General Motors: Pricing Mistake Sinks Future Sales

Many people assume General Motors (GM) filed for Chapter 11 bankruptcy in June 2009 because of the recession. Arguably, this was not really the case.

Instead, in 2005, GM led one of the most successful car sales promotions ever which acquired customers from the worst possible place: the future.

In 2005, GM was selling an average of 6% less vehicles than the year before. Marketing executives needed a solution, and came up with a rather revolutionary idea.

What they proposed was selling vehicles with the highest possible discount available: employee discounts.

So, each vehicle was sold at employee discount pricing, and the results were unprecedented.

In June of 2005, they sold 41% more vehicles than they had the June before. Vehicles were literally selling off the lots.

However, by the end of August, sales began to plummet. In October, sales were down by 23%, and GM saw negative growth for the rest of the year.

What happened? Why did this revolutionary new promotion suddenly stop working?

1) GM Ate Their Entire Market Share Too Quickly

Because this offer was so attractive, many people that were poised to buy a vehicle some time in the future decided to purchase a vehicle sooner.

Think of it like this: Only a certain number of customers will potentially buy a car each year. They represent a big bowl of gumballs. What GM did was consume all of their gumballs before the Fall of 2005.

However, why didn't GM generate huge profits with all of these customers buying their cars so quickly?

2) GM Boosted Sales But Killed Profits

What GM realized is it had boosted revenue, but killed its profits, and it 2005, the company posted a $20.9 billion loss.

Take a look at this graph showing the difference between revenue and profit, following the employee pricing program, at Shanghai General Motors:

GM was the leader is car sales for 77 straight years, but fell to second place in 2008. In June 2009, the company filed for bankruptcy.

In a sudden need to boost revenue, marketing executives saw the need to boost sales by creating the most attractive offer they could think of. Unfortunately, in the pursuit of profiting customers, the killed their own.

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