EV affordability – the proactive product manager’s playbook

The automotive industry is in flux. Carmakers are pivoting from internal combustion engines (ICE) to battery electric vehicles (BEV), from selling cars to offering car subscriptions, all while dealing with tougher regulations and intense competition including new market entrants. In recent years, automakers and leaders across the supply chain have had to become crisis experts, with the war in Ukraine and economic uncertainty placing further strain on the fragile ecosystem. On top of this, most countries have made zero-emission pledges, which alongside the growing consumer demand for electric vehicles (EVs) is putting pressure on original equipment manufacturers (OEMs) and the automotive industry to transition quickly.

Automotive leaders need to respond to the multiple challenges this transition brings them, as impacts are being felt across their organisations, in areas as diverse as upskilling and retaining staff, adapting manufacturing facilities, building new supply chains, devising new product portfolios, and designing new programme management frameworks to come to terms with new development timelines.

However, a point raised by many senior industry leaders is the impact of the battery on the material cost of the vehicle, and the requirement to price accordingly to ensure ongoing profitability. Across all market segments, BEVs are often more expensive than their internal combustion predecessors and counterparts.

 Deloitte’s Global Automotive Consumer Study demonstrates that the level of consumer interest in moving toward EVs has stalled on a year-over-year basis as cost-conscious consumers, weighed down by inflationary conditions, are finding it difficult to afford the transition.

This raises the question – how can OEMs ensure accessibility and mass market appeal of higher priced products?

Go-to-market innovation

An answer lies in the continued growth of financial products such as Personal Contract Purchase (PCP) and “non-ownership usage” models such as leasing, for example, Personal Contract Hire (PCH) and subscription. According to the latest Deloitte Future of Automotive Mobility study to 2035 report, 57% of private car purchases across Europe will be through leasing and subscription by 2035.

From the customer’s perspective, these methods of purchase seem tantalising. Instead of a lumpsum headline pricing figure for their hypothetical new BEV, the customer can instead see a more accessible monthly figure. With BEVs especially, this value proposition can be enhanced with additional products around charging and can include insurance and maintenance to further sweeten the deal and simplify things for the customer. Subscription can also offer the additional benefits of flexibility, such as the opportunity to swap between different vehicles within a lease term, often with short notice from the OEM’s portfolio.

These financial products have two important figures at their heart –the first, of course, being the manufacturer’s retail price for the vehicle. The second is the residual value of the vehicle at the end of the term covered by the agreement.

With the former being heavily influenced by the battery supply chain and its knock-on impact on vehicle pricing, can car manufacturers do anything to improve the latter?

Enabling transformation through residual value enhancement

By protecting as much of the vehicle’s residual value as possible, the customer will pay less to cover their term of ownership or usage of the vehicle – simply put, the financial burden of depreciation becomes smaller.

OEMs have several levers to pull to ensure that the residual value remains as high as possible. At its most fundamental, it is a practice of optimising the parts of the product offer that make it more desirable to the customer base.

Strong, segment-leading vehicle performance or capability is a significant contributor, such as EV range, charging time or overall efficiency.

Offering desirable features is also vital – this could be in the form of desirable EV feature content such as a heat pump to improve range or an onboard charger that enables high-capacity charging. Similarly, class-leading in-car technology, navigation, and infotainment can assist. Ensuring each derivative has a competitive level of feature content is important. Furthermore, the ability for future owners to add software features not specified by the first customer – “over the air” software features such as parking assistants – can make the vehicle more attractive for longer periods.

Appealing visual differentiation can help as well. This can be in the form of more attractive wheels, dedicated exterior and interior design packages or premium colour and trim.

Another crucial factor is OEM’s brand health – stronger brands have greater customer appeal, and thus depreciate slower than weaker brands, so brand managers are important players in the conversation as there is a need to maintain the credibility and reputation of the brand. For established OEMs, a storied brand can be a powerful differentiator in a crowded, contested marketplace.

Making subscription work

Subscriptions work by taking the fundamental vehicle lease cost – where the vehicle’s residual value matters – and adding on the maintenance costs and insurance costs for the duration of the agreement. The provider must work to optimise all three to beat the competition. It must accurately understand the total cost of ownership (TCO) and develop the car to reduce this.

Focusing on service intervals and vehicle quality, more reliable vehicles with longer service intervals will contribute to fewer dealer visits for scheduled and unscheduled maintenance. By making repairability in the event of a collision easier and cheaper, the cost of insurance could in turn decrease, resulting in lower TCO.

It is imperative for the brand or the automaker to hold on to excellent practices across the organisation to maintain the reliability and quality of the products offered. Engineering capability, durability testing standards, quality control procedures and processes need to be streamlined to ensure the reduction of parts failure that arise on a vehicle. Longer service intervals and fixed-price, benchmarked servicing pricing from dealerships are critical.

Vehicle packaging can also be a factor. By ensuring parts are easily accessible, repairs become faster, further reducing the cost burden at the time of maintenance. By placing expensive parts such as technologically advanced headlights, radar systems and cooling systems in less vulnerable positions, repair costs in the event of an accident would be lower, bringing down the costs of insurance.

Putting the customer offer at the forefront of strategy

Since it's clear that the levers controlling many of these decisions lie beyond the traditional role and responsibility of the pricing team or product marketing department. Many of these decisions are instead made in engineering and vehicle design teams.

Indeed, some of the decisions related to the design of the car and packaging of key features are taken very early in the product development process and are difficult to reverse once they are committed to.

Therefore, the focus on residual value and TCO must become embedded across the organisation. The OEM could remove pricing flexibility when taking the vehicle to market without addressing these decisions at the appropriate point and considering the likely impact on the residual value and TCO.

Innovative go-to-market models are becoming increasingly important to OEMs faced with the challenge of launching new BEVs, whose underlying cost base drives a higher sticker price.

Delivering compelling pricing models, however, is not just the work of the sales & marketing function. Focussing on optimising the residual value and total cost of ownership is an organisation-wide effort – where the vehicle's research, design and development capabilities are as significant as the pricing model.

By placing the pricing model and offer strategy at the forefront of the product strategy phase and designing the vehicle and customer offer to achieve cutting-edge residual values, brand reputation, vehicle quality and total cost of ownership, OEMs can offer more competitive monthly rates that feed PCP, lease, and subscription ownership models. To transform the customer offer is to transform the organisation.