“GOD SAVE THE BRAND!” Why Honda was ‘Forced’ to Implement Price Restrictions on TrueCar…

Many view Honda’s decision to restrict pricing on TrueCar as a move to protect the profits of the Honda dealer network. However, in my opinion, the main reason was to protect American Honda and Honda Global’s shareholders from TrueCar’s brand diluting practices.

TrueCar, which seeks to commoditize the shopping experience for new vehicles, represents the most severe brand defection threat facing automotive manufacturers(“OEMs”) today. With billions invested in brand equity and dealer networks, Honda cannot afford for brand differentiation to occur on a price comparison website. Companies such as Apple, Sony, Louis Vuitton, and Rolex have deployed online pricing restrictions (and offline) for many years. In fact, in a 2007 landmark case, the Supreme Court ruled in Leegin Creative Leather Products Inc. vs. PSKS Inc., that manufacturers can stop selling to resellers that violated the manufacturer’s MAP policies (Read my post “Should auto manufacturers implement strict MAP (Minimum Advertised Price) Policies?“). However, Honda never attempted to regulate the prices their cars are sold for, but instead implemented a policy to protect their brand.

I believe Honda realized the following:

1. Shoppers are more loyal to automotive brands when they buy/service at the same facility
• In order for brand loyalty to occur, Honda drivers must be comfortable with the entire customer experience. This includes recognizing the value they receive on their new Honda from the same local dealership that will service it. If customers are not purchasing from their local Honda dealerships but instead the dealership with the cheapest TrueCar price (that could be a distance away), the entire dealer/market model is severely weakened, leading to brand defection for Honda.
2. Billions invested in facilities, brand identity requirements, and employee brand training
• Honda spent billions (along with their dealer network) to create “brand consistent” facilities, showrooms, and shops. These investments are required to show multiple-brand car shoppers the superior experience that they will receive from Honda and Honda Dealers. TrueCar’s intent of excluding the dealership’s showroom, and other brand investments during the pre-sale experience, will only lead to brand defection for Honda.
3. Price commoditization in GENERAL leads to brand defection
• Car buyers will not see Honda’s value if only viewing online prices
• In order to switch a TOYOTA customer to Honda, or any other combination, the customer needs to visit a showroom to learn what additional value a Honda can offer. While customers can/should use online sites for research, the transaction component of the car buying experience must occur within the dealer’s showroom to maximize this limited buying window (and prevent brand defection). If Honda shoppers cannot trust the Honda dealer that provided the original test drive, then they cannot trust the Honda brand. Moreover, if they shop a TrueCar price before visiting a Honda showroom and therefore fail to preview the value of Honda ownership, then they’ll end up with a Hyundai (as only the manufacturer with the cheapest prices wins under the commoditization model).
• Dealers are not focusing on assigned target markets
• The most effective means for dealers to obtain customers is to maximize marketing/outreach within their local and assigned markets. TrueCar’s model causes participating dealers to attempt to steal market share from markets out of reach, and forcing dealers that don’t participate in TrueCar’s model to face irate customers. In my experience, I’ve seen TrueCar BMW quotes (below invoice) from dealers nearly 2 hours away from my dealership. BMW requires us to serve our market with a finite inventory, so we cannot match a below invoice quote for a TrueCar customer, and too often this leads to brand defection as the customer ends up not trusting the brand. So, the end result of same-brand dealers not concentrating on their assigned market and instead other dealer’s markets is, you guessed it, brand defection.
• Dealers deploy bait/switch techniques
• Price comparison sites (e.g. TrueCar) only favor the dealers with the cheapest price on a specific car. Therefore, in order to effectively compete on TrueCar, dealers must deploy tactics to “bait” the customer into the store. Charles Kim, Director of TrueCar, admitted that bait/switch techniques were a chronic problem, and that TrueCar continuously suspended dealers for this practice. However, the bait/switch tactic is an inherent flaw with price comparison models, and also another factor leading to brand defection for Honda.
4. Affinity Relationship Conflicts
• Mercedes-Benz has mastered affinity programs by offering affinity members discounts that non-affinity customers cannot receive. TrueCar, with its affinity alliance, does not offer the affinity members any additional value from TrueCar dealers. Instead, it merely acts as a buying referral agent for members of groups like the USAA. There is no further discount for the USAA member vs. a shopper who came directly to the TrueCar site. OEMs realize this limitation, and also realize the best way to maximize affinity programs is to work with these groups directly.  Read my post: “OPPORTUNITY KNOCKING FOR OEMs? SET UP YOUR OWN AFFINITY PROGRAMS“!
5. Dealer Exclusionary Practices
• TrueCar excludes dealers in certain markets for arbitrary reasons. As explained in my post “TOUGH LUCK! : TrueCar to 70% of LA’s TOYOTA Dealers,” TrueCar excludes dealers from certain markets based on undisclosed variables that only they deem appropriate. This fundamentally conflicts with the 100+ year idea of car dealerships serving the needs of local markets.

TrueCar publically implies that American Honda does not believe in transparent pricing for their customers. However, this is merely an attempt to smear Honda’s reputation, as Honda posts MSRPs, incentives, and special programs on their own website. Any critic of Honda’s decision should realize that Honda’s management is required to protect their shareholders from threats to their business model. Honda’s action was consistent with their fiduciary duties to their shareholders, but incidentally, a measure that also assisted their dealers and customers.

It’s important to remember that the new car dealer is an extension of the franchised brand they represent. Customers perceive the dealer and the OEM as agents of a common purpose and BRAND, and they need to trust both in order for true brand loyalty to occur.

It’s refreshing to see common sense prevail.

For your reference, below is an excerpt from the Supreme Court’s decision in Leegin Creative Leather Products v. Kay’s Kloset:
“Minimum resale price maintenance can stimulate interbrand competition–the competition among manufacturers selling different brands of the same type of product–by reducing intrabrand competition–the competition among retailers selling the same brand. See id., at 51-52. The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” Khan, 522 U. S., at 15. A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.”

Default and Necessary Disclaimers:
•Opinions AND VIEWS SET FORTH HEREIN  are my own AND DO NOT REPRESENTS FACTS.   SUCH OPINIONS AND VIEWS COULD BE WRONG. They do not represent the companies named or cited in this blog.
•I am not a lawyer. This information, especially legal advice, can be completely incorrect. No warranties are provided or expressed. Any reliance on such information is solely at your own risk.
•I am not privy to ANY details of the backend operations/analytics of any company mentioned in this blog – notably TrueCar or Honda.
•This blog does not provide financial advice, and should not be interpreted as such.
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