer’s inexperience with air travel, reduced the percentage of customers willing to purchase their tickets in person through the airline kiosks at airports (Highly).

The expensive risks of booking incompatible connecting flights among competing airlines deterred even the most experienced travelers from self-booking air-inclusive travel plans. Most travelers chose to employ a professional travel agent, their expert guidance also provided a guaranteed delivery of the travel contract, as the agency, hotels and the airlines cooperated to insure the fulfillment of the itinerary. Those guarantees were influential at a time when a round trip cross country airline ticket cost nearly a month’s wages. In inflation adjusted dollars, the lowest possible price for a round trip, red-eye connecting flight from New York to Los Angeles was $1444 in 1974, where today that same ticket can be found as a direct, round trip flight for under $400. The bargaining power of the airline industry supplier’s in that period justified large travel agent commissions and airline subsidized hotel rates. With the guaranteed income from airlines and travel agencies, hotels were less dependent on the street level consumer that arrived seeking lower room rates and competitive hotel amenities. The efficiencies of a demand influenced hotel industry were diffused by the travel agents influence on demand (Thompson).

1980’s: Credit Card and Airline Deregulations Increase Customer Bargaining Power

A loosening of credit card regulations arrived in the 1980’s that allowed hotels to take payment in full or charge enforceable cancellation fees over the telephone. Those remote electronic payments in combination with the prior airline deregulations of 1978 enabled customers to book their own airfares by phone, bypassing the travel agents who previously held a captive market in airline ticket sales. These changes allowed travelers to cherry pick their precise wants on each day of their trip rather than accepting a plain vanilla bowl of prepackaged hotel offerings, the changes in payment infrastructure resulted in the improved bargaining power of hotel customers (Durkin).

Hotels began to produce color catalogs listing their locations in a state by state directory with actual photos, contact information, local maps and advertised nightly rates. This fresh recipe provided a consistent and convenient platform for travelers to prepay their reservations for added discounts. The publication of room rates in directories allowed consumers additional bargaining power through the quick comparisons of dozens of hotels near their destination, a factor that allowed hotels with less desirable locations to compete with those flagship hotels in downtown areas. Travelers began to frequent hotels that were located between their destinations rather than at their eventual location to lower the overall expense of their trips. Subsequent hotels were built on the inexpensive real estate along rural stretches of interstate highways. These rural hotels were not only less expensive, but also offered ample parking and relief from the stresses of comparison shopping hotels on the busy downtown streets of unfamiliar cities (Benschneider).

1990’s: Mobile Phones and the Popularity of the Travel Clubs

The early 1990’s brought the arrival of the mobile phone in addition to an increased consumer confidence in paying by credit card over the phone. These market changes fueled the introductions of travel clubs which provided catalogs that featured detailed state maps which soon replaced conventional travel atlas’ maps. These travel club catalogs highlighted their participating hotel partners and those hotel locations within both state and local maps. The catalogs contained new driving-directional details which lent themselves well to attracting mobile travelers looking for the least-expensive hotel nearest a particular exit of a highway. Travel club popularity grew quickly, pioneered by Citi-group subsidiary, Citi-Travel, which was the 1990’s incarnation of Priceline.com, the club functioned like a wholesale club, leveraging the bargaining power of millions of members to pressure hotel’s into deeper discounts. Travel clubs featured the participating hotel’s names and addresses as well as their discounted member rates, amenities and distances to major attractions. The 1990’s catalog approach to hotel marketing brought changes to hotel construction and location in order to create offerings that most importantly “looked good on paper”(Bearne).

In order to utilize the travel club system, members normally paid fees from $100-$250 per year in 2017 dollar equivalent. In order to buy at the “member rate”, customers were required to call a central 800 phone number to request reservations, even if they were already standing in the hotel lobby. This captive reservation system ensured that the travel clubs would be paid their commission on the booking. The club’s hotel catalog was arranged by city and sorted by rates from low-high, a factor that strongly incentivized hotels to shave their margins thinner to capture a larger percentage of the members passing through their city. Travel clubs pre-negotiated rates resolved the variable hotel rate shell game that travelers found distasteful. To combat the leverage of travel clubs, hotels introduced rewards clubs and credit cards that required customers to book their trip direct to the hotel rather than through a travel club. Room rates for “rewards club members” and were similar to the discounts of the travel clubs but pressured the customer to use their company rooms throughout a trip. The publication of those discounted rates laid the foundation for ever increasing bargaining power of customers, in a formula that would later evolve into the travel booking websites of today (Bearne).

Today’s Lodging Market

In the current U.S. lodging market, hotels are enjoying the highest occupancy rates since 1984, with an average occupancy rate of 66% for 2016 (Edelson). Accor and most other chains have reduced on their reliance on Online Travel Agents (OTA) such as Expedia or Travelocity which still provide about a third of their bookings while currently a quarter of the average hotel industry bookings come through the corporate hotel websites, roughly 10% of bookings are made by inbound phone calls and the balance are a variable and wide mix of rewards clubs, organization referrals and repeat customer walk ins (Edelson). Accorhotels will need to plot their course into the 2020’s, allocating resources to hold or grow their market share utilizing search engine optimization and organic social media brand recognition We will answer the questions on how Accorhotels can enhance their “Online Travel Agent” relationships, harvest brand value through social media and integrate loyalty rewards clubs. In addition, we can demonstrate how the supplementation of conventional strategies such as charitable contributions and alternating waves of well-designed television, billboard and print advertising can increase in effectiveness when leveraged across online platforms.

Today, brand recognition for a company is heavily dependent on search engine rankings with those most searched brands returning the highest in search engine results. Search engine optimization, the ability for a company to climb higher in the search engine results, for as an example “Best hotel in Tampa?” is dependent on web traffic that refers to “Hilton, Tampa” or “Accor Tampa”. If web mentions of “Best Hotel” are most often correlated with AccorHotels Tampa than “Hilton Tampa” than the Accor results will show up nearer the top of the page in a search. For a company to fully optimize its search engine rankings, it must depend on consumer posted references of its brand name which have greater influence on rankings than those from corporate public relations websites (Perrin).

In the internet marketing world, a company that utilized its name brand in most of its products such as “Disney” will have a search engine advantage over an equal sized company that has diversified its brands into independently named products; for example Coca-Cola=Coke, Sprite, Mello-Yello, Barq’s,Seagrams, Nestea, Dasani ect… In an internet optimized world, a hypothetical soft-drink company would be best served to use the word “Coke” in all its offerings and advertising such as Coke-Lemon, Coke-Root Beer, Coke Tea ect to leverage its brand strength in web searches. Today, cost-effective marketing campaigns include the parent brand along with the subsidiary brand name mention in the post titles to pull in larger share of search results. Search engine keyword selections dictate how search engine steer web traffic down the path to the desired content and repeated use of those keywords train search engines to direct similar searches to the intended online content (Campbell).

Competition

AccorHotel is one of the largest international hotel chains in the world. The company’s biggest competitors include Starwood, Marriott, Hilton, InterCon, and Wyndham (Exhibit 2). The hotel industry is highly concentrated worldwide. Almost every hotel offers the fulfilling of the same need – a temporary room in which to stay. Because hotels corporations offer near-identical services at similar prices, differentiation in features and minor details is vital. There are two ways to differentiate and obtain a competitive advantage: either vertically or horizontally (Becerra, Santalo, & Silva, 2013).

Differentiation

Vertical differentiation occurs when a company’s product or service is objectively better than the competition’s. For example, Ferrari makes cars of much higher quality than Toyota, so they can charge significantly more. Since hotel rooms are so similar, vertical differentiation is likely not an attainable strategy for AccorHotel to differentiate from its biggest competitors.

Horizontal differentiation is valuable for gaining market share in industries like that of the hotels. This is attained through offering minor features or distinctions not offered by the majority of competitors (Piana, 2003). Using cars as an example again, Ferrari and Lamborghini offer similar products: high quality sports cars. However, Ferrari generally has always been deeply involved in Formula One racing – a detail that potentially captures more market share.

In the hotel industry, customers are influenced by location, room price, service, quality, reputation, security, and cleanliness (Becerra, Santalo, & Silva, 2013). It would make sense for AccorHotel to differentiate more horizontally because the possibilities are virtually endless as to the features and distinctions of a hotel room that can be offered, both physically and digitally.

Prior to the evolution of digital technologies, hotels found success differentiating horizontally by including pools, gym rooms, and breakfast. Eventually, demand for these extras became mainstream, so other methods of differentiation ensued. Major hotel chains began strategically forming collaborations with airlines, cruises, restaurants, and travel agencies for deals that were mutually beneficial for both the customers and partnering businesses.

Wyndham

No other hotel chain in the world operated more hotels than Wyndham, with over 7,800 facilities around the world (Exhibit 3). They dominated the economy/budget segment of the hotel industry, making them direct competition to Accor in that sector. Both Wyndham and Accor were the biggest players in the low-cost hotel room sector, where the number of rooms offered targeting economy class were 64% and 47% respectively of their portfolios. Wyndham and Accor were the only two major hotel chains to successfully operate in all three segments – economy, midscale, and luxury.

Wyndham found differentiation by entering the resort and timeshare field. They launched Wyndham Vacation Ownership in 2004, attracting independent timeshare and hotel developers to participate in franchise and affiliation opportunities (“History of Wyndham Resorts”, 2017). Wyndham would later rebrand into Club Wyndham, the umbrella brand from three primary groups: Wyndham Vacation Resorts, WorldMark by Wyndham, and Wyndham Resorts Asia Pacific).

