Toyota Prius Case Study

There are many reasons why people want a revolutionary car. Some enthusiasts enthuse about scientific and technological advances and want the latest gizmos. Others rebel against fuel price increases, even though fuel is cheaper than it has been for decades. Finally, people are ‘concerned about the environment’. Hoping that all the above was true and looking to grab a technological advantage over other car manufacturers; in 2000 Toyota introduced Prius, their first hybrid car. Prius means ‘to go before’, so is a name that may be very prophetic.

The Prius and the Honda Insight are the first in a wave of hybrid family cars coming out ahead of similar vehicles from GM, Ford and Daimler Chrysler. At first glance, the Prius seems to have a lot going for it. It combines a 1.5 litre, four cylinder petrol engine and a 33-kilowatt electric motor. It comfortably seats five, if the three in the back aren’t too tall or too big and has 0,34 cubic meters of luggage space. The electric motor starts the car and operates at low speeds, using a nickel metal-hydride battery. At higher speeds, the Prius automatically switches to the internal combustion engine. Under normal motorway conditions, it should get 28 km per liter.

The downside is that the Prius is no muscle car. It also costs about 4,000 euros more than the Toyota Echo, although they are nearly the same car. Of course, getting twice as many kilometers per liter of petrol will help to offset the price differential. Assuming the range and a typical 2002 price of one euro per liter, the Prius owner would have to buy 4,000 liters of petrol, enough fuel for 112,000 km, which could take years.

Of course, if prices were to rise drastically, that could change. But even if prices doubled-which is not likely-you’d have to drive more than 50,000 km to make up the initial price difference. The picture gets even gloomier when you realize that no one is going to get the estimated fuel consumption anyway. The Environmental Protection Agency (EPA) has admitted that its testing procedure overstates petrol mileage by as much as 15 per cent. It tests cars on a chassis dynamometer, where the driven wheels turn freely on a set of rotating drums-far from normal driving conditions.

In addition, hybrids use regenerative braking to recharge their batteries, with the result that braking during the EPA driving cycle is feeding more energy back into the system, boosting estimated petrol mileage. Although this offers a fuel saving, the overall cost of ownership looks less attractive. Compared with the family ‘Car of the Year 2004’, the conventionally powered Toyota Avensis 1.8 T3-S, the Prius looks poor value. Although the Prius saves on fuel, its overall running cost comes out higher than that of the equivalent Avensis.

The reason is its 25 per cent higher service or contract hire cost. On the brighter side, Toyota and its competitors believe that costs will decrease once production of hybrids begins to yield economies of scale. The benefits of scale would not stop with the producer. For example, a major part of the cost of the car is the nickel metal-hydride batteries. A company such as Panasonic could reduce the cost of producing batteries through research and development, it the market merited such an investment and could further reduce the price of batteries through its own economies of scale.

However, realizing that cost reductions are a way off that fuel savings aren’t going to be the key to convincing people to purchase the Prius, car manufacturers have asked for tax incentives to stimulate purchase of clean-fuel and high-mileage cars. Several governments are providing incentives to people to buy hybrid cars. The US government offers $ 2,000 federal income-reduction and the UK government offers reduced car tax on initial purchase. Electric car drivers can also avoid London’s GBP 5 per day Congestion Charge.

Are consumers ready for hybrids? Do improved gas mileage and emissions standards affect their buying decision? A glance at car sales in the last 10 years would suggest not. The biggest sales growth was in gas-guzzling 4 x 4s. After all, we rarely saw Range Rovers 10 years ago, now they’re a fairly common sight. People, it seems, think it’s a good idea for their neighbors to drive green machines, not themselves. Actually, when the Prius was introduced, it flew out of dealer’s showrooms. Between July and October 2000, Toyota sold 2,610 Priuses and had difficulty keeping up with demand. By the end of October 2000, the cars were waitlisted until January.

Of course, much of that sales success is attributable to Toyota’s clever marketing. Two years before introduction, Toyota began educating consumers about the Prius. The company established a website to distribute information and also sent e-brochures to 40,000 likely buyers just before the introduction. Within two weeks. Toyota sold 1,800 cars based on the email message. In all, Toyota spent €15 million in 2002 promoting the Prius.

