Prius: Leading a Wave of Hybrids Strategy Analysis

Americans love their cars. In a country where SUVs sell briskly and the biggest sport is stockcar racing, you wouldn’t expect a small, hybrid, sluggish vehicle to sell well. Despite such expectations, Toyota successfully introduced the Prius in 2000, and Honda introduced the Insight. The Prius, whose name means “ to go before,” literally flew out of dealer showrooms, even if consumers weren’t quite sure how to pronounce it ( it’s PREE-us, not PRY-US). Given Toyota’s success with the Prius and Honda’s with the Insight, other automotive companies have plans to introduce hybrids of some sort.

Hybrid vehicles have both a gas engine and an electric motor. When starting up or at very low speeds (under 15 mph), the auto runs on the electric motor. At roughly 15 mph, the gas engine kicks in. This means that the auto gets power from only the battery at low speeds, and from bothe the gas engine and electric motor during heavy acceleration. Once up to speed, the gas engine sends power directly to the wheels and, through the generator, to the electric motor or battery. When braking, energy from the slowing wheels—energy that is wasted in a conventional car—is sent back through the electric motor to charge the battery.

At a stop, the gas engine shuts off, saving fuel. When the driver presses the accelerator, the electric motor kicks in. When starting up and operating at low speed speeds, the auto does not make noise, which seems eerie to some drivers and to pedestrians who don’t hear it coming! The original Prius was a small, cramped compact with a dull design. It had a four-cylinder gas engine and a 33-kilowatt electric motor. It went from 0 to 60 in a woeful 14. 5 seconds. But it got 42 miles per gallon. The 2004 Prius is a much spiffier-looking car that can hit 60 mph in 10.

5 seconds and get 55 mpg. Its top speed is 105 mph and it goes from 30 to 60 in 4. 5 seconds. Although that sounds like a big improvement, in actual driving it isn’t so exciting. One test driver referred to the Prius as laboring its ways to 60 in 10. 5 seconds; then taking another 10. 5 seconds to get to 80, and then he didn’t have enough time in the day to get to 100 mph. The car ran a quarter-mile track in 18 seconds at a 77 mph; so the test driver concluded that you could drag race any school bus, confident of victory.

But you better watch out for SUVs—they can blow you off the road! A muscle car, the Prius isn’t. In a country where everyone was ecstatic when governments raisd speed limits above 55 mph, why would the Prius be so successful? For the first model, the answer lies in Toyota’s clever marketing campaign. To begin with, it wasn’t aimed at the mass market. Instead, Toyota thought that the first hybrid buyers would be “techies” and early adopters (people who are highly likely to buy something just because it’s new). The company was right.

Once Toyota identified the target market, it was able to educate the right consumers 2 years before introduction. The company established a Web site to distribute information and set e-brochures to 40,000 likely buyers just before the introduction. The press was also excited about the technology. Auto magazines, and even general interest media, ran articles describing, enthusing, or belittling the hybrids. All of this coverage helped Toyota sell 1,800 cars immediately. In all, Toyota spent $15 million in 2002 touting the Prius.

There were print ads in magazines such as Newsweek and Vantity Far, but the bulk of the campaign was in television advertising on channels such as Discovery, the History Channel, the learning Channel, and MSNBC. Ads running before the actual introduction used the tagline, “ A car that sometimes runs on gas power and sometimes runs on electric power, from a company that always runs on brain power. ” These ads helped to position Toyota as an “environmentally concerned” company and more subtly stressed the technology aspect of the car. After all, Americans love technology and are quick adopters of it.

After introduction, the ads appealed more to emotion with taglines such as “ When it sees red, it charges,”- a reference to the recharging of the battery at stoplights. Such ads are based on ambiguity where the headline attracts attention because its meaning is not clear. The consumer must process the information in the ad in order to interpret it. The result is higher ad impact and longer ad recall. Toyota also took advantage of the environmental appeal by sending out green seed cars shaped like Toyota’s logo to prospective buyers on Earth Day.

They also wrapped some Priuses in green and gave away cars at Earth Day events. While $ 15 million in advertising may sound like a lot, it’s really just a drop in the bucket compared with the $ 190 million that Toyota spent overall to market cars and trucks in 2002. For the first 6 months of introduction, Toyota sold close to 5,000 cars, which is quite good given the newness of the technology, the dull design , and the lack of muscle. Much of the Prius’s success is based on correct identification of the target market.

Many early purchasers were attracted by the technology, began to modify cars, and shared their experiences through chat rooms such as Priusenvy. com. The object of attachment was the computer system. One owner in Philadelphia was able to add cruise control (an option not offered by Toyota) by wiring in a few switches in the car’s computer system. The founder of the Priusenvy. com Web site figured out how to use the car’s dashboard display screen to show files from his laptop, play video games, and look at images taken by a camera mounted on the rear of his car.

One Austrian consumer installed a sniffer—a device on the car’s computer network that monitors electronic messages. With the sniffer, he could hook up add-ons such as a MiniDisc Player, an MP3 player, a laptop computer, and a TV tuner. Even though the Internet played a major part in the Prius launch, Toyota does not sell the car from its Web site. Buyers go to www. prius. toyota. com online to look at colors and decide on options such as CD players and floor mats. After that, the dealers get involved, but it takes specially trained salespeople to explain and promote the Prius.