Starwood

Although one of the biggest hotel chains in the world, Starwood operated fewer hotels and rooms than other major competitors. They were the only major international hotel chain in which 100% of their rooms were of the luxury/upscale segment, where AccorHotel was only 16% (Exhibit 4).

Starwood was the first hotel chain to differentiate themselves through collaboration with the airline industry. In 2013, they teamed up with Delta Airlines to offer a unique reward point system called Crossover Rewards. The new point system would allow customers to use accumulated points interchangeably to redeem rewards with either Delta Airlines or Starwood. The new reward system was a major success, winning the Industry Impact award and changing the way the industry rewarded customers. Five months after Starwood was awarded for success with their Crossover Rewards system, some competitors followed suit.

Marriott

Similar to Starwood, Marriott hotels mainly centered on luxury/upscale class. Only 15% of their hotels were not luxury. The three biggest players controlling the upscale hotel segment were Marriott, Starwood, and Hilton – Hilton being the largest. Marriott bought Starwood in 2015 for $12.2 billion, surpassing Hilton in the number of luxury hotel facilities and rooms worldwide.

Marriott discovered a successful differentiation strategy through founding a travel agent training program called Hotel Excellence! (HE!) in 1999. HE! would educate travel agents on the general hotel industry and Marriott’s portfolio, offering special certification and discounts through using Marriott hotels. This strategy aimed at influencing customer decisions at an important point of their inquiry process, knowing that customers relied heavily on travel agents for availability information, price listings, deals and discounts (Dubois, 2016).

Hilton

Hilton hotels mainly target the upscale hotel segment, where 99% of their rooms were of the luxury/upscale type. Hilton, Doubletree, Embassy Suites, Hampton Inn, Hampton Inn & Suites, and several other subsidiaries. They were the first major hotel chain to incorporate the use of balanced scorecards, a concept developed in the early 1990’s that helped Hilton manage its performance of value to customers and stakeholders (Huckstein & Duboff, 1999). The scorecards pointed out a gap between franchised and company-owned properties in meeting basic customer needs of a clean, quiet, comfortable room. A new customer-focused strategy was formed, helping the company continuously evaluate their commitment to customer demands, priorities, and expectations. This approach led to a clear vision for Hilton employees to follow, empowering team members with a sense of pride in creating value for customers.

InterCon

Intercon owned hotel brands like Holiday Inn, Candlewood Suites, and Crowne Plaza. They are the only major hotel company to focus most of their targeting on the midscale segment was InterCon. Over 2/3 of their 744,364 rooms were midscale-focused, more than any other competitor. They wanted to serve the ‘everyday heroes’ of society, like firemen, sports coaches, and teachers. The InterCon strategy was directed at making guests stay comfortable, starting at the entrance. They decluttered lobbies and implemented peaceful sounds and scents for guests upon arrival (Rooney, 2009). Inside guest rooms, bedding and bathroom amenities were of the highest quality for the average mid-scale hotel room.

Airbnb

One of the biggest disruptions to the hotel industry was the launch of Airbnb in 2008. Its founders, Brian Chesky and Joe Gebbia, were roommates that rented out an air mattress of their San Francisco apartment during a local conference in which all nearby hotels were sold out. After recognizing its potential, they create an online platform that allowed travelers to link up with locals. They expanded the idea and have exploded in growth ever since (Exhibit 5). In 2015, the company received a total of $25.5 billion in funding, surpassing the market cap of hotel chains like Marriot, Starwood, and Wyndham (Dubois, 2016).

Airbnb offers a completely different experience for travels than a traditional hotel. Customers are accommodated with choices from a plethora of residential location to stay for the night. Not only are many offerings cheaper than hotels, but the experience is inherently different. Unlike hotels, travelers establish a one-on-one relationship with their host to feel more like a local than a tourist. Not only is the experience a major differentiator for Airbnb, but the listings are much more unique, where customers a can stay in RVs, Boats, and even castles (Exhibit 6)

Technology

Technology Disruption #1: Internet Pricing Search Engines

The internet arrived in the late 1990’s to spawn a disruptive revolution in customer bargaining power with the arrival of Priceline.com, which unlike a Citi-Travel club, was a free service paid for by its hotel partners rather than club members and its live streamed pricing and room availability information allowed online shoppers to even pick specific rooms from a hotel chart for a better view or preferred location near the pool (Bearnes). However until early 2000’s most customers remained cautious about typing their credit card and personal information into the unfamiliar digital void and instead typically called operators at Priceline to pay for their reservations. Priceline and its imitators were able to publish live discounted pricing and real-time availability from custom built itineraries of airfare, hotel and rental cars rather than prepackaged bundles of the travel agencies of the 70’s and rolled those a-la-carte selections into those familiar guaranteed terms that made the travel agencies of the 70’s popular (Highly).

Today, internet shopping is the go-to for Millennials, Generation Z, and even Generation X and Baby Boomers. The advancement of sites such as Expedia.com, Booking.com, Agoda, KAYAK, TripAdvisor, and Google Bookings has completely changed the way consumers plan trips and book hotels. 148.3 million consumer make travel bookings online, ⅔ of these consumers booked their stay online. The reason for this shift is not only convenience, but also reduced costs. For example, you can book a hotel on Expedia.com that can be almost half the price of booking from an agent.

Technology Disruption #2 – Social Media

As the 21st century progressed, social media and customer ratings began to steer customers away from hotels that featured misleading pictures, an area of customer dissatisfaction that emerged with advancements in online marketing. Customer ratings and reviews revolutionized the customer service factor of the travel industry, not only was the shell game of front desk pricing removed; but, overly flattering hotel pictures and descriptions were exposed to those who were considering a booking. Since customers continued to gain confidence in the online security of their banking information, online purchases exploded and luxuries such as the travel industry grew into the most searched categories of search engine activity (Teicher).

Today potential customers put greater trust in the feedback from strangers than they afford the public relations campaigns of business owners. Online review sites have magnified the bargaining power of customers and held entire brand names accountable for the wrongs weakest personnel links. In the social media age, hotel manager’s performance bonuses are directly tied to the metrics of their online customer ratings. Modern desk clerks are no longer recruited for their sales closing ratios and average booking price, instead they are measured by a newly discovered tangible: “customer enthusiasm” which generates high ratings on customer review sites through the gratuitous use of smiles, welcoming body language and energetic verbal skills. Studies revealed that the first ten minutes of a guest’s arrival had become the most critical in generating positive guest ratings throughout the rest of their stay. Every step of the arrival process was refined, from the street signage that guided the guest to the unloading zone through the design of the doorknob that opened the door to their room every detail of the arrival experience was reevaluated (Hognas).

Social media review scores provided a previously unmeasurable insight into every detail of the customer’s experience, which typically features positive feedback from the guests. IN the past previous attempts to solicit feedback through email and guest card surveys had typically gathered only negative experiences, which only increased the management’s awareness of what customers did not like, where social media was able to articulate and advertise what each hotel’s strengths were in customer appeal. The barriers to entry of new hotel chains and single location boutique hotels were dramatically lowered through social media and brand reputation became less important as customers spent less time browsing the online catalog of hotels from a single brand and instead turned to a google search of hotels near a certain address. Existing hotel chains that had large sunken costs in marketing departments, brand research and advertising contracts found themselves burdened by the high carrying costs of their own operational infrastructure (Mckinsey.com).

By 2006 family owned bed and breakfasts were able to surpass nearby chain hotels in web traffic and search engine rankings by utilizing a few thousand dollars in servers and then staffing the hotel with pioneers of grassroots social media optimization which was enabled by the arrival of millennial born employees. This new generation of employee was able to reach the digitally influential millennial customers that were coming into their own period of buying power. The social media conscious young employees were often able to push their employer’s search engine rankings ahead of the established hotel chain competition through the simple amplification of their own personal Klout scores which was attached through affiliation to the hotel’s own social media efforts (Teicher).

The technological disruption of social media is a positive aspect for lodging businesses. Through social media, AccorHotels can connect with the consumers on a day to day basis, instantly. One of the most important technologies that should be utilized is Social Media Listening (SML) which allows for hotels to acquire information easily, brands can also reply to criticism or negative reviews quickly and efficiently to make sure that they do not become a problem and ruin the brands image. For example the Swiss-based Nestle brand developed an internal task force to monitor and respond to potential attacks, criticisms, and negative reviews. Another famous example is Wendy’s, who utilize social media as a brand building mechanism, they use Twitter, Facebook, and Instagram to reply to consumers directly, making them feel special and engaged.

2009 – Technology Disruption #3 – Airbnb

EBay introduced a pioneering business model in 1998 that reduced the risks of buying items from unfamiliar sellers in the mysterious, digital void of internet commerce. EBay’s unique escrow partner PayPal guaranteed refunds if seller failed to deliver on the transaction. User ratings allowed both buyers and sellers to rate each other on each transaction and attach those scores to the buyers own public reputation. 11 years later Uber launched a ride sharing system on top of eBay’s escrow payment and peer rating model. Uber’s success is forecasted to become the revolutionary disruption that will reshape the foundations of the 21st century auto industry. However Uber would have not been able to gain the needed foothold in transportation-for-hire sector, if it had not been for the deregulation of the taxi industry. Today the hotel industry is waging a regulatory battle against the likes of the Uber-esque lodging start-up, Airbnb, to protect their industry from following in the footsteps of the declining taxi industry. The popularity of Uber with millennials has led its customers and investors to expect great success from the business model of Airbnb, a lodging broker that enables hosts to rent rooms in their homes, guesthouses or offer their entire dwelling for short term vacation rentals (Yu, 2017).

