96

Company Cases
Part Two

| Understanding the Marketplace and Consumers

Chapter

COMPANY Case
Prius: Leading a Wave of Hybrids
Americans love their cars. In a country where SUVs have dominated the roads for more than a decade and the biggest sport is stockcar racing, it seems unlikely that a small, sluggish, hybrid vehicle would become such a hit. But against all odds, the Toyota Prius has become one of the top 10 selling vehicles in America. Introducing a fuel sipper in a market where vehicle size and horsepower have reigned led one Toyota executive to profess, Frankly, it was one of the biggest crapshoots Ive ever been involved in. Considering these issues, it is nothing short of amazing that only five years later, the president of Toyota Motor Sales U.S.A., Jim Press, dubbed the Prius the hottest car weve ever had. within the monitor also provided controls for air conditioning, audio, and a satellite navigation system. And whereas the first Prius averaged an astounding 42 miles per gallon, its successor did even better at 48.

3 Chapter CXXXX 43550 Page 96 11/07/08 MD

A RUNAWAY SUCCESS
Apparently, consumers liked the improvements. In its inaugural year, the Prius saw moderate sales of just over 15,000 unitsnot bad considering that Toyota put minimal promotional effort behind the new vehicle. But sales for the carbon fuel miser have increased exponentially ever since. In 2007, Toyota sold 181,000 Priuses in the United States alone, a 70 percent increase over 2006 sales. That makes the Prius Toyotas third-best-selling passenger car following the Camry and Corolla. Perhaps more significantly, in May of 2008, Toyota announced that it had sold a total of 1,028,000 Prius cars worldwide since the vehicle first went on sale in Japan in 1997. The rapid increase in demand for the Prius created a rare automotive phenomenon. During a period when most automotive companies had to offer substantial incentives to move vehicles, many Toyota dealers had no problem getting price premiums of up to $5,000 over sticker price for the Prius. Waiting lists for the Prius stretched up to six months. At one point, spots on dealers waiting lists were being auctioned on eBay for $500. By 2006, the Prius had become the hottest car in the United States, based on industry metrics of time spent on dealer lots, sales incentives, and average sale price relative to sticker price. In fact, according to Kelley Blue Book, demand for new Priuses became so strong that, even after one year and more than 20,000 miles, a Prius could fetch thousands more than its original sticker price. There are many reasons for the success of the Prius. For starters, Toyotas targeting strategy has been spot-on from the beginning. It focused first on early adopters, techies who were attracted by the cars advanced technology. Such buyers not only bought the car but found ways to modify it by hacking into the Priuss computer system. Soon, owners were sharing their hacking secrets through chat rooms such as Priusenvy.com, boasting such modifications as using the dashboard display screen to play video games, show files from a laptop, watch TV, and look at images taken by a rear-view camera. One savvy owner found a way to plug the Prius into a wall socket and boost fuel efficiency to as much as 100 miles per gallon. In addition to Toyotas effective targeting tactics, various external incentives helped to spur Prius sales. For example, some states issued permits for hybrids to drive in HOV (High Occupancy Vehicle) lanes, even if they only had one occupant. Some cities, including Albuquerque, Los Angeles, San Jose, and New Haven, provide free parking. But the biggest incentives were monetary.

THE NUTS AND BOLTS OF THE PRIUS

Like other hybrids currently available or in development, the Prius combines a gas engine with an electric motor. Different hybrid vehicles employ this combination of power sources in different ways to boost both fuel efficiency and power. The Prius runs on only the electric motor when starting up and under initial acceleration. At roughly 15 mph, the gas engine kicks in. This means that the auto gets power from only the battery at low speeds, and from both the gas engine and electric motor during heavy acceleration. Once up to speed, the gas engine sends power directly to the wheels and, through the generator, to the electric motor or battery. When braking, energy from the slowing wheelsenergy that is wasted in a conventional caris sent back through the electric motor to charge the battery. At a stop, the gas engine shuts off, saving fuel. When starting up and operating at low speeds, the auto makes no noise, which seems eerie to some drivers and to pedestrians who dont hear it coming! The Prius first sold in the United States in the 2001 model year. It was a small, cramped, slow compact car with a dull design. Three years later, the second-generation Prius benefited from a modest power increase. But it was still anything but a muscle car. However, there were countless other improvements. The sleek, Asian-inspired design was much better looking than the first generation Prius and came in seven colors. The interior was roomy and practical, with plenty of rear leg room and gobs of storage space. The Gen II Prius also provided expensive touches typically found only in luxury vehicles. A single push button brought the car to life. A seven-inch energy monitor touch screen displayed fuel consumption, outside temperature, and battery charge level. It also indicated when the car was running on gas, electricity, regenerated energy, or a combination of these. Multiple screens

