Why Toyota will be Driving Happy on the back of the Price Promise

Friday, 6 April 2018

Toyota New Zealand says its Drive Happy Project could be one of the biggest changes in distributor auto retailing in this country - maybe in the world.

OPINION: Honda New Zealand says it is delighted Toyota New Zealand is radically revamping the way it sells its cars. Why? Because it proves that the way Honda has been selling its cars for the past 18 years has been a success.

TNZ's newly-introduced Drive Happy Project is almost identical in format to Honda's method, which it calls Price Promise, and which it says has led to an exceptionally high level of customer loyalty because it helps protect the total cost of vehicle ownership.

Honda New Zealand it has been doing the same thing for the past 18 years with its Price Promise.

'Price Promise has been very success for Honda in New Zealand, and we are delighted that Toyota New Zealand is adopting a similar approach,' says Honda NZ managing director Nobuya Sonoda.

Nice marketing PR, Sonoda-san.

Toyota new vehicle prices are now a lot less under the new no-haggle strategy.

Honda is the darling of the private buyer via its no-haggle prices for such vehicles as the CR-V.

* Say 'R' when you see the new Civic hatch, says Honda**

Under the traditional vehicle sales system, individual dealerships purchase vehicle stock which is then offered with what are known as recommended retail prices (RRPs). It's then left up to individual sales people, most of whom are on commission, to negotiate a transaction price with a customer.

Way back in 2000 Honda NZ moved right away from that as a way of maintaining equity, transparency and value. It replaced it with the Price Promise - an assurance that new car buyers would all get the same price on a new Honda, no matter who they were, where they lived, and what day of the month they purchased.

I remember when the company first introduced Price Promise, it was criticised - almost laughed at - by many members of the motoring media. But Honda stuck to its guns, arguing that such things as special deals, varying discounts, run-out specials and end-of-the-month sales all lowered resale values and sped up depreciation.

The argument was pretty simple. Honda said that under the traditional dealership method, if a person purchased a new vehicle from dealership A and negotiated a 5 per cent discount off the RRP, and another person went to dealership B and negotiated a 15 per cent discount on the same model car, then that meant the first person's new car would have depreciated by an additional 10 per cent before even being driven off the car yard.

Price Promise got rid of all of that, which meant the only factors affecting the resale value of a Honda were vehicle age, mileage and condition. And at various media conferences Honda NZ's then-managing director Graeme Seymour would bore journalists witless with graphs illustrating slower depreciation of Honda product under the Price Promise system.

But Seymour was right. It has resulted in a much simpler and more relaxed buying process, and ever since Price Promise has been in place the company's customer retention rate has increased to the extent it is now close to 80 per cent.

Things did get tough for Honda NZ during the global financial crisis when in order to continue with Price Promise it increased the no-discount price of its vehicles to the extent they were more expensive than opposition vehicles, and sales fell. But the company didn't deviate from its pricing strategy, and it remained profitable.

So how does Honda NZ work the Price Promise? It does it because it changed from a dealer distribution model to an agency distribution model, owns all demonstration stock at the agencies nationwide, owns all new car stock which is held at a national distribution centre in Nelson, and sells directly to the end customer, with the sales agent involved getting paid a fee for the sale.

These days the Honda prices are much more competitive, and the company says its customers are happy that they don't have to go through the often-uncomfortable process of haggling over prices. Not only that, but they're also happy in the knowledge that at the other end of the vehicle ownership experience the residual value of their cars are among the highest in New Zealand.

Now Toyota New Zealand is doing almost exactly the same thing with its Drive Happy Project - it's getting rid of RRPs and replacing them with non-negotiable nationwide Toyota Driveaway Prices (TDPs) that are substantially lower than the old RRPs and closer to what were the former final transaction prices.

It's going to be interesting watching Toyota's Drive Happy work, because Honda's Price Promise is a little bit different in an important way.

Honda, which doesn't have any commercial vehicles to sell, is a darling of the private motorist and in that regard it is easier to enjoy customer loyalty. And of course Honda's operation is smaller - last year the brand sold 4616 passenger cars for a 4 per cent market share.

Meanwhile last year Toyota sold 32,282 vehicles for a massive 20 per cent market share. Much of this was fleet and rental business - and it will obviously still agree to bulk business deals involving prices cheaper than the TDPs.

But a large number of private and small business owners are also Toyota customers, and now they are being asked to forego the old method of negotiating best prices for their new cars, in exchange for no-haggle TDPs.

'We are changing the way the Toyota business operates in New Zealand,' says chief executive Alistair Davis, in what could be seen as a nod to what much smaller Honda NZ has already achieved.

'This could be one of the biggest changes in distributor auto retailing in this country - maybe in the world. It's certainly the most significant by a market leader, rather than a new entrant or a minor player.'

Will the Toyota customers find this acceptable? The Honda experience suggests that they will. And it all raises another question: will Honda now piggy-back on the Toyota's high-profile Drive Happy publicity campaign by re-launching the Price Promise? I know that if I were Honda, I would.