Ford’s Idea: Pay More To Get Less

July 30, 2010 Larry M. Elkin

Ford Motor Co. (F) recently announced its new plan to spur interest in the redesigned 2011 Explorer: Ask customers to pay more to get less.

The vehicle will come with a standard 3.5-liter V-6 engine with 290 horsepower, but, for a little extra, Ford will swap in a less powerful four-cylinder engine instead.

This makes me wonder: Is there something in Detroit’s water that causes automobile executives make bizarre decisions?

Ford plans to present the lower-powered alternative as a more fuel-efficient option, catering to customers who are worried that gas prices may increase once again. The automaker apparently thinks this is an important demographic, despite the fact that anyone who pays attention to such things will have noticed that gas prices are in fact falling. Jim Hall, principal of the automotive consulting firm 2954 Analytics, told Bloomberg News that prices in the U.S. have fallen 34 percent from their peak two years ago.

Vehicles with the smaller engine will not be able to tow as much and will have decreased off-road capacity, according to Ford. The souped-down SUVs will also almost certainly be worse at highway acceleration, especially when laden with baggage and passengers.

Jim Holland, the Explorer’s chief engineer, told Bloomberg that he thinks customers will be willing to pay the premium nonetheless. “To get great fuel economy it takes technology, and it’s our view that people will pay for that,” he said.

Ford’s wishful thinking seems to be rooted in the fact that, up to this point, a slice of the public has been willing to pay more to get hybrid or electric-powered cars that promise to cut fuel costs and pollution emissions.

Depending on consumers’ priorities, paying more for a different type of engine may be reasonable. But paying more for less of the same does not make sense. No one would pay extra to get a smaller, standard burger, even though the smaller sandwich would have fewer calories and less fat. And no one is going to want to pay more for a smaller gas engine.

Ford’s pricing of the new Explorer is even harder to understand when we consider the decision by the automaker’s own Lincoln brand, announced just a few days earlier, to eliminate the premium price for a hybrid version of the MKZ sedan. Lincoln will sell conventional and hybrid versions of the luxury sedan for the identical base price of $35,180. Eliminating the premium price will probably boost sales of the hybrid, since buyers will be able to take advantage of lower fuel costs without having to pay a higher price up front. Selling more hybrids will, in turn, allow Lincoln to drive down unit costs and increase the cachet of its brand, which is struggling against Japanese and European competition.

The Lincoln MKZ pricing strategy assumes that the only sure-fire way to get customers to go green is to offer them a no-lose economic proposal. If gas prices continue to drop or the buyer ends up not driving the car enough for the difference in fuel costs to be significant, at least he hasn’t wasted any money upfront by betting on long-term returns that never materialize.

The small-engine Explorer, on the other hand, puts consumers in a no-win situation. Even if fuel costs do go up, the buyer is still stuck in an underpowered gas-engine SUV when he would probably do better to just drive a smaller car or an actual hybrid. And, having paid a premium for the small engine, a buyer who doesn’t drive much, or who keeps the car while gasoline prices stagnate or fall, is simply going to feel like an idiot.

So what were the folks at Ford thinking? Are they eager to feature in a business school case study? Or maybe the executives at Ford are big fans of AMC’s Mad Men, whose season premiere was Sunday night. Perhaps it sent them scurrying back to the long-locked office liquor cabinet. If that’s the case, watch out. The last bunch to get into that sauce is best remembered for giving us the Edsel.

Ford may have a better idea (to reprise a 1960s advertising slogan), but charging more money for less car certainly isn’t it.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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