There were print ads in magazines, but the bulk of the campaign was in television advertising. Ads running before the actual introduction used the tag line ‘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 introduction, the ads appealed more to emotion, with tag lines such as ‘ When it sees red, it charges’ – a reference to the car’s recharging at traffic lights. The headline captured the consumer’s attention through ambiguity.

Only through focusing on the ad could the consumer learn why the headline was accurate. Again, the appeal is based on the technology of the car. Finally, Toyota took advantage of Earth Day to send out green seed cards shaped like Toyota’s logo to prospective buyers, wrapped some Priuses in green, and gave away cars at Earth Day events. Of course, €15 million is just a drop in the ocean compared to Toyota’s overall marketing budget of € 200 million in 2002, but Toyota was satisfied with the effectiveness of the campaign, given the ‘newness’ of the car and the need to explain its technology. Much of this success can also be attributed to the narrow targeting of the ads.

The company expected the first hybrid car buyers to be ‘techies’ and early adopters (people who are highly likely to buy something new). They were right. Many Prius owners are immersed in thee technology. They flood chat rooms with discussion of the car. The website urges owners to ‘Kick some gas’. Owners immediately began tinkering with the car’s computer system.

One owner 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 worked out how to use the car’s dashboard display screen to show files from his laptop, play video games, and took at rear-view images from a video camera pointed out of the back of the car.

One Austrian consumer installed a sniffer – a device on the car’s computer network that monitors messages. With the sniffer, he will be able to hook up add- ons such as a MiniDisc Player, an MP3 player, a laptop computer and a TV tuner. In the past, owners using mechanical skills customized cars with paint, lowered bodies, and souped – up engines. In the future, customization may rely on being computer savvy. Even though the Internet was a major part of the Prius launch, Toyota does not sell the car from its website.

Buyers go to online to pick a color and decide whether they want a CD player and floor mats- the only options available from Toyota. After that, the dealers get involved, but it takes specially trained salespeople to explain and promote the Prius. Consequently, only 75 per cent of Toyota dealers handle the car. Many of them are not happy about the need to train salespeople. And why should they be?

Margins are higher on gas-guzzlers, which are also easier to sell. Given dealer reluctance and consumer resistance, why have Toyota and Honda spent so much on their hybrids? While part of the answer is government regulations, a bigger part of the answer is competition. All car manufacturers concede that they will eventually have to move to hybrids to raise petrol mileage and lower emissions, and all of them have plans to do so. Ford, for example, plans to introduce an Escape SUV that will get 17 km/litre. Daimler Chrysler says that 15 per cent of its sport-utility vehicles will be hybrids that will get 20 per cent better fuel efficiency than conventional vehicles.

General Motors is betting on hybrid buses and trucks. Toyota hopes, however, that its early entry will be the basis for a system of hybrids from ultra compact ‘minicars’ to luxury saloons, sport-utility vehicles, and even commercial trucks,. The mass market, however, values space, comfort, and power. Although hybrids may have space and comfort, power would appear to be elusive. Without greater power, it will be interesting to see whether consumers, who like speed on those open autobahns and acceleration on alpine roads, will settle for a hybrid. Questions1.

Outline the major macroenvironmental factors-demographic, economic, natural, technological, political and cultural-that have affected the introduction and sales of the Toyota Prius. How has Toyota dealt with each of these factors? 2. Evaluate Toyota’s marketing strategy so far. What has Toyota done well? How might it improve its strategy? 3. In your opinion, what are the advantages of Toyota’s early entry into the hybrid market? What are the disadvantages? Should Toyota have waited- like Ford, GM and Daimler Chrysler?

4. What needs and reasons would drive someone to purchase a “green” car? View as multi-pages TOPICS IN THIS DOCUMENT Electric vehicle, Fuel economy in automobiles, General Motors, Hybrid electric vehicle, Internal combustion engine, Plug-in hybrid, Toyota, Toyota Prius RELATED DOCUMENTS Toyota Prius Case Study …Marketing 3301 Toyota Prius: The Power of Excellence in Product Innovation and Marketing 1. In what stage of the product life cycle is the Toyota Prius? Explain. The Toyota Prius was in the market introduction stage then it matured into the market growth stage. In the Product life cycle there are four different phases.

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