Hotel Industry analysts are struggling to determine if AirBnB has added 3% to the total lodging market or taken a 3% share away from existing hotel operators. Regardless of the impact on the distribution of market shares, AirBnB has surprised analysts by increasing in value despite generating operating losses over its nine years in business. In fact today the total market value for AirBnB is 30% greater than that of Accorhotels, despite the 40 year age difference. However, the valuation of Airbnb may be misleading since the startup’s capital value is based mostly on speculative stock value, where over 40% of Accor’s market value is based on its ownership of sellable capital infrastructure such as hotels, office buildings and furnishings (Stone). The most unique aspect of Airbnb’s market appeal was the discovery that customer demand for alternative lodging options was not being driven by a demand for lower rates, in fact AirBnB hosts charge average nightly rates 25% higher than those charged by hotels. However, that figure also may prove to be misleading because much of the price premium reflected in the Airbnb rates could be attributed to the higher percentage of “whole-house” vacation rentals that drive up Airbnb’s average nightly rates, these house rentals are difficult to compare since they would equate to three or four hotel rooms. The arrival of peer to peer lodging sales and the infrastructure that overcame the safety risks that had previously deterred the rental practice may become the biggest disruption that the hotel industry has encountered. Since May of 2016 over 20% of U.S. travelers have used Airbnb at least once for their lodging needs (McDermott).

In the first quarter of 2017 Airbnb generated an operating profit for the first time since its launch in 2008. Despite the inadequacies of its revenue generation, Airbnb surpassed the then 47 year old Accor’s market value only six years after it opened and today Airbnb is valued at nearly three times the market capitalization of Accorhotels. While Airbnb may only hold 3% of the market share, the capital efficiency of its infrastructure could soon harvest the lion’s share of lodging industry’s profits. The true measure of success remains to be seen as the privately held Airbnb’s true market value will remain unknown until it goes public, but its potential influence to reshape both the housing and lodging markets will have the potential to make history as one of the greatest digital disruptions in history (Ting).

Airbnb is one of the greatest threats to the lodging industry, and it has become the go to for young HENRYs (High Earners, Not Rich Yet) , entrepreneurs, college students, and young couples. The CEO Bazin was quoted as saying “I would have loved to participate in Airbnb.” Airbnb provides any experience you desire that can be authentic, welcoming, and engaging. The hardest aspect for hotels is to keep up with the trend. For example AccorHotels has a luxury hotel in China, that is in a garden and was part of the Emperor’s castle. Authenticity and uniqueness is what draws consumers in today.

Recommendations

Content and the customer journey.

1. Steps of the customer journey.
  1. The customer experience begins with educational content, a prospect realizes that they have a problem to solve and have turned to the internet to search for solutions. “How To Videos” are a great tool in creating brand and product awareness. For example Accor could create a youtube series of short videos that highlight how to have unique travel experiences in each of the cities that it services. Content should genuine and avoid excessive brand trumpeting. Additional video series could feature travel tips such as how to fold clothes in a suitcase to avoid wrinkling or life hacks on best ways to how to hail a cab or save time utilizing street vendor dining during your vacation. The second step in the customer journey is the customer’s readiness for the explanation pitch. These are storytelling examples utilizing a case of a customer and how your hotel overcomes their specific travel inconveniences. Here is where customers want to hear how your service works and defines what you can do for them. This is where you would post blog or video on the range of travel services that are included with a nights stay at an Accor hotel. An example would be how the free morning breakfast is made from superior all fresh ingredients or how the fleet of hotel shuttles at each property are happy to drive you to dinner or pick you up at a bar as a free alternative to Uber. Each video should wrap up with a call to action and clear brand trumpeting. An example of this would be: “You will never need to call a cab if you stay at an Accor hotel, because Accor cares about customer convenience!”. The third step in the customer experience requires added confidence to choose your solution over alternatives. Here is the opportunity for endorsements and testimonials. Highlighting positive reviews and awards in the corners of the rate and room content pages is a good example of this strategy’s application. The fourth step of the customer experience is to be sure to express your gratitude for their patronage. In addition to the standard emailed “thank you for your stay”and survey, by utilizing SML’s you can locate the customer’s posts and add an enthusiastic reply to a positive tweet, rating or geo-check in the guest made on social media. Supporting posts of others demonstrates that the organization is genuinely happy for the customer and proud to have been a participant in creating the best experience for that guest. The fifth step is continued engagement with customers after their stay is completed. This can be accomplished by emailing the customer links about new features or locations for them to try.

Which types of content efficiently improve each of the different stages of customer experience such as triggering brand awareness or changing customer perceptions?
1. Short sharable how-to videos are an effective device to introduce the company for brand awareness without the hard sale approach of an advertisement.
2. Once a customer is aware of the brand, descriptive videos or meme style posts on company facebook page are another type of content exposure to trumpet the competitive advantages of the Accor hotel chains over its competitors. Many companies post action pictures of happy guests and smiling employees with their day to day messages.
3. Ratings and endorsements further guide the customer along the path to the confidence they need to choose Accor over the competition. A system to encourage satisfied and influential customers to post positive reviews will advance Accor’s own marketing efforts with little to no cost to the bottom line.
4. Follow up emails that feature upcoming events, discounts or informative links to lifehack videos can maintain the relationship after the stay is over.

How to leverage content?

For Accorhotels to become “customer-centric” across digital platforms it must first quantify a real-time, single-view of each customer as an individual entity. This can be achieved by isolating the user’s email, phone number, social media profile. By identifying and cataloging an individual user, that person’s online presence and posted feedback can allow Accor insight to how that user and corresponding demographic interacts with, not only Accor, but other people and businesses. Web content posted by that individual can provide insight on how that person might be expected to interact with Accor’s business offerings and allow the firm to adapt its offerings to best serve the largest majority of like-minded consumers. Big Data analyst Vamsi Chemitiganti captured the customer-centric vision of today when he said “The only way to attain Digital success is to understand your customers at a micro level while making strategic decisions on your offerings to the market. Big Data has become the catalyst in this massive disruption as it can help business in any vertical solve their need to understand their customers better. It aids this by providing foundational platform for amazing products.” To launch the data collection process we recommend that Accor hire the experienced big data software firm Eleks to design a database to harvest customer data and provide guidance on how to interpret and integrate the data into the Accor business model.

The online content should first be intuitively responsive to customer posted content gathered by “Social Media Listening Software” that will be designed into Elek’s data analytics product. We recommend that Accor reduce its conventional advertising department by three people to be reallocated to the communication of the Accor corporate vision with the recommended social media marketing firm “Friendemic”. We propose that Friendemic in conjunction with your existing brand managers handle the launch of the multi-platform social media campaign, where the Accor brand can be molded into a carefully groomed online presence by a social media firm with seven years of experience managing campaigns for companies such as Fiat and the Habberstat Group.

Social media is a major influencer of customer decision making. According Andrew Perrin of the to the Pew Research Center (2015), most adults use at least one form of social media – and the trend is growing (Exhibit 7); usage grew from only 7% in 2005, to 65% in 2015. Advertising on social media can be an effective way of reaching customers, even before they begin their own independent research. Because Accor does not specialize in creating digital content, it is recommended that they hire in-house employees that are expert in creating social media content that can capture interest. Centralizing the flow of online traffic can be helpful in uniformity, as well as evaluating which personnel and techniques work best. Hiring employees to manage this component can ensure that a consistent image is projected, as opposed to leaving all decisions to a 3rd party social media company to do so. In addition to existing conventional media efforts, we are recommending a strong investment in social media content generation such as youtube, Facebook, Twitter, instagram and WordPress. The content should include travel blogs, destination photos, employee photos, stories and fun, informative one minute videos. The staff should also closely monitor yelp, tripadvisor, google reviews and other ratings sites to gather feedback on areas for improvement.

1. 1. Youtube is the primary platform to post videos longer than 15 seconds, while Facebook would be the platform to post a mix of links, company news, photos of Accor’s hotels, destinations and happy guests. Twitter is the channel to post very brief news updates and funny stories of less than 140 characters while on the other end of the spectrum WordPress would be the ideal platform to post commentary on the industry or the company history. Review websites like TripAdvisor influence customer decision-making early, so getting guests to leave reviews during or after their stay is critical. According to Dubois’ article (2016), “95% of customers check reviews and research about destinations and rooms”. One way Accor can get more guests to leave reviews is by incentivizing them with discounts on their next visit. For example, upon completion of an online review, customers can receive a promo code to receive 15% off their next visit when booked directly from the company website. In addition, each Accor employee should be encouraged to create LinkedIn profiles that are linked to the main Accor profile, Friendemic consultants should assist and train employees on ideal LinkedIn career content. The more employees who list Accor as their employer, the higher the social media ranking that Accor will reach, especially true for employees who themselves have high Klout scores.

How to become a content-driven organization?

