When Peter Schutz became CEO of Porsche AG in January 1981, the German carmaker was in big trouble. Sales were declining. The company was losing -- yes, losing -- money. Employee morale was in the basement, and the iconic 911 was about to be discontinued. In his new book, The Driving Force: Extraordinary Results with Ordinary People, Schutz tells how he turned around the company by challenging conventional thinking and motivating people to perform at peak levels. In this excerpt from the section entitled, "Pricing the Porsche 944," Schutz discusses the pricing strategy for a new key product.
In 1981, Porsche was faced with the opportunity to introduce the Porsche 944 automobile into the U.S. market. In its day, this constituted a significantly differentiated product. It offered unique performance and styling. The question arose: What is the appropriate price for this automobile?
We had a big pricing meeting. The sales department had done its homework. In concert with the financial establishment, a cost had been determined for the car. At the time, a production level of about 70 cars per day had been projected.
I remember posing the question, "What is the proper price for this new product in the U.S. market?"
Armed to the teeth with the best and latest financial cost information, the sales people responded, "$24,000."
I asked, "Why $24,000?"
"Because that is what it will take to make a reasonable profit," they responded.
I had reached a point where I had to be careful about what I did next. I could have disagreed, told them what I thought was right, and tried to use my authority to force the decision my way. Everyone would have been sure the new product would fail because Herr Schutz had insisted on doing it "his way" instead of "the right way." We might have taken a great leap backward in our efforts to make the best of the driving force in the organization. On the other hand, I could not let this decision be made in a way that I was pretty sure would not lead to maximum success for the new product. I did not disclose what I believed was the "right" answer. I challenged their thinking instead.
Specifically, I decided to put a spotlight on their reasoning and the statement that a price of $24,000 would "make a reasonable profit." I replied with, "That is not what I asked you. I would like to know: What is the proper price for Porsche to optimize the return on the investment we have made in this car?"
This response resulted in major confusion. Cost-plus pricing was an integral part of the company culture; it was the way it was done. Nobody had thought about how to optimize the business by selling large numbers of cars; they were thinking instead about how to achieve a reasonable margin on each car we might sell.
To clarify the issue, I rephrased the question by making my request more specific: "At what price would this new product generate a volume level of 150 units per day? At what price would this new product be a major success in the U.S. market and make full use of available production capacity?"