25 Feb 14

Company car selection: Why pay a premium?

Despite significant incentive programs such as discounts, bonuses, tax advantages, finance and leasing incentives, the demand for new cars has not yet returned to the level that the automotive industry was used to and it seems questionable when, or even if, it will.

Car makers look for the right tactics in order to boost their sales figures. A key focus is on the product itself. Offering exactly the right product can obviously be the basis for success. Just think of the Nissan Qashqai, a car that combines the advantages of the Compact segment (Golf) and the Compact SUV segment (Tiguan) and, due to its huge popularity, ended up being called “Qashcow”. Creating the optimal proposition implies that many different factors need to be handled well: design, equipment, innovation, quality, finish, warranty, crash tests results … the list is endless. The major factor, however, cannot be changed that easily: the image.

The image (or desirability) is one side of the coin. How much the customer is willing to pay for the product is the other. If one particular car is more desirable than its direct competitors, the customer is willing to pay a premium. Premium cars are not necessarily better when it comes to the factors mentioned earlier, but they are usually more expensive ones. In the used car market the better performance of premium cars becomes most obvious. The used car values of the Porsche 911 are higher than those of the Corvette. Even if you convert these into percentages the Porsche will show higher values and “win” the comparison.

At BF Forecasts we like to take a different view of the traditional ranking of residual value performance. From the perspective of a car owner, the percentages are not that important – you lose money, not percentages. The percentages confirm the image of a model or brand, but the monetary loss is more relevant. Let´s have a look at an interesting article we published in Spain together with “Renting Automoción” in October 2013, called “Gigantes de Valores”. In the article we are looking for the cars with the best residual value performance in each segment.

In the C-segment, the Volkswagen Golf, Mercedes-Benz A-Class and Audi A3 occupy the podium – at least when it comes to the percentage ranking. The picture looks different when the focus is on the lowest possible depreciation measured in Euro. Two SEAT’s and a Citroën take the lead and there is no premium brand in sight. Another meaningful example is apparent in the Van segment. Again it is a SEAT spoiling the Volkswagen victory. With residual percentage values being roughly on the same level, the new car buyer loses significantly less money when buying the SEAT Alhambra than with the Volkswagen Sharan.

Eventually, both factors will be at the basis of a successful product – a strong image and an attractive pricing proposition. Buying a car is indeed an emotional decision and who does not like to drive a premium car? Economic difficulties can accelerate the process of people becoming more critical and cost-sensitive. It will be easier, and more common, to make a decent TCO calculation, taking into account the forecast monetary loss, costs for extra equipment, warranty conditions, related taxes (incl. BIK), fuel consumption under realistic conditions, insurance costs, as well as costs for maintenance and repair. The growing importance of TCO confirms that it is right to substitute the RV percentages with real monetary depreciation. This offers a level playing field for each brand that is listed in the “Gigantes de Valores” monetary ranking, which are not necessarily Premium brands.

Maarten Baljet
BF Forecasts


Authored by: Steven Schoefs