In addition to creating digital content, monitoring what guests are talking about can be pivotal to Accor’s brand. Technology companies like HootSuite and Social Sprout provide software that allows the monitoring of a company’s entire social media presence. The software can immediately alert the hired campaign managers of customer posts, allowing for timely responses to any complaints that arise. Accor managers can regularly check the aggregate data to better understand what they are doing right, and to fix what customers say they are doing wrong. This is a fast, reliable way for Accor to become customer-centric.
Through a combinations of the analytics software designed by Eleks to monitor Accor’s online traffic and the outbound social media pictures and stories from the Friendemic we plan to quantify gains in online presence through a dashboard of standardized social media metrics. One primary measure of online influence is taken from an organization’s Klout score, a metric which measures web traffic interactions with Accor’s corporate home page and select social media sites: Facebook, LinkedIn,Twitter, Instagram, WordPress, youtube and google+ platforms. In addition we recommend the use of social media tools “Wildfire Monitor”, “Mention” and “Trackur” to compare the trends and performance of competitors Marriott, Hilton and Wyndham in “Wildlife Monitor” and Klout scoring metrics against the social media performance of Accor’s campaign content.

The most important guiding principles of a corporate online presence is above all else, do no harm to the anyones perception of the organization, avoid controversial topics and when confronted by a hostile critic, to immediately respond by posting the customer satisfaction help number encouraging that critic to call with the promise that a manager will be happy to help resolve the issue for them. To build brand value it is important that the company post positive and supportive messages of affirmation to others in the online community even congratulating its competitors for acts of altruism. To be effective it is critical that posts are interesting, entertaining and image rich original content rather than simply sharing or retweeting the posts of others, pictures and videos are especially effective at generating content. Most importantly create a posting protocol that requires a marketing manager with social media training approve all content prior to posting.

Marketing or Public Relations employees can post company news and should quickly respond to customer comments on the corporate pages. However, we recommend leaving the foundation content to the professionals and suggest hiring Cox Media to film short and fun informational videos featuring real employees from Accor to demonstrate travel tips, lifehacks and offer local recommendations for fun tourism experiences in the areas around Accor’s various locations. We also recommend leaving the timing and mix of postings to the professionals at Friendemic until the Accor marketing professionals master the concepts through feedback metrics.We recommend bringing in both Cox Media and Friendemic on annual vendor agreements while also seeking out a third Social Media Management firm at the six month mark to audit the work of all three online content partners: Cox, Friendemic and Eleks.

1. We recommend that no hard and fast rules be applied to differentiation between each level until the social media partners have initially rolled out a universal marketing campaign. One year from now Accor will be able to compare the responses to the social media campaign and tweak the content mix for each of the brands. However we do recommend that the Accor parent brand name be included in all content in addition to the subsidiary brand names to leverage the web traffic from all the brands into a single larger and more influential entity.
2. The success of the social media campaign will be partly dependent on the “buy-in” depth and organizational changes of the Accor staff. Incentive bonus’ for each property’s online ratings and Klout scores should be added to employee’s current compensation plan. Since effective social media marketing can reduce Accor’s dependence on the more expensive advertising in conventional media platforms such as television, print and radio could social media performance bonuses would be a justified through the added payroll expense. There are several recommendations that could help with Olivier’s task. The customer journey taken to reserving hotel rooms typically begin with some research. To get Accor employees on-board with the new digital transformation, an online review system can be sent to guest with a section to rate customer service by employees. This was previously accomplished through client feedback cards which grew into a computerized platform consistent with the digital movement and simplifies tracking. In addition to identifying low customer service score locations, employees of high customer services rating can be rewarded with praises or raises.
3. We strongly recommend that employee’s current pay level not be docked for poor social media performance, as negative backlash from the perceived punishment will hinder the enthusiasm needed to drive cultural changes. We recommend that Accor fully integrate social media feedback metrics into their ROA calculations and post each property’s social media influence and customer ratings in common employee areas. Additional bonuses should be awarded properties with the highest scores as compared to other Accor locations to create teamwork and peer pressure within each property to adapt the new directive. We believe that no reasonable business argument could made in favor of remaining absent from social media marketing investments and that Accor should plan to reduce its conventional marketing budget to reallocate it in small incremental fractions into social media development and analysis.

Exhibits

Exhibit 1

New Player	Example
Online Travel Agents (OTA)	Booking.com, Agoda, Expedia
Aggregators-Metasearch sites	Trivago, Tripadvisor, KAYAK
Review Sites	Tripadvisor, Dianping
Travel Blogs and Forums	Lonely Planet
Social Media Sites	Facebook, Twitter, Instagram
Alternative Lodging Platforms	Airbnb, Homestay

Latest Search Engine Highways Driving Traffic to Hotel Brand Content: Dubois, D. (2016)

Exhibit 2

Dubois, D. (2016)

Exhibit 3

Dubois, D. (2016)

Exhibit 4

Dubois, D. (2016)

Exhibit 5

http://www.businessinsider.com/airbnbs-summer-reach-has-grown-by-353-times-in-5-years-2015-9

Exhibit 6

https://www.smartertravel.com/2015/09/09/airbnb-reports-17-million-guests-this-summer/

Exhibit 7

http://www.pewinternet.org/2015/10/08/social-networking-usage-2005-2015/

References

Bearne, S. (2016). “How Technology has Transformed the Travel Industry”. The Guardian https://www.theguardian.com/media-network/2016/feb/29/technology-internet-transformed-travel-industry-airbnb

Becerra, M., Santalo, J., & Silva, R. (2013, February). “Being Better vs. Being Different: Differentiation, Competition, and Pricing Strategies in the Spanish Hotel Industry”. Tourism Management, Vol. 34, p.71-79. USF Libraries.

Benschneider, Carla. “A Travel Agent Perspective on the Evolution of the Hotel Industry.” Personal interview. 15 June 2017. From 16 year old Hotel Greeter to Travel Trade Manager for Disney Resorts

Campbell, K. (2016). “How to Drive Organic Search Results for Hotels”. Hotel News Now http://hotelnewsnow.com/Articles/29352/How-to-drive-organic-search-results-for-hotels

Chemitiganti, V. (2016). “How to Create Customer Centric Digital Transformation”. Hortonworks
https://hortonworks.com/blog/create-customer-centric-digital-transformation/

Dubois, D. (2016). “AccorHotels and the digital transformation”. ISNEAD case study. Harvard Business Publishing.

Durkin, Thomas. (2000). “Credit Cards: Use and Consumer Attitudes 1970–2000”. Federal Reserve Bulletin https://www.federalreserve.gov/pubs/bulletin/2000/0900lead.pdf

Edelson, H. (2016) “With Occupancy High, Hotels Seek to Avoid Online Booking Services”. New York Times. https://www.nytimes.com/2016/09/06/business/with-occupancy-high-hotels-seek-to-avoid-online-booking-services.html

Harrington. C. (2014). “Hotel Secrets – 10 Confessions of Front Desk Clerks”. Accessed from: http://touristmeetstraveler.com/2014/hotel-secrets-10-confessions-of-front-desk-clerks/

Hershman, B. (2017). “AirBnB Vs. Accor: The Battle For Luxury Rental Market Supremacy”. Benzinga https://www.benzinga.com/news/17/02/9082330/airbnb-vs-accor-the-battle-for-luxury-rental-market-supremacy

“History of Wyndham resorts”. (2017). Retrieved from https://www.buyatimeshare.com/wyndham-timeshare-history.asp

Highly, J. (2013). “A History Lesson in Hotels”. Hotel News Now

http://www.hotelnewsnow.com/Articles/20090/A-history-lesson-in-hotels

Hognas, S. (2015). “The Importance of First Impression for Hotel Customer Service”. https://publications.theseus.fi/bitstream/handle/10024/96496/Sandra_Hognas.pdf?sequence=1

Huckstein, D., & Duboff, R. (1999, August). “Hilton Hotels: a Comprehensive Approach to Delivering Value for All Stakeholders”. Cornell Hotel & Restaurant Administration Quarterly. Retrieved from: https://business.highbeam.com/4074/article-1G1-55905416/hilton-hotels-comprehensive-approach-delivering-value

Kaminski, J. (2016). “An HVS Guide to Hotel Revenue Management”. Retrieved from:

https://www.hvs.com/article/7733/an-hvs-guide-to-hotel-revenue-management/

Piana, V. (2003). “Product Differentiation”. Retrieved from:

http://www.economicswebinstitute.org/glossary/product.htm#vertical

Mahmoud, A. (2016). “The Impact of AirBNB”. Retrieved from:

https://www.hospitalitynet.org/opinion/4074708.html

Mcdermott, R. (2017). “Hotel industry rests uneasily with growth of Airbnb and other short-term rental services”. Washington Times http://www.washingtontimes.com/news/2017/may/25/airbnb-gives-hotels-competition-with-lower-costs-f/

Mckinsey.com (2014).”Strategic Principals for Compeeting in the Digital Age” Retrieved from: http://www.mckinsey.com/business-functions/strategy-and-corporate-fin ance/our-insights/strategic-principles-for-competing-in-the-digital-age

Morrow, M. (2015). “How Airbnb Became More Valuable Than Marriott & Hilton”. Fox Business News http://www.foxbusiness.com/features/2015/06/22/is-airbnb-best-lodging-stay.html

Perrin, A. (2015). “Social media usage: 2005-2015”. Retreived from: http://www.pewinternet.org/2015/10/08/social-networking-usage-2005-2015/

