Halden Zimmermann’s latest blog post
Volvo observed a glint of weakness in the SUV market and decided to take advantage of the situation by offering a product which provides everything the top sport utility sellers have, but with a safer design. The anxiety in the consumer market fuelled 6000 orders for the new Volvo XC90 even before one customer got behind the wheel for a test drive, which falls into the same category of knee jerk demand which occurred when consumers started buying bomb shelters during the Cuban missile crisis. The reason Volvo is already so successful centers on the competitive alternatives offered in the same niche market and how the XC90 SUV acts as a substitute. Specifically Volvo centered it’s product to compete with the Acura MDX, Lexus RX 300, Mercedes ML320 and the BMW X5, focusing of high end SUV consumers who are looking to drive with a good conscience. The table below compares top consumer preferences from a first glance perspective, and how the Volvo XC90 ranks in this niche.
The highlights in the table under the Volvo column are shaded green where Volvo was 1st in class for the category and yellow it was comparable to it’s substitutes. Notice how the price is the only comparison that is red, Volvo knows that they have a differential factor focused on safety and therefore the price their vehicle with that in mind. The Volvo out prices the status symbol conscious M-class and the high performance BMW, making safety an investment rather than just another option.
Loyalty versus Price Elasticity:
The ability for Volvo to charge a premium price for it’s product is directly related to the strength of the substitutes available for the SUV. The current SUV has direct
replacements for performance and status, however Volvo has patented is safety features and is using driver anxiety over death or protecting children as a fairly elastic lever to set their prices higher than the market competition. Drivers of the XC90 develop a utility function that is not quenched by any other vehicle in the market due to the Volvo patents for safety designs. A person with children typically has a high utility for options that will keep them safe which increased the price elasticity of the safety feature.
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