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Asian teenager holding keys to new car

For luxury carmakers, the lowest end models in their product lines often represent only a small portion of their sales. Yet these models are critically important when it comes to attracting new customers and, potentially, establishing their lifelong loyalty to the brand. Accordingly, more high-end, traditionally expensive brands have developed comparatively less option-laden options to lure first-time and unconventional buyers to their dealerships.

The most prominent entrant was Mercedes-Benz, which introduced its CLA model at a base price of less than $40,000. When consumers realized that they could purchase or lease a Mercedes-Benz for approximately the same monthly price that they would spend for a high-end Toyota or Honda, many of them switched happily. For the most part, the target market for such models includes young professionals. These consumers earn a steady income that enables them to take on a car payment, but they cannot pay for a new car outright, and they need their monthly payments to fit their budgets.

Noting the success Mercedes was enjoying, Audi added the A3, for a base price of less than $30,000. With a stated goal of appealing to young, cool, urban drivers, Audi promised that they could “upgrade” from their non-luxury brands, though the differences between the A3 and high-end versions of comparable Hondas or Toyotas have little to do with actual upgrades to the cars. That is, both likely provide leather interiors and sunroofs. Rather, the key difference is the image benefits that driving a luxury brand offer to consumers.

The lack of distinction in the amenities offered by the luxury brands might constitute a risk too. One test driver, after cruising around in a Mercedes CLA, deemed it similar to the experience of driving a Honda. Such attitudes could readily overturn the distinctive and long-standing advantages that luxury brands have enjoyed. If enough people come to perceive that driving a luxury car is no different from driving a midrange car, those image-based benefits from luxury branding would disappear.

For Mercedes and Audi though, the risks appear subordinate to the potential and realized benefits. Both brands have enjoyed sales increases due to the introductions of these low-end models. Furthermore, these purchases are not repeat buys: Approximately 60 percent of new A3 drivers and 75 percent of CLA purchasers are new to the brands. Such statistics suggest an expanded market for the brands. As these buyers age, advance in their careers, and consider more expensive car purchases, they should be more likely to continue visiting the dealerships that provided them with their very first luxury automobile.

Source:

Mark Clothier, “The Downside of Low-End Luxury Cars,” Bloomberg Businessweek, July 17, 2014, http://www.businessweek.com

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