Stone, B. (2017). “AirBNB Enters the Land of Profitability”. Bloomberg Business News https://www.bloomberg.com/news/articles/2017-01-26/airbnb-enters-the-land-of-profitability

Teicher, D. (2010). “Need a Reservation? That Could Depend On How Big You Are on Twitter”. Advertising Age http://adage.com/article/digitalnext/marketing-las-vegas-palms-hotel-klout-scores/146189/

Ting, F. (2016). “Airbnb’s Latest Investment Values It as Much as Hilton and Hyatt Combined”. Skift https://skift.com/2016/09/23/airbnbs-latest-investment-values-it-as-much-as-hilton-and-hyatt-combined/

Thompson, D. (2013). “How Airline Ticket Prices Fell 50% in 30 Years (and Why Nobody Noticed)”. The Atlantic. https://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/

Yu, H. (2017). “Marriott And Hilton Stay Ahead Of The Sharing Economy, Proving That Airbnb Is Not The Uber Of Hotels”. Forbes https://www.forbes.com/sites/howardhyu/2017/02/16/marriott-and-hilton-stay-ahead-of-the-sharing-economy-proving-that-airbnb-is-not-the-uber-of-hotels/#2c709b4576b3

General Motors: Social Stigmas Faced By Industrial Workers

October 3, 2015Automobile Industry, Business Management, Consumer Behavioral Research, Domestic Policy, Economics, Executive Leadership, General Motors, Human Resources, Industry Regulation, Management Research StudyAutomobile Industry, executive leadership, general motors, Human Resources, United States ManufacturingTodd Benschneider

Todd Benschneider

September 16, 2012

General Motors Recovery and the Influence of Social Stigmas Faced By Industrial Workers

The 2008 bailout of General Motors remains a focal point of economics analysts and political journalists. Today, nearly four years after its corporate collapse, reporters alternate between glowing praise and sharp criticism. However, regardless of journalistic viewpoint, one fact cannot be ignored: General Motors has clawed its way back up Fortune Magazine 2012 rankings into 5th place of America’s largest revenue corporations (Morgenson 1).

The second observation that can not be ignored is that the press and public opinion during the recovery period have focused heavily on corporate leadership and the politicians who engineered the bailout. A crucial factor missing from the news articles: The devotion shown by designers and assemblers at General Motors who have banded together to prove that they can produce a world class product at a competitive price. The thousands of headlines during the period the followed the auto industry meltdown reflect the values with which modern Americans view industrial workers, providing recognition to white collar workers and leaving unmentioned of the achievements from the engineering and the industrial trades, this shift in values may be contributing to declines in domestic production.

Much of this anti-union and industry sentiment results from taxpayer resentment of the government rescue of the world’s largest automaker General Motors, that left the American taxpayers owning 31.9% of the common stock. Today GM rightfully wages a daily war on two fronts: normal industry competition and now the new front of public relations, under a microscope of press scrutiny and public opinion. While this scrutiny seems to have generated results with increased accountability, as units sales climb, product ratings improve and as profitability reaches new levels. This can be seen in the 2012 employee profit sharing plans, which will provide dividends to compensate for a large portion of the pay cuts hourly employees had accepted as part of the restructuring plan. According to an article in the New York Times that for 2012 it is projected that “45,000 union workers would receive profit-sharing checks averaging $4,300, the most in the company’s history” (Morgenson 4).

However, many industry critics present pessimistic statistics possibly influenced by political agendas and an ingrained anti-industrial sentiment. In an example, an article that opens with anti-Obama critique, industry writer Louis Woodhill wrote a scathing review of GM products in the August edition of Forbes under the shocking title “General Motors is Headed for Bankruptcy—Again”. In the article Woodhill interprets a scoring aspect of recent “Car and Driver” review with:

“Not only was the 2013 Malibu (183 points) crushed by the winning 2012 Volkswagen Passat (211 points), it was soundly beaten by the 2012 Honda Accord (198 points), a 5-model-year-old design due for replacement this fall. Worst of all, the 2013 Malibu scored (and placed) lower than the 2008 Malibu would have in the same test.”

Despite a moderate share of negative press many Americans, influenced by recession and unemployment are reconsidering purchasing American industrial products in hopes that their support will result in a mutually beneficial environment for the American economy. This attitude is shared in the New York Times news article titled “General Motors 2012 Earnings: Second Quarter”, which while presenting a negative spin on GM’s European subsidiary, the article does present a positive spin on GM’s domestic operations with the paragraph:

“In its new carnation, the automaker is proving that it can be profitable at a lower sales volume. The company announced in February 2011 that it earned 4.7 billion in 2012, the most in more than a decade. It was the first profitable year since 2004 for G.M. which became publicly traded in November 2012, ending a streak of losses totaling about $90 billion” (Morgenson 1).

However recently an equal number of industry writers have taken a middle of the road stance on the American auto industry such as the CNN Money article entitled “A Recovering GM is Losing Ground at Home” which despite opening with the statistic that GM lost nearly 2% of the domestic market share in 2012, the article goes on to cite the influence of external factors by quoting auto industry economist Sean McAlinden with “Its very complex, the latest downturn isn’t from lack of sales, it is the result of GM closing down 3 million units of production facilities to improve profitability.” The article also offers hope in the second paragraph with “The Cadillac division in coming months will benefit from two key new model introductions” (Levin 1).

Economists and political journalists write about GM leadership strategies and shareholder returns but ignores those autoworkers putting in the effort day after day to prove that they can once again dominate the global automobile market. This critical public opinion of American manufacturers and the negative stigma of industrial trades is withoutquestion the greatest obstacle of corporate moral. The resulting negative self-image among industrial workers slows the progress of American industry and that anti-industrial sentiment begins with the attitudes that modern Americans view those industrial jobs.

Over the past 150 years careers in manufacturing goods that were once viewed as hi-tech careers are perceived by many with a negative stigma. This negative connotation is fostered through the American educational system, especially seen in views of the parents of school children in manufacturing communities. The attitudes being imbedded in schoolchildren are that by studying hard and earning professional credentials that they could escape a dirty and dangerous, low paying life of industrial work. Those children later grow into consumers that believe that through hard work and achievement that they “escaped industrial servitude” with careers in medicine, science and especially education and who grow up to resent industrial workers earning similar wages who in their eyes have not earned the right to those wages through scholastic self-improvement. What many educated professionals do not realize is that those high paying industrial jobs need to offer compensation levels that can attract reliable workers to fill jobs with much less desirable working conditions.

These anti-industrial trade values are crippling todays American manufacturing companies, especially in the automobile industry. A slow drive throught the parking lot of any white collar company such as JP Morgan here in Tampa and you can count that nearly 85% of white collar workers in non-industrial cities buy foreign produced automobiles and the 15% of the exceptions to that rule are almost exculsively those few who desired the largest of SUV’s that do not have foreign counterparts. Polling these owners for an explanation, uncovers the nearly universal response offered by import owners, is their belief that the American manufacturers produce an inferior, unreliable product. Many that offer this assumption often admit that they had never owned a new American car for comparison, and deveolped these opinions from information from the press.

The declines in American manufacturing will likely continue until society offers industrial achievement similar recognition to those contributing to the advancements in computer technology and finance professions. You can not build a championship team without being able to recruit the best engineering talents entering the workforce and you can not obtain those cream of the crop graduates to accept a job in an industry with a sinking prestige factor.

Work Cited

Levin, Doron. “A Recovering GM is Losing Ground at Home”. CNN Money. May 11, 2012

http://features.blogs.fortune.cnn.com/2012/05/11/gm-2/

Ed. Morgenson, Gretchen. “General Motors 2012 Earnings: Second Quarter”. The New York

Times. August 2, 2012

http://topics.nytimes.com/business/companies/general_motors_corporation/index

Woodhill, Louis. “General Motors is Headed for Bankruptcy –Again” . Forbes. August 15, 2012

http://forbes.com/sites/louiswoodhill/2012/08/15/general-motors

Consumer Resistance to Superior Technology: General Motors Hybrids, Siri and Video Messaging, Why are We So Slow to Adopt?

October 28, 2013Applied Management, Automobile Industry, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Domestic Policy, Economics, environmental sustainability, EPA, Executive Leadership, Foreign Policy, General Motors, Human Resources, Industry Regulation, Management Research Study, Marketing Strategy, Muma College of Business, Pollution, Start-Up Ventures, Technology, Triple Bottom Line, University of South FloridaBob Lutz, Business Canvas, China Auto Industry, electric vehicles, Elon Musk, Entrepreneurship, Eric Ries, general motors, Hybrid technology, Innovation, Innovation Education, Jack Welch, Lean Startup Methodology, Lithium Batteries, MBA Programs, Solar Power, STEM, Technology Adoption, Tesla, University of South FloridaTodd Benschneider

Todd Benschneider

University of South Florida
Revised 4/23/2018

When I first wrote the foundation for this article on “Consumer Resistance to General Motors Hybrid Vehicles” nearly six years ago, I was hoping to make sense of the unexpected marketing challenges that we uncovered when Americans proved surprisingly reluctant to purchase the General Motors electric and hybrid option vehicles in 2012.

The market timing of 2009-2012 seemed ideal for electric automobile technology, with record high fuel prices, deeper understandings of global warming and the inevitable decline of petroleum production in the coming century.

On the surface, it seemed to be a reasonable assumption in 2012, that industry projections for alternate fuel vehicles would become a reality and “most cars of the future” (by 2020 was the expectation) would employ some form of electric or hybrid powertrain.

