The accelerating shift to electric vehicles (EVs) is intensifying the disruption in an already volatile post-COVID automotive market. The knock-on impacts are being felt right though the value chain, from new and used car sales and on to insurance, servicing and the aftermarket. Strategic pricing can help your business turn the gathering disruption to your advantage. Here’s how.

It’s been a bumpy few years for the auto market. Used car sales surged during the lockdowns and microchip shortages of 2021, but prices have since fallen away as vehicle production normalises.

Are new car dealers faring any better? Sales did pick up in 2023. But with output outstripping demand, prices are being driven down by the resulting competition to clear factories and forecourts.

It’s a much rosier picture in a currently thriving  aftermarket. But how long can that last? As new cars purchased post-COVID come into the second-hand market,   which could reduce the demand for parts and repair.

All change

While ups and downs are common in a continually cyclical market, there will be even bigger upheaval ahead as petrol and diesel give way to electric.

EVs accounted for over 16% of new sales in the UK in 2023, up from 0.4% in 2016. While questions over subsidies and charging capacity meant that the year-on-year increase in EV purchases hadn’t been as high as in previous years, the long-term trend is clear. 

The Government wants 80% of new cars and 70% of new vans sold in the UK to be zero emission by 2030, increasing to 100% by 2035. In many of Britain’s major cities, the switch to EVs is being accelerated by the growing adoption of ultra-low emission zones (ULEZ). On the supply side, more and more manufacturers are phasing out petrol and diesel production ahead of going EV-only over the next ten years.

Gauging the market impact

So, what does the switch to EVs mean for pricing and wider business models? Old assumptions about vehicle value and price depreciation will need a fundamental rethink for EV engines, which don’t wear out through wear and tear, but through gradual loss of battery capacity. 

The lifespan of an EV is still a matter of debate as the battery technology is relatively new and production models haven’t been around for long enough to say with any certainty. The pace of battery degradation is also dependent on how the car is driven and charged. What we do know is that a carefully driven and generally slow-charged EV needs less repair and can sustain performance longer than a petrol counterpart. Diesel engines can outlast both petrol and EV, but this is a market in sharp decline. The relatively low maintenance and sustained performance of an EV will not only affect demand for parts and servicing , but also the skills required in workshops where there is less grease and more technology. From a market perspective, the enduring performance of EVs is likely to reduce the levels of trade-in and the flow of vehicles through various stages of the used car market – nearly new, five-years-old etc.

But as one door closes, another opens. If we look at the specific impact on different segments of the auto market, a rethink of pricing models could help to sustain relevance and returns:

New cars

Lack of charging capacity could hold up EV adoption in the short-term, but EVs will eventually make-up the bulk of new sales.

The premium purchase price enjoyed by EVs is likely to disappear as they come to dominate new car sales. We’ve already seen major price cuts, most notably by Tesla.

The endurance of an EV means that while some drivers will still want a brand new car as before, others may feel less urgency to replace their existing EV if it continues to perform well.

Possible pricing options

We’re already seeing moves towards more leasing and subscription models that include regular servicing and battery warranties. Uncertainties over long-term battery performance could heighten the demand for warranties.

More drivers may also opt for leasing as an alternative to traditional finance as it could prove cheaper in some cases. It would also allow for regular upgrades in a fast-advancing EV technological arena.

Used cars

Demand for used EVs is growing as more come onto the market and drivers take the opportunity to switch to hybrid and electric at a more affordable second-hand price.

In the longer term, the whole new depreciation profile of an EV means that the algorithms used to price second-hand cars will need to be overhauled, with judging when the battery would need changing as the key criterion . While fewer trade-ins will reduce supply, this could raise prices and reduce speed of sale. 

Possible pricing options

The immediate priority is developing new pricing guides based on battery life as well as factors that can influence speed of sale such as age, mileage and service history. 

The importance of upselling in areas such as warranties and maintenance contracts is likely to increase. While EVs have fewer parts to go wrong, the complex electrical components still need regular monitoring and care. As we’ve seen in markets such as heating equipment and aero engines, the use of real-time sensors can augment the reliability and speed of fault detection and repair, while tying customers more closely to the manufacturer or dealer.

Insurance

EVs are less susceptible to defects. But when something goes wrong, putting it right is more costly. And when the damage is caused by an accident, the higher costs inevitably impact on insurance prices. According to the Association of British Insurers, EVs are over 25% more expensive to fix than their internal combustion engine (ICE) equivalents and take 14% longer to repair. It is also more likely that relatively ‘minor’ collision damage could result in vehicles being written off. 

Possible pricing options

Insurers already use a demand-based dynamic pricing model. As policyholders look to reduce their premiums, we may also see a growing switch to the sensor-enabled pay-as-you-drive and pay-how-safely-you drive models, which are already common in markets such as South Africa and the US.

Servicing and aftermarket

With fewer engine components, the switch to EV could reduce demand for servicing and aftermarket parts. The impact is likely to be heightened by the fact that insurance companies often write EVs off rather than paying the high cost of repairs.

But features common to all vehicles including tyres, suspension and brakes will still need regular maintenance and repair as before – possibly even more because of the weight distribution of the EV battery.

The Independent Automotive Aftermarket Federation  is lobbying for the ‘right to repair’ on competition and economic grounds. For environmental reasons, consumers may also press for more ‘make do and mend’ as an alternative to needless scrapping.

Possible pricing options

Some leading servicing companies are moving to a dynamic pricing model that aligns charges with levels of demand – e.g. weekdays versus weekends. The aftermarket and possibly other areas of the auto industry could follow suit.

How to get ahead of the curve

How can your business take advantage of these pricing options? Two key priorities stand out:

1/  The short-term priority is being able to pull existing pricing levers more effectively, such as demand-based pricing. If you’re quiet, price low to attract demand. If you’re busy, push up the prices to maximise revenue and returns. If your products are not easily comparable, can you increase your price. If they are common, try and price closer to the market.

The longer-term shift is thinking about what consumers want in this changing market, where you can best compete and what kind of pricing model is right for your evolving business. In similarly disrupted industries such as software, many businesses are moving away from one-off sales to more bundled, subscription and service-oriented models.

2/ Get data-savvy

The businesses out in front recognise the importance of effective data and analytics in informing pricing and keeping pace with changing costs, competition, market dynamics and customer requirements.

We’ve seen the benefits in other industries. This includes working with several transport and logistics companies to implement advanced analytics that enable them to monitor and adjust their pricing strategies. One ferry company implemented a pricing monitoring tool for its freight strategy, through which it can now assess the impact of various pricing strategies on clients’ supply chains and make data-driven decisions that directly impact its margins.

Don’t miss out

Through a strategic review and rethink of your overall approach to pricing , you can get more customers through the door and maximise revenues in the short-term, while gearing your business model for the changing market dynamics ahead. You can also build stronger relationships and gather associated data that will strengthen your competitive position.

If you’d like to know more about the different pricing developments and strategies in the automotive industry and how your business could benefit, please get in touch.