One of the most common questions dealers are asked is “Does it have to be plugged in? ” the answer is no; you push a button and it starts. But if you want the high fuel efficiency of the car—nearly 60 mpg-you have to operate it correctly, and many Prius owners haven’t done that. Therefore, Toyota is planning to launch an educational campaign aimed at salespeople and consumers. It will also put an operating manual in the glove compartment of each new car. By 2004, Toyota had skimmed off the market of techies and adopters and needed to launch a new version of its car to appeal to a wider market.

To launch the new Prius, Toyota spent more than $40 million dollars spread over media in more consumer-oriented magazines and TV. It seems to have worked, as Prius sales are up 120 percent and will likely reach 28,000 units this year. The new Prius is a sleek, Asian-inspired design that comes in seven colors, such as salsa read pearl or tidal and pearl. The most popular color is silver metallic with a gray/ burgundy interior. Once inside the Prius, you find a stubby switch to engage reverse or drive and a push button that turns everything on.

A 7-inch energy monitor touch screen displays fuel consumption, outside temperature, and battery charge level. It also explains whether you’re running on gas, electricity, regenerated energy, or a combination of these. There are also screens to show how much electricity you have stored and to arrange your air conditioning, audio, and satellite navigation system. The interior is roomy and practical, with plenty of rear legroom. There are many storage space cubbyholes and shelves in the front, as well as a deep dashboard which leaves ample space for maps, books, and even your lunch.

The CD player holds six discs. In all, it’s quite an improvement over the 2000 models. Besides the improved styling and performance, higher gas efficiency, and “environmentally friendly” aspects of the car, there are also governmental breaks on the car. The federal government will give you a $ 1,500 tax deduction, and some states allow single-occupant hybrids in HOV (High Occupancy Vehicle) lanes. Although the federal deduction will be phased out in the near future, other bills are pending to extend the tax break based on greater fuel efficiency and lower emissions from vehicles.

In the summer of 2004, gasoline prices began to rise – going to over $ 2 a gallon in some locations. There were fears that this would not just be a summer spike in prices, but a permanent increase. As a result, buyers moved toward smaller SUVs, cars, and hybrids. Sales of full-sized SUVs such as the Ford Excursion and Expedition and the Lincoln Navigator fell during the first 4 months of the year followed by a sharp drop in April. Sales of GM’s Hummer tanked 25 percent. At the same time, demand for Priuses increased.

By June 2004, waiting lists for the Prius often stretched to 6 months or more and some dealers had quit taking deposits. Spots on dealers’ waiting lists were being auctioned on Ebay for $500 and some dealers tacks as much as $5,000 to the car’s sticker price of $20,295 to $ 26,000. At the same time, automotive companies were trying to move the gas-guzzlers by offering incentives. Until last December, Toyota’s allocation scheme gave the US and Japanese markets roughly the same number of cars, but late in 2003, Toyota allotted 47,000 Priuses to the US market and 70,000 for the Japanese market.

Frustrated dealers and customers besieged Toyota with letters and calls of complaint. As inventory levels dropped and waiting lists lengthened, Toyota increased monthly production from 7,500 vehicles per month to 10,000 and eventually to 15,000. Toyota President Fujio Cho announced that the increased production should alleviate the shortages. But he made it clear that Toyota has no plans at present to start production at a second plant. Toyota and Honda are not the only companies in the hybrid market. While the Japanese have created new cars,

Ford began production of a hybrid model of the Escape SUV, giving consumers a choice of a hybrid or regular model. To promote the hybrid, Ford began an environmental print campaign built around mileage, emissions, and other environmental concerns. Later in 2004, the campaign broadened to include TV. GM is following a similar strategy, putting hybrid technology in vehicles that uses the most gas. GM claims that each of its hybrid buses (sold to cities) will provide the fuel savings of 8,000 hybrid cars.

It has also developed a hybrid model of its Silverado truck that will hit the market in late 2004 or early 2005. By 2007, GM expects to be making 1 million hybrids of some sort. Analysts believe that US automakers need to get into the hybrid market because of the internal learning curve —“the quicker you get into the game, the quicker you get the real-world experience at developing and marketing these vehicles. ” Clearly Toyota is the leader in hybrid sales with the Prius, and its Lexus division planned to introduce a Lexux SUV hybrid in the fall of 2004, moving hybrids up to the luxury car level.

The company began taking orders for it during the summer. Thus, Toyota has a big jump on US automakers who have only dabbled in this market. If gas prices remain high or rise even higher, Toyota will be very well-placed to take advantage of the scramble for hybrid cars. Perhaps Mr. Cho would decide that a second plant is needed after all. Questions for Discussion: 1. What microenvironmental factors affected the introduction and relaunch of the Toyota Prius? How well has Toyota dealt with these factors? 2.

Outline the major macroenvironmental factors—demographic, economic, natural, technological, political and cultural—that affected the introduction and relaunch of the Toyota Prius. How well has Toyota dealt with each of these factors? 3. Evaluate Toyota’s marketing strategy so far. What has Toyota done well? How might it improve its strategy? 4. GM’s marketing director for new ventures, Ken Stewart, says “ If you want to get a lot of hybrids on the road, you put them in vehicles that People are buying now. ” This tends to summarize the US automaker’s approach to hybrids. Would you agree with Mr. Stewart? Why or why not?