It is ironic how eight years into the future seemed limitless in its potential; but, eight years ago, feels like it was just yesterday.

How could anyone not want inexpensive clean energy cars; especially, ones that cost less than a dinosaur powered vehicle?

Few people would even argue that oil reserves could possibly sustain our current demand for gasoline for future generations.

The proposed electric car technology was reliable, those powertrains had proven their reliability for a decade of testing.

The price was certainly right, General Motors hybrid options for Buick Lacrosse and Chevrolet Malibu were priced the same as the gas versions and, as bonus, the hybrids were even more powerful and provided income tax credits.

How could that not sell like a syrup covered hot cake????

I still shake my head in amazement at how difficult it was to get rid of the hybrids we ordered in 2011 at our Buick-GMC store. Several sales managers would have probably been fired if our veteran inventory manager Sandy had not pushed back and insisted that we limit our initial order to six units rather than the twenty that I thought was a very modest forecast …. this was not her first rodeo.

Sandy probably saved my job and managed to dealer trade most of those six aged units from our inventory and I for one, learned a valuable lesson in product development: think twice before building a superior solution for customers who do not see a problem worth solving.

Since that realization I, like many in the industry, have concluded that unless government intervention mandates the phase out of petroleum powertrains, the adoption rate of electric-powered vehicles could take another two decades. Looking ahead now from 2018, I have adjusted my expectations down a few notches from back in 2012; now, I suspect that relying on the market demand alone to bring electric powertrains to full-scale adoption would be overly optimistic.

I find myself taunting the overzealous Tesla enthusiasts with history trivia that the automaker Detroit Electric nearly overtook gas automobiles in the early 1900s, selling over 13,000 electric cars that had top speed of 20 mph and a recharge range of 80 miles. A current Tesla 3 base model is rated for 220 miles of recharge range and with modern production capability has only recently surpassed 200,000 units sold. That seems like a miniscule amount of progress made across the 100 years of technology that evolved between the two.

It also seems unlikely that government intervention will mandate the phase-out of the internal combustion engine. Some assumptions could be made regarding the far-reaching economic disruptions to foreign trade markets, devastation to the economies of export countries, displaced petroleum workers, and the reallocation of every dollar generated throughout the gasoline supply chain, not to mention the economic impact to the plastics and chemical industries which rely on the waste byproducts of oil for cheap fundamental ingredients.

So, despite being a GM guy whose career was built on gas engine emissions and combustion technology, I must admit that I had been rooting for Elon Musk’s solar-powered auto revolution. Mostly because, I hoped to avoid becoming one of those cynical old guys who fights progress, for no reason other than, maintaining a comfortable status-quo.

I am still optimistic that electric powertrains will become mainstream and that automobiles will convert to solar charged electricity before the rest of the power grid. However, I am imagining that the solar revolution will plod forward slowly for decades in a long-drawn-out guerilla war due to the lack of strong market pull for those alternative fuel vehicles while the petroleum industry survives long enough to support the codependent plastics industry until renewable sourced manufacturing ingredients are developed.

Hopefully Tesla investors are long-range thinkers and have prepared for the long road ahead when consumer demand someday aligns with electric automobile technology. Recently Tesla’s investors had their confidence shaken when company stock prices dropped over 60% during the first week of April over a combination of news that was only slightly negative. If that bearish responsiveness is any indicator of the market, we could expect that a prolonged loss of investor confidence could snuff out the young company before they make it to the finish line.

Few people in the auto industry expect the Tesla plants to disappear or its existing cars to become obsolete. However, a sharp drop in Tesla market value will most likely lure General Motors or Toyota in to absorb the brand at a bargain price in the coming years. Unfortunately, if that happens, a Tesla surviving without Musk at the helm will probably see electric car technology being pushed to the back burner, adding several additional decades to reach full market potential.

It is times such as this that it becomes apparent that consumers (and voters) stated principals fail to correlate with their actions. This anomaly of consumer behavior manages to slow the adoption of superior technology for reasons that will remain a mystery.

My personal experience from being on the front lines, trying to persuade General Motors customers to buy the hybrid powertrain has burned this demand paradox into my view of most technological advances.

For now, we can appreciate how one man, Elon Musk, passionate about his vision for solar power has managed to get far enough to pose a serious market threat to all three economic super powers: auto manufacturing, petroleum and the global power grid. I tip my GM hat to the relentless visionary and hope he makes it to the finish line to prove the naysayers wrong.

As a matter of fact, back in 2012, I used to tell a similar story to this one about rates of technology adoption, it was my own story about the technology predictions of a decade earlier. In 2002, a full two years before Elon Musk joined Tesla, while he was busy building PayPal, I enrolled in an Automotive Technology program and was introduced to Professors suggesting that our class focus on the General Motors hybrid trucks and Chevrolet EV1 electric prototypes from the parking lot, since they would be the products in the market when we finished the program in 2005.

Not taking any credit away from the Tesla contributions, but electric and hybrid gas/electric models were well-developed by several large automakers and proven in field testing long prior to 2002. General Motors introduced the GM Impact electric car prototype in 1990 and revised it several times into the EV1 in 1996, adding the S10 EV truck in 1997, the duo sold around 1600 units from 1996 through 2002 when they were discontinued due to high replacement battery costs.

GM prepared the next generation of alternative fuel powertrains, this time using smaller batteries in combination with the standard gas engine, allowing drivers to select between gas and electric modes. The added value proposition to hybrid technology being that the hybrid optioned car could still be driven in standard gasoline mode if the customer chose not to spend the $10,000 plus to replace the batteries required for the electric mode.

In 2002, most of us in the GM world thought this hybrid technology would provide the company with the competitive edge needed to fend off the Japanese competitors in the global market. Inside GM, everyone seemed fully committed to the project and the service press even printed the repair manuals and training materials for an expected hybrid truck product release.

We were told that the first hybrids would release no later than 2005. Surprisingly though, with the exception of the quiet release of a small batch of hybrid tucks in 2005, General Motors delayed the marketing air campaign for hybrid offerings until 2009. The marketing launch failed to build the required buzz among consumers and even with $4 gas, the hybrids were seen by most as a dismal market flop. Some environmental critics claim that the marketing campaign was designed to flop with a hope of preserving GM’s previous investments in gas engine technology while also winning support of environmentally focused politicians.

Regardless of the motives of the ineffective marketing campaign, I was there when new customers came to our showrooms to test drive hybrid models, then agreed with the proposition of the revolutionary technology; but, when it came time to sign the finance contracts, the agreement fizzled out. Many of these deals fell apart in the finance office, when the customers began contemplating uncertain future repair costs, trade in values, warranty extensions and differences in insurance rates. It seemed like many feared that hybrids would be a passing fad and they could be stuck investing in a car that would have limited resale or trade in value.

In fact, from 2008 to 2018 the General Motors dealership I worked at sold around 8000 new vehicles and despite the huge bonus offered to sales staff and managers to improve sales of hybrids, the store sold a whopping total of sixteen hybrid cars in those nine years and nearly all of those were leases.

These thoughts came to mind earlier this week when having a conversation with friends about another ambitious prediction in tech news that, by 2020, over 90% of web traffic will be video rather than the text and image data of today.

Being jaded now by these types of predictions, I shared with them another related story, that just a couple of years earlier I had read a similarly optimistic prediction, that by 2020, few people would be texting and reading from their phones; instead, we would all be using Siri-like voice translators and listening to the replies of others through our cordless ear buds.

With the 2020 model year now only fifteen short months away, I realize that most of the auto manufacturing line equipment is currently tooling for that year’s production and my friends in engineering tell me that they are working from forecasts that fewer than 7% of GM vehicles sold in 2020 will be ordered with the hybrid powertrains.

With that fresh on my mind, I am sitting in the atrium lounge of the University of South Florida, surrounded by nearly a hundred of the youngest millennials and realized that they were all still texting from their phones and reading the responses. I will curb my enthusiasm for consumer technology adoption projections in the future….. I am starting to see how old guys become so cynical

The foundation article from back in 2012, here is the research on the state of fuel economy technology and the obstacles to adoption:

Continued Consumer Resistance to General Motors Hybrid Vehicle Technology – November 7, 2012

EPA policies that affect the economy become front page news in an election year and the hot topic for 2012 is the Corporate Average Fuel Economy (CAFE) revisions, requiring automakers to improve average automobile fuel economy from 29 mpg to 54.5 mpg over the next 13 years. Agreements to these revised fuel efficiency standards were concessions made by automakers during the industry bailouts of 2009.

In the backlash of that federal bailout, critics have been quick to fault American manufacturers for their lack of long-term planning. However, in defense of management strategy, the automakers have for decades been doing what profitable businesses do best, responding to consumer demand (Vlasic).

Journalists such as News-Herald’s John Lasko write articles that with opening lines such as, “With gas prices hovering near $4 a gallon, many are opting to trade in their gas-guzzlers for more fuel-efficient vehicles.” With news headlines like those, it is easy for the public to conclude that the US automakers lack of sales was due to its heavy reliance on gas guzzling models. However, those assumptions are based on popular ideas that the domestic manufacturers previously lacked the capability to produce fuel-efficient vehicles. In their defense, the simple reality remains, the automakers must make their first priority to produce those vehicles that sell well in the domestic market.

