Insight: RV management is essential at all stages of the model lifecycle

31 March 2017

Residual value is the ultimate measure of the strength of a vehicle make and model, according to the latest report from Autovista Intelligence, Launch Intelligence: Maximising Residual Value.

A strong residual value is critical for new car success in the fleet sector and increasingly in the retail market, as greater numbers of vehicles are bought through a finance package, particularly in the UK. But poor decisions on all aspects of a vehicle from design and specification to list price, promotions and targeted sales channels can quickly affect the residual value. This inflates the realisable leasing rate and forces manufacturers to resort to incentives to boost sales or to boost short-cycle and rental business to hit sales targets.

Launch Intelligence sets out the ′dos’ and ′don’ts’ of product management to help steer product development decisions and support residual values. It covers all aspects of product management from design to marketing, using a series of case studies to show where manufacturers have adopted effective residual value management strategies – and where approaches may have been lacking.

In terms of design, incremental change that remains true to a model’s heritage is a far better approach for maintaining values. Changes might not seem particularly exciting, but if a model is already seen as a design icon, then it is important to build on that, rather than do anything to jeopardise that position. When the new generation launches, buyers interpret these updates as improvements to the car which justify an increase in list price and subsequently residual value. Too dramatic a change and the predecessor can appear passé, with the result that residual values can tail off sharply. Alternatively buyers interpret the new generation as an entirely new car and they have no idea what value to put on both the current and the previous generation.

Volkswagen has been the most successful exponent of the ′slow and steady’ approach, observing the rule throughout the life of the Golf, with residual values holding steady for 40 years. Renault’s attempt to shake up the luxury executive car market and provide a car that was quite distinct from those offered by the main competitors – Audi, Mercedes and BMW – was less successful. The Vel Satis quickly divided opinion and residual values suffered, leaving the Vel Satis trailing at the bottom of the segment.

An effective pricing policy is also essential. Setting a high initial list price and then offering significant discounts to achieve monthly or annual sales targets creates spikes in new car sales. These can quickly ripple through to the used car market, harming valuations over the long term. In setting prices at a lower – but more achievable – level compared with competitors, Dacia has avoided discounts and, as a result, retains a much higher proportion of list price after three years.

But it is not always possible to impose such a policy. Marketing promotions are occasionally necessary to stimulate interest and new car demand. However, the nature and timing of those promotions can either be a help or a hindrance when it comes to effective residual value management.

Direct discounts, ′cash back’ incentives, or any promotion that has an obvious cash value should be avoided where possible. While they may boost new car sales volumes, they result in lower transaction values, which impacts new car margins and also brings the cost of a new car closer to that of a young used car. Under these circumstances, buyers will be attracted to purchase a new car rather than a used one.

Instead, it is far better to offer other incentives that reduce total cost of ownership (TCO), but have a less obvious cash value than taking a defined amount directly off the list price. In this respect, low interest finance packages, an extended warranty or free servicing are a better bet. Jaguar Land Rover adopted this approach in Germany offering free servicing on its vehicles to bring their TCO more closely into line with its direct competitors and saw a corresponding boost in sales.

The report also looks at the damaging impact of short-cycle business; it may bolster new car sales in the short term, but generates a strong supply of young, high-mileage vehicles with low values, pulling down the residual value of other similar age cars. Manufacturers should closely monitor competitors’ short-cycle business levels to ensure that their own activities are in line, or below the market average of around 20% of new sales. In the UK, Kia has tried to limit its short-cycle business to 10% of sales as part of a wider programme of residual value management. However, even without such an ambitious target, a more carefully managed level of short-cycle business relative to competitors will have a positive influence on comparative residual value positioning.