dolution

Case Study

PRICING OF FORD MUSTANG

In the early 1960s the Ford car company launched a plan to compete with General Motors and European car manufacturers in the sports car market. Ford’s approach to this task was unique in the sports car industry.
Under the traditional systems, management would have begun the process by sending a memo to the design department, instructing it to develop a sports car that would top the competition. Each designer would then have drawn on individual preconceptions of what makes a good sports car to design bodies, suspensions and engines that would be better. Next, management would have turned those designs over to the marketing research department. Its researchers would have asked potential customers which design they preferred and how they compared with competing cars. This information would have been used to produce cars with prices that would cover their costs and yield the desired rate of return. Ultimately, the best choice would have been built. It would have shared with competitors the adoration of many but be purchased by only the few customers who could afford it.
Fortunately, Ford’s general manager, Lee Iacocca, was a marketer, unlike many of the top executives in the US car industry. When he began to research the new car, he began with the customer rather than the design department. Iacocca found that a large and growing share of the market longed for a sports car and that most people could not afford one. He sought to understand his customers more deeply and discovered what they wanted. The challenge for Ford was to design a car that looked sufficiently sporty to satisfy most buyers, but without the usual mechanical elements of a sports car that drove its price out of reach. To meet that challenge, Ford built its sports car with the mechanical workings of an existing economy car, the Falcon. Many sports car enthusiasts were appalled.
In 1964 Ford introduced the Mustang sports car at a base price of $2,368. More Mustangs were sold in the first year of sales than any other car Ford ever built. Ford’s new product strategy for the Mustang reversed the traditional, product-driven focus related to costbased pricing. The product-based price assumes that the attributes of the product are given and cannot be readily changed. The price is determined by estimating the product’s costs and calculating the price that would cover cost plus a given yield (or profit). Only then does the marketer consider whether customers can and will pay the price. In the case of the Mustang, Ford began to consider the favoured price by asking customers what they wanted and what they were willing to pay for it. Their response determined the car’s selling price. Only then did Ford attempt to develop a product that could satisfy potential customers at a price they could afford, that still permitted a substantial profit. This reflects a customer-orientated marketing approach to pricing.