How Mercedes slid the CLA below $30,000

As Mercedes-Benz's U.S. marketers brainstormed in 2009 about how to attract youthful buyers with a compact sedan then being developed, it quickly became clear what they needed most -- an un-Mercedes-like sticker price.

Something, say, less than $30,000.

That's what the marketing team wanted and that's what it got for the front-wheel-drive CLA that arrives in showrooms this fall. But it meant jumping through a series of hoops to persuade Daimler executives in Stuttgart.

"From our earliest product concept, when they asked us, 'Where does it need to be?' we always said $29,900,'" said Steve Cannon, CEO of Mercedes-Benz USA. "We wanted to shock people."

And that's pretty much what they did last month in a 30-second Super Bowl commercial that proclaimed the price in big, bold numbers.

Still, it was a three-year effort to get Germany to agree not only to price the sedan at $29,900, before the $925 shipping charge, but to announce the price so long before it goes on sale in September.

"It was a phenomenal accomplishment that we ended up with the pricing we asked for," said Cannon, who was head of marketing when discussions on the subject began in July 2009.

"Germany knows we are trying to open our brand and we are trying to get younger buyers," he said. "You can have great styling that speaks to them. But if you do not bring your transaction price to the point where they can reach your brand, you aren't going to accomplish your objective."

The CLA, a sedan with coupe styling, is the first of three compact fwd vehicles that Mercedes will offer in the United States. The GLA compact crossover goes on sale in August 2014 and the B-class electric sedan debuts in early 2015.

But the CLA is regarded as the halo car at the bottom of its range.

"We said, 'Here is the opportunity with one car to redefine the perception of the Mercedes-Benz brand,'" Cannon said. "People always put us up into this stratosphere. We are associated with the S class and heads of state."

U.S. team members knew they needed a significant price gap -- at least $5,000 -- between the CLA and the C-class sedan so there would be no cannibalization, said Bernie Glaser, Mercedes-Benz USA marketing boss.

The 2013 C250 sedan, Mercedes' current U.S. entry car, is priced at $36,275, including shipping. Typically equipped, the average transaction price for the C class tops $40,000, Glaser said. The average C-class buyer is 51 years old with a household income of $137,000.

With the CLA, Mercedes wanted to aim at 30- to 40-year-old buyers.

In 2010, a few influential U.S. dealers were flown to the Mercedes design studio in Irvine, Calif., for an early look at the CLA. It was unusual for Mercedes to let dealers see a product so early but management wanted their support in the pricing talks with Germany.

The feedback we got was that Stuttgart was concerned about cannibalization of the C class," said Joseph Agresta Jr., president of Benzel-Busch Motor Car Corp. in Englewood, N.J., and chairman of the Mercedes dealer council. "There was always a concern about dilution of the brand."

He said the dealers "all agreed the [lower] price point was not an issue for us."

But the dealers wanted the CLA to come standard with advanced safety and collision-avoidance features, a luxurious interior and the latest entertainment and communications system, Agresta said. The ability to go online and link smartphone applications is especially important to the young buyers Mercedes was targeting, he said.

For nearly two decades, Mercedes-Benz USA had rejected selling the small European A and B class in the United States. But with Mercedes' new generation of fwd cars, the U.S. executives felt they had stylish vehicles that would appeal to Americans.

Still, Cannon and his team had plenty to do. They had to show Stuttgart that a lower entry price would bring in more buyers and retain them as their income grew.

Cannon shot down concerns about customer loyalty by citing the numbers. Mercedes' loyalty rate was 58.6 percent last year, the highest among luxury brands, according to R.L. Polk & Co.

He said much of the back-and-forth with Stuttgart dealt with the price needed to attract a certain volume. But with the CLA "there was also a brand discussion -- the brand opportunity."

The U.S. team had something else going for it: The CLA would be built in a new factory in Kecskemet, Hungary. Labor costs in Hungary are lower than in Germany, where the previous generation A and B class were made. Also, the new factory will make several models using a new flexible architecture.

"It made a big difference," Cannon said. "Without that we would not have been able to do it."

And the U.S. team had some clout at the Hungary plant, too. They wanted a big piece of the CLA's annual production. Initially the factory will make 150,000 vehicles a year and likely double output to 300,000 units annually by 2015.

Cannon won't say how many CLAs Mercedes-Benz plans to sell annually in the United States but said it will be more than a niche vehicle.

In October 2012, Cannon and Glaser went before the Mercedes-Benz management board to present the business case with projected volumes. They had the support of Joachim Schmidt, Mercedes-Benz board member for sales and marketing.

Mercedes-Benz USA pitched the $29,900 price with the assumption that the average transaction price would be between $33,000 and $35,000 compared with $42,000 for the C class, Cannon said.

The price will break a psychological barrier, have "a wow effect," Cannon said. "And it is a double-wow effect when you look at the sheet metal."

The U.S. team proposed a CLA with standard features such as collision control, a seven-speed automatic transmission and power seats so that "people who step into this realize it isn't a stripper car," Cannon said.

The board signed off on pricing in late October 2012.

In November, Stuttgart agreed that Mercedes-Benz USA could announce the price in the Super Bowl commercial.

"For us that was a huge victory, to get the price point that we wanted," Cannon said. "We don't always win that battle -- sometimes production or content costs are higher and we make compromises along the way so that the price we settle on is actually higher. This time, we got exactly what we wanted."