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Ford’s Idea: Pay More To Get Less

Ford Motor Co. recently announced its new plan to spur interest in the redesigned 2011 Explorer: Ask customers to pay more to get less.

The vehicle will come with a standard 3.5-liter V-6 engine with 290 horsepower, but, for a little extra, Ford will swap in a less powerful four-cylinder engine instead.

This makes me wonder: Is there something in Detroit’s water that causes automobile executives make bizarre decisions?

Ford plans to present the lower-powered alternative as a more fuel-efficient option, catering to customers who are worried that gas prices may increase once again. The automaker apparently thinks this is an important demographic, despite the fact that anyone who pays attention to such things will have noticed that gas prices are in fact falling. Jim Hall, principal of the automotive consulting firm 2954 Analytics, told Bloomberg News that prices in the U.S. have fallen 34 percent from their peak two years ago.

Vehicles with the smaller engine will not be able to tow as much and will have decreased off-road capacity, according to Ford. The souped-down SUVs will also almost certainly be worse at highway acceleration, especially when laden with baggage and passengers.

Jim Holland, the Explorer’s chief engineer, told Bloomberg that he thinks customers will be willing to pay the premium nonetheless. “To get great fuel economy it takes technology, and it’s our view that people will pay for that,” he said.

Ford’s wishful thinking seems to be rooted in the fact that, up to this point, a slice of the public has been willing to pay more to get hybrid or electric-powered cars that promise to cut fuel costs and pollution emissions.

Depending on consumers’ priorities, paying more for a different type of engine may be reasonable. But paying more for less of the same does not make sense. No one would pay extra to get a smaller, standard burger, even though the smaller sandwich would have fewer calories and less fat. And no one is going to want to pay more for a smaller gas engine.

Ford’s pricing of the new Explorer is even harder to understand when we consider the decision by the automaker’s own Lincoln brand, announced just a few days earlier, to eliminate the premium price for a hybrid version of the MKZ sedan. Lincoln will sell conventional and hybrid versions of the luxury sedan for the identical base price of $35,180. Eliminating the premium price will probably boost sales of the hybrid, since buyers will be able to take advantage of lower fuel costs without having to pay a higher price up front. Selling more hybrids will, in turn, allow Lincoln to drive down unit costs and increase the cachet of its brand, which is struggling against Japanese and European competition.

The Lincoln MKZ pricing strategy assumes that the only sure-fire way to get customers to go green is to offer them a no-lose economic proposal. If gas prices continue to drop or the buyer ends up not driving the car enough for the difference in fuel costs to be significant, at least he hasn’t wasted any money upfront by betting on long-term returns that never materialize.

The small-engine Explorer, on the other hand, puts consumers in a no-win situation. Even if fuel costs do go up, the buyer is still stuck in an underpowered gas-engine SUV when he would probably do better to just drive a smaller car or an actual hybrid. And, having paid a premium for the small engine, a buyer who doesn't drive much, or who keeps the car while gasoline prices stagnate or fall, is simply going to feel like an idiot.

So what were the folks at Ford thinking? Are they eager to feature in a business school case study? Or maybe the executives at Ford are big fans of AMC's Mad Men, whose season premiere was Sunday night. Perhaps it sent them scurrying back to the long-locked office liquor cabinet. If that's the case, watch out. The last bunch to get into that sauce is best remembered for giving us the Edsel.

Ford may have a better idea (to reprise a 1960s advertising slogan), but charging more money for less car certainly isn’t it.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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