The critics overlook the 3 million Chevrolet Chevettes that were produced between 1976 and 1987 or its domestic counterparts, the Plymouth Horizon and the Ford Fiesta that provided fuel efficiency equal to most economy cars on the market today. For example, the Chevrolet Chevette was for nearly a decade, the American flagship economy car, selling millions by providing a real world fuel economy of 25 city/ 30 hwy, or with a popular diesel engine option reaching 33 city/41 hwy. The Chevette was sold with a base price, that inflation adjusts to about $11,000 in today’s dollars and consistently surpassed the fuel economy ratings of it’s main Japanese competitor, the Toyota Corolla by nearly 2 mpg for nearly a decade (fueleconomy.gov).

Compare those cost and fuel efficiency ratings to today’s most economical products available in the US, the Korean made 2013 Hyundai Accent with an MSRP of $10,665 that is rated at 29 city/39 hwy. The comparison of these cars in the context of the 25 years of technology that evolved between them should dispel assumptions that Asian economy cars have enjoyed decades of superiority in fuel economy (fueleconomy.gov). However, in the American car market, every one of those fuel sipping economy cars was discontinued in the late 1980’s when sales dried up as the pendulum of automobile fashion swung toward a return of larger and more powerful transportation, with the introduction Sport Utility vehicles and the return of V8 powered high performance sedans.

By 1990, it became increasingly unfashionable to be seen in fuel-efficient cars, American auto style entered the age of the 1993 Jeep Grand Cherokee, offering a taller ride height for a better visibility in traffic and providing the owner with a sense of safety and rugged capability. The Grand Cherokee became the benchmark to measure style popularity, marketed with an image of recreational outdoor travel and adventure rather than previous trend for economical commuter transport. These mid-sized all terrain Sport Utilities grew especially popular with female buyers in northern states, at the same time four-door 4×4 pickups became increasingly popular with young male buyers seeking that “Eddie Bauer” outdoorsy image.

Critics often ignore the strategic decisions that allocated research and development funding away from fuel economy and directed budgets to safety, performance and durability to meet the consumer demand curves. Over the past 15 years the average vehicle age alone has grown by a third to 10.8 years old with advancements in vehicle durability (USA Today). Additional progress that was made during that period to improve braking distances and implement crash avoidance technology reduced accident frequency and cut the percentage of crash fatalities in half. In an effort to appeal to consumer demands for more powerful accelerator pedals, 0-60 acceleration times have improved by over 40%. And to counter the reliability critics of the domestic cars from the 1980’s, the inflation adjusted annual maintenance costs have dropped by more than 80% (NADA.COM).

Today even after the industry collapse, American manufacturers once again dominate automobile industry technology development, General Motors again was ranked the 2011 No. 1 innovator in automotive patents by US patent board (Tuttle). However, consumer demand trends in automobiles are similar to those in fashion, with opposing trends recurring in 10-year cycles, such as style trends toward skinny jeans from bell bottoms and short carefully styled hair to today’s bushy headed natural hairstyles. Sociologists attribute 10-year style cycles to be dependent on the needs for generational self-image, as each generation makes fashion and identity statements to differentiate them from the previous generation.

Business Times writer Brad Tuttle suggests that the fuel economy trend that began in 08 will continue to gain momentum:

“A new True Car post traces the average miles-per-gallon rise among new cars sold
in the US… all of the top seven automakers posted dramatic year over year
increases in average miles per gallon. In 2011 the average new Ford got just 17.3
mpg compared with 22 mpg in February of 2012 … the rise comes primarily as a
result of Ford doubling sales of small cars such as the Fusion and Focus”
However, despite increases in economy cars sales, auto sales as a whole have risen, the demand is also increasing on 5-year-old full size SUV’s.

According to industry writer Nick Bunkley,
“Retail prices for five-year-old full size S.U.V.’s are 23 percent higher than a year ago
according to Edmunds.com, an automotive information Website. That is more than
double the average price increase of 11 percent for all five-year-old vehicles.”
One constant in the automobile industry, vehicle selection is an emotional decision more than it is an economic one. Customer buying motives first and foremost are influenced by how the vehicle makes them feel, a vehicle becomes one with the driver, it can allow them to feel bigger, more secure or more powerful. I recently encountered a perfect case that really defined the influence of self-identity on vehicle selection.

Carolyn, a 60-year-old widow and retired guidance counselor arrived at our Buick-GMC showroom in a well maintained, three-year-old, luxury four-wheel drive truck. Carolyn had gotten a letter from our used car department that high demand for trade-ins like her truck had currently driven trade-in values up thousands over the previous year. The letter encouraged her to consider upgrading soon, to take advantage of current trade in values for used 4×4’s.

The timing of the letter was perfect for Carolyn, since she had recently moved to Florida from the Midwest and no longer had the need for wintertime four-wheel drive; to further complicate matter the garage of her new condo also couldn’t accommodate the truck. She explained when she arrived, that she really wanted to reduce her fuel budget and downsize into one the new hybrid Buick Regal sedans she had been reading about in the newspapers, rated for twice the fuel economy of her truck.

Over the following week Carolyn test drove over a dozen of fuel-efficient sedans from ours and different dealerships including the Hybrid Regal that she initially planned to purchase. Despite our best efforts to persuade her to choose our last remaining hybrid, she instead opted to buy the high performance Regal T Type, performance sedan, that ironically provides an only a slight fuel economy advantage of 15% over the truck she was trading in and was priced thousands higher than the $28,000 hybrid version.

Carol admitted that when driving the cars rated highly for fuel efficiency she felt as if she had sacrificed the power that she was accustomed to and those low powered cars made her feel old and slow behind the wheel, she insisted that she “wasn’t ready to feel like an old lady toodling down the right lane, holding up traffic”. Carol’s time behind the wheel of the Regal Turbo made her feel young and put a smile on her face every time she pushed down on the accelerator pedal. For the sake of “feeling young” she was perfectly content to pay an extra $90 in monthly car payment for the high-performance engine and luxury options and disregard the $65 month in fuel savings that the hybrid version offered.

Think of the vehicle choices by comparing it to an airplane selection; imagine choosing between airplanes, where you could select a 2 seat Cessna that might make you feel like buzzing mosquito, or for another $150 a month, you could pilot the F-16 fighter jet or a Boeing 747 to work, ….to you, which of those options excites you? The difference it capability seems huge and imagine if the difference in increased fuel costs was only an additional $100 a month. The thrill of becoming something larger and more powerful and the status that comes with that ownership has an attraction beyond what can be measured in simple terms of transportation costs per mile. American buyers have consistently demonstrated that they are willing to sacrifice a larger part of their income to enjoy vehicles that provide them with excitement.

Current sedan trends are influenced by the fuel-efficient designs from Asian manufacturers, designed to handle the high taxes on Japanese gas and the shortage of open roads and parking space on the islands of Japan. Understanding the American tastes requires us to understand the differences in our driving habits and the luxuries of smooth, open roads that Americans can enjoy, foreign drivers are often limited in their ability to appreciate American tastes for size and horsepower.

However, in Australia, with road systems similar to the US, a huge market still exists for large SUV’s, trucks and big engine cars. A market that was penetrated in the 1990’s when many Japanese automakers began to design vehicles to cater to the American influenced market, with large gas guzzlers like the Nissan Armada, Toyota Sequoia and Honda Ridgeline ensured import survival during the SUV years, and most notably even those Japanese trucks and SUV’s suffer from slightly lower fuel economy ratings than the American SUV competitors.

It has been easy for the press to fault American automakers for their lack of vision in developing economy vehicles, and to blame management for not remaining competitive in fuel efficiency technology. However, despite almost a total lack of advertising dollars for large engine SUV’s, compounded by the handicaps of stale, aged-out designs and a decrease of sales incentives offered, the demand for large SUV’s is climbing back to nearly 2008 levels despite continued fuel cost nearing $4.

Over the past 30 years American consumers have voted with their wallets, fuel economy was considerably less important to them than size, safety, reliability and performance. The challenge that lies ahead is not to build smaller, less powerful cars as much as the need to direct energy-saving technology development at the powerful SUV’s and spirited sedans that consumers demand (nada.org).

Because for many Americans the automobile is more than transportation, it is a fashion decision as much as a financial decision, and many Americans have proven for decades that are perfectly willing to pay a premium to enjoy a few more smiles-per-gallon.

Work Cited

Bunkley, Nick. “As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s.” New

York Times. 07 2012: n. page. Web. 7 Nov. 2012.

“Side By Side Economy Comparison.” fueleconomy.gov. US Environmental Protection Agency,

07 2012. Web. 7 Nov 2012.

Lasko, John. “Gas Prices Have Car Makers, Sellers, Buyers Looking at Fuel Efficiency.” The News

Herald. 30 2012: n. page. Web. 7 Nov. 2012.

. “Guidelines.” nada.com. National Automobile Dealers Association, 07 2012. Web. 7 Nov 2012.

Tuttle, Brad. “Even with $4 Gas, Few Drivers Choose Electric Cars – Or Even Hybrids.” Business

Time. 12 2012: n. page. Web. 7 Nov. 2012.

Vlasic, Bill. “U.S. Sets Higher Fuel Efficiency Standards.” New York Times. 28 2012: n. page. Web.

7 Nov. 2012.

“Our Cars are Getting Older, too: Average Age now 10.8 years.” USA Today. 01 2012: n. page.

Web. 7 Nov. 2012.