Chapter 3 The federal government gave huge tax breaks amounting to thousands of dollars. Some state governments gave additional tax breaks, in some cases matching the federal tax break. On top of all that, some eco-friendly companies such as Timberland, Google, and Hyperion Solutions also joined in the incentive game, giving employees as much as $5,000 toward the purchase of hybrids. But after some time, the early adopter market had been skimmed and the government incentives were slowly phased out. Just as these changes were taking place, Toyota was already well into a $40 million campaign targeting a different set of consumers, the environmentally conscious and those desiring greater fuel efficiency. With the accuracy of a fortune teller, Toyota hit the nail right on the head. Gas prices skyrocketed, first to $3 a gallon, then past $4. By the spring of 2008, Prius hysteria had reached an all-time high. Just as demand for full-sized SUVs began to tank, waiting lists and dealer mark-ups over sticker for the Prius once again became the norm. Im selling every one I can get my hands on, said Kenny Burns, a general sales manager at a California Toyota dealer. With a 30-day waiting list for a new Prius, The day the car comes in is the day the car goes out.

| Analyzing the Marketing Environment

97

3 Chapter CXXXX 43550 Page 97 11/07/08 MD

FUELING THE HYBRID CRAZE

The overall category of gas-electric vehicles in the United States is hotter than ever. Although hybrids accounted for only about 3 percent of total U.S. car sales in 2007, their share is growing rapidly. For the first quarter of 2008, hybrid sales were up 25 percent over the previous year. In April of that year, sales jumped a whopping 58 percent. The Prius alone commands more than 50 percent of the market and is largely responsible for category growth. While various hybrid models have hit the market in recent years, it appears that consumers like their green cars very green. Sales of the ultra-high-mileage Prius and Civic have grown significantly each year since their introductions. But less efficient (and more expensive) hybrid models such as the Honda Accord (now discontinued), the Ford Escape, and the Mercury Mariner have not fared nearly as well. Some analysts believe it is because consumers are doing the math and realizing that even with better fuel efficiency, they may not save money with a hybrid. In fact, a widely publicized 2006 report by Consumer Reports revealed that of six hybrid models studied, the Prius and the Civic were the only two to recover the price premium and save consumers money after five years and 75,000 miles. But as the price of gas rises, the break-even period for the price of a hybrid gets shorter and shorter. That may just mean greater demand for all hybrid models as consumers perceive that even the less efficient hybrids make financial sense. Almost every automotive nameplate now wants a piece of the growing pie. In 2008, there were 15 hybrid models available in the United States from 9 different brand nameplates. General

Motors offers both the only full-sized SUV hybrid in the Tahoe and the lowest priced hybrid option at $2,000 for the Saturn Vue and Aura. GM plans to extend the Saturn hybrid line to almost every vehicle in the lineup while continuing to introduce hybrids in other divisions. Ford plans to produce 250,000 hybrids a year by 2012. And while Subaru, Hyundai, and Honda are all promoting upcoming hybrid models, Audi, BMW, and numerous others are busy developing hybrid vehicles of their own. Even with all the activity from these automotive brands, Toyota is currently the clear leader in hybrid sales and likely will be for some time to come. It makes 6 of the current 15 U.S. hybrid models (including 3 Lexus models). And with market conditions changing, Toyota is also showing its ability to adapt. In addition to the increased level of competition, the Prius faces more internal competition from new Toyota models like the Camry. Toyota faces a greater challenge in ramping up production to meet demand than from external competition. All indications show that Toyota plans to maintain its hybrid momentum, doubling its line to 12 models and increasing its worldwide hybrid sales to 1 million vehicles per year by the early 2010s. At that time, it plans to unleash an entirely new lineup of hybrids based on next-generation lithium-ion batteries, which pack more power than the current nickel-metal-hydride batteries. If the past is any indication, Toyotas future looks very green.

Questions for Discussion 1. What microenvironmental factors affected both the first
generation and second generation models of the Toyota Prius? How well has Toyota dealt with these factors?

2. Outline the major macroenvironmental factorsdemographic,

economic, natural, technological, political and culturalthat have affected Prius sales. How well has Toyota dealt with each of these factors?

3. Evaluate Toyotas marketing strategy so far. What has Toyota

done well? How might it improve its strategy?

4. GMs marketing director for new ventures, Ken Stewart, says

If you want to get a lot of hybrids on the road, you put them in vehicles that people are buying now. This seems to summarize the U.S. auto makers approach to hybrids. Would you agree with Mr. Stewart? Why or why not?
Sources: Martin Zimmerman, Hybrid Car Sales Are Zoomin, Los Angeles Times, May 23, 2008, p. A1; David Welch, Prius: Over 1 Million Sold, BusinessWeek, May 15, 2008, accessed at www.businessweek.com; Peter Valdes-Dapena, Prius Still King as Hybrid Auto Sales Rise, CNNMoney.com, August 2, 2007; Peter Valdes-Dapena, Mad Market for Used Fuel-Sippers, CNNMoney.com, May 18, 2006; David Kiley and David Welch, Invasion of the Hybrids, BusinessWeek, January 10, 2006; and Brian Twomey, The Prius Is the World, Mirror, May 23, 2008, p. 44.