Ford's Model-T: Pricing over the Product Life Cycle

Ramon  Casadesus-Masanell

Journal Article | Abante: Estudios en dirección de empresas | 1998

Ford's Model-T: Pricing over the Product Life Cycle

Abstract

The pricing decisions monopolistic firms make over time are determined to a large extent by the complex interplay of two distinct sets of elements: demand- and supply-based considerations. Demand factors include the possibilities of (a) exercising dynamic price discrimination, and (b) enhancing information diffusion about the product's characteristics. The main cost (i.e., supply) element influencing pricing over the Product Life Cycle is the possibility to exploit learning economies. Although these two sets of factors — demand and supply — are inter-linked in complex ways, I will propose a methodology to separate them. I will apply this procedure to the case of Ford's Model-T. We will be able to disentangle by how much demand issues (as opposed to cost based factors) affected the level and slope of the observed price sequence. I will also point out some issues regarding experience curve estimation and will outline a technique that allows for endogenous generation of sales and unit cost predictions.

Keywords: Experience and Expertise; Decisions; Forecasting and Prediction; Cost; Price; Information; Demand and Consumers; Monopoly; Product; Sales; Complexity; Auto Industry;

Format: Print

23 pages

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Citation:

Casadesus-Masanell, Ramon. "Ford's Model-T: Pricing over the Product Life Cycle." Abante: Estudios en dirección de empresas 1, no. 2 (1998): 143–65.

This Teaching Note accompanies the case HBS No. 718-419, “Hilti (A): Fleet Management.” It provides guidelines for class discussion, as well as a board plan and transcripts of the associated videos, Hilti Fleet Management Video Supplements.
The associated case explores the strategic decision-making process of premium power tools manufacturer Hilti in 1999, when the company was considering implementing a fleet management system in the construction industry. Fleet management would involve a shift from selling power tools to leasing them as a service. For Hilti, it represented an entirely new business model, which would substantially differentiate the company from its competitors. While fleet management had the potential to significantly improve the customer experience, Hilti was already a successful firm under its extant model and had to decide whether the restructuring of its business model was worth the risk.

Supplement | HBS Case Collection | June 2017 (Revised May 2018)

Hilti Fleet Management Video Supplements

Ramon Casadesus-Masanell, Oliver Gassmann and Roman Sauer

This case explores the introduction of fleet management in the construction industry by the premium power tools manufacturer Hilti in 2000. Following its customers’ needs, Hilti moved from selling power tools to leasing them as a service. The introduction of the new business model contributed significantly to the success of Hilti, since it sustainably differentiated the company from its competitors. For instance, the adoption of fleet management resulted in customer loyalty levels five times higher than under the dominant business model Hilti had formerly employed, and over-proportioned profit contribution at Hilti. Hilti’s Chief Technology Officer described the importance of the innovation as follows: “Hilti developed many very innovative and successful products over the years, but they paled in comparison with the fleet management business model, which was the most important innovation in Hilti’s history.” All told, Hilti, which had about 22,000 employees and made about 4.5 billion Swiss Francs (or $4.589 billion USD) in sales in 2015, managed 1.5 million tools under fleet management contracts in 40 countries, resulting in a contract value of more than 1.2 billion Swiss Francs (approximately $1.4 billion USD).

Case A describes the strategic decision-making process regarding the introduction of fleet management in its early planning stages.

Keywords: Hilti; business model innovation; fleet management; decision-making; decision making; Implementation; power tools industry; Construction industry; Construction; Europe; Switzerland; strategy; Liechtenstein; Business Model; Restructuring; Transformation; Transition; Customer Value and Value Chain; Construction; Leasing; Strategy; Decision Making; Construction Industry; Switzerland; Liechtenstein; Germany; Austria; Europe; United States; Asia; Brazil; China; Latin America; North America; Africa; Japan; Hong Kong;

Citation:

Casadesus-Masanell, Ramon, Oliver Gassmann, and Roman Sauer. "Hilti Fleet Management Video Supplements." Harvard Business School Multimedia/Video Supplement 717-808, June 2017. (Revised May 2018.) View Details

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This case explores the strategic decision-making process of premium power tools manufacturer Hilti in 1999, when the company was considering implementing a fleet management system in the construction industry. Fleet management would involve a shift from selling power tools to leasing them as a service. For Hilti, it represented an entirely new business model, which would substantially differentiate the company from its competitors. While fleet management had the potential to significantly improve the customer experience, Hilti was already a successful firm under its extant model and had to decide whether the restructuring of its business model was worth the risk.

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Ford's Model-T: Pricing over the Product Life Cycle

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