Continued Consumer Resistance to Fuel Efficency Technologies

December 9, 2012Automobile Industry, Business Management, Consumer Behavioral Research, Domestic Policy, Economics, EPA, Executive Leadership, General Motors, Industry Regulation, Management Research Study, Style TrendsBuick, businessmanagement, consumer behavior, executive leadership, general motors, GMC, Marketing, SalesTodd Benschneider

12/09/2012 EPA policies that affect the economy become front page news in an election year and the hot topic for 2012 is the Corporate Average Fuel Economy (CAFE) revisions, which automakers to improve average automobile fuel economy from 29 mpg to 54.5 mpg over the next 13 years. Agreements to these revised fuel efficiency standards were concessions made by automakers during the industry bailouts of 2009. In the backlash of that federal bailout, critics have been quick to fault American manufacturers for their lack of long term planning. However, in defense of management strategy, the automakers have for decades, simply been doing what profitable businesses do best, responding to consumer demand (Vlasic).

The press often suggests that domestic auto sales recovery will depend on the fuel economy of the products that manufacturers can provide. These critics assume that consumers make purchase decisions using primarily math and logic, those of us in the auto industry experience first hand purchase motives that are much more closely akin to the process of purchasing fashions or artwork. To most Americans, their car is a part of their self-image, not just a tool that converts dollars into miles traveled. Journalists such as News-Herald’s John Lasko write articles that with opening lines such as, “With gas prices hovering near $4 a gallon, many are opting to trade in their gas-guzzlers for more fuel-efficient vehicles.” With news headlines like those, it is easy for the public to conclude that the US automakers lack of sales was due to its heavy reliance on gas guzzling models. However, those assumptions are based on popular ideas that the domestic manufacturers previously lacked the capability to produce fuel efficient vehicles. In their defense, the simple reality remains, the automakers must make their first priority to produce those vehicles that sell well in the domestic market.

By 1990, it became increasingly uncool to be seen in fuel efficient cars, American auto fashion began to enter the age of the 1993 Jeep Grand Cherokee, offering a taller ride height for a better visibility in traffic and providing the owner with a sense of safety and rugged capability. The Grand Cherokee became the benchmark to measure style popularity, marketed with an image of recreational outdoor travel and adventure rather than previous trend for economical commuter transport. These mid-sized all terrain Sport Utilities grew especially popular with female buyers in northern states, at the same time four door 4×4 pickups became increasingly popular with young male buyers seeking that “Eddie Bauer” outdoorsy image.

Today even after the industry collapse, American manufacturers once again dominate automobile industry technology development, General Motors again was ranked the 2011 No. 1 innovator in automotive patents by US patent board (Tuttle). However, consumer demand trends in automobiles are similar to those in fashion, with opposing trends recurring in 10 year cycles, such as style trends toward skinny jeans from bell bottoms and short carefully styled hair to today’s bushy headed natural hairstyles. Sociologists attribute 10 year style cycles to be dependent on the needs for generational self-image, as each generation makes fashion and identity statements to differentiate them from the previous generation.

Business Times writer Brad Tuttle suggests that the fuel economy trend that began in 08 will continue to gain momentum:

“A new True Car post traces the average miles-per-gallon rise among new cars sold

in the US… all of the top seven automakers posted dramatic year over year

increases in average miles per gallon. In 2011 the average new Ford got just 17.3

mpg compared with 22 mpg in February of 2012 … the rise comes primarily as a

result of Ford doubling sales of small cars such as the Fusion and Focus”

However, despite increases in economy cars sales, auto sales as a whole have risen, the demand is also increasing on 5 year old full size SUV’s. According to industry writer Nick Bunkley,

“Retail prices for five-year-old full size S.U.V.’s are 23 percent higher than a year ago

according to Edmunds.com, an automotive information Web Site. That is more than

double the average price increase of 11 percent for all five-year-old vehicles.”

One thing is constant in the automobile industry, vehicle selection is an emotional decision more than it is an economic one. Customer buying motives first and foremost are influenced by how the vehicle makes them feel, a vehicle becomes one with the driver, it can allow them to feel bigger, more secure or more powerful. I recently encountered a perfect case that really defined the influence of self-identity on vehicle selection.

Carolyn, a 60 year old widow and retired guidance counselor arrived at our Buick-GMC showroom in a well maintained, three year-old, luxury four wheel drive truck. Carolyn had gotten a letter from our used car department that high demand for trade-ins like her truck had currently driven trade-in values up thousands over the previous year. The letter encouraged her to consider upgrading soon, to take advantage of current trade in values for used 4×4’s.

The timing of the letter was perfect for Carolyn, since she had recently moved to Florida from the Midwest and no longer had the need for wintertime four wheel drive; to further complicate matter the garage of her new condo also couldn’t accommodate the truck. She explained when she arrived, that she really wanted to reduce her fuel budget and downsize into one the new hybrid Buick Regal sedans she had been reading about in the newspapers, rated for twice the fuel economy of her truck.

Over the following week Carolyn test drove over a dozen of fuel efficient sedans from ours and different dealerships including the Hybrid Regal that she initially planned to purchase. Despite our best efforts to persuade her to choose our last remaining hybrid, she instead opted to buy the high performance Regal T Type, performance sedan, that ironically provides a only a slight fuel economy advantage of 15% over the truck she was trading in and was priced thousands higher than the $28,000 hybrid version.

Carol admitted that when driving the cars rated highly for fuel efficiency she felt as if she had sacrificed the power that she was accustomed to and those low powered cars made her feel old and slow behind the wheel, she insisted that she “wasn’t ready to feel like an old lady toodling down the right lane, holding up traffic”. Carol’s time behind the wheel of the Regal Turbo made her feel young and put a smile on her face every time she pushed down on the accelerator pedal. For the sake of “feeling young” she was perfectly content to pay an extra $90 in monthly car payment for the high performance engine and luxury options and also disregard the $65 month in fuel savings that the hybrid version offered.

Think of the vehicle choices by comparing it to an airplane selection; imagine choosing between airplanes, where you could select a 2 seat Cessna that might make you feel like buzzing mosquito, or for another $150 a month you could pilot the F-16 fighter jet or a Boeing 747 to work, ….to you which of those options excites you?. The difference it capability seems huge and the difference in increased fuel costs may only be an additional $100 a month. The thrill of becoming something larger and more powerful and the status that comes with that ownership has an attraction beyond what can be measured in simple terms of transportation costs per mile. American buyers have consistently demonstrated that they are willing to sacrifice a larger part of their income to enjoy vehicles that provide them with excitement.

Current sedan trends are being influenced by the fuel efficient designs from Asian manufacturers that were designed to handle the high taxes on Japanese gas and the shortage of open roads on the islands of Japan. Understanding the American tastes requires us to understand the differences in our driving habits, many countries do not have the smooth open roads that American can enjoy, foreign drivers are often limted in their ability to appreciate American tastes for size and horsepower. However in Australia, which has road systems similar to the US, they have a huge market for large SUV’s, trucks and big engined cars. During the 1990’s many Japanese automakers began to design vehicles to cater to the American market, large gas guzzlers like the Nissan Armada, Toyota Sequoia and Honda Ridgeline ensured import survival during the SUV years, and most notably those Japanese trucks and SUV’s suffer from slightly lower fuel economy ratings than the American SUV competitors.

It has been easy for the press to fault American automakers for their lack of vision in developing economy vehicles, and to blame management for not remaining competitive in fuel efficiency technology. However, despite almost a total lack of advertising dollars for large engine SUV’s, compounded by the handicaps of stale aged out designs and a decrease of discounts offered on the large SUVs, the demand for large SUV’s is climbing back to nearly 2008 levels despite continued fuel cost nearing $4.

Over the past 30 years, American consumers have voted with their wallets, which indicated that fuel economy has been considerably less important than size, safety, reliability and performance. The challenges that lie ahead are not building smaller, less powerful cars as much as directing energy saving technology development at the powerful SUV’s, light trucks and spirited sedans that American consumers demand.

Because for many Americans the automobile is more than simple transportation, it is as much an entertainment and fashion decision as a financial decision, and many of those Americans have proven for decades that they are perfectly willing to pay a premium to enjoy a few more smiles-per-gallon.

Work Cited

Bunkley, Nick. “As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s.” New

York Times. 07 2012: n. page. Web. 7 Nov. 2012.

“Side By Side Economy Comparison.” fueleconomy.gov. US Environmental Protection Agency,

07 2012. Web. 7 Nov 2012.

Lasko, John. “Gas Prices Have Car Makers, Sellers, Buyers Looking at Fuel Efficiency.” The News

Herald. 30 2012: n. page. Web. 7 Nov. 2012.

. “Guidelines.” nada.com. National Automobile Dealers Association, 07 2012. Web. 7 Nov 2012.

Tuttle, Brad. “Even with $4 Gas, Few Drivers Choose Electric Cars – Or Even Hybrids.” Business

Time. 12 2012: n. page. Web. 7 Nov. 2012.

Vlasic, Bill. “U.S. Sets Higher Fuel Efficiency Standards.” New York Times. 28 2012: n. page. Web.

7 Nov. 2012.

“Our Cars are Getting Older, too: Average Age now 10.8 years.” USA Today. 01 2012: n. page.

Web. 7 Nov. 2012..

Todd Benschneider

Research Projects and Case Studies in Economics & Management

Category Archives: Consumer Behavioral Research

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