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Originally Posted by mgescuro
GM: The New Service Company
...yet another commentary by mgescuro...
When one thinks of General Motors, one usually thinks of a large, manufacturing based company. General Motors is the builder of auto parts, auto systems, and automobiles themselves. However, recent development and announcement made by General Motors in recent week points to a seemingly fundamental change in their business strategy – selling services (presumably high margin services).
True, General Motors isn’t new to selling services. OnStar has been a part of General Motors automobiles for nearly a decade. Cusomter who buy GM vehicles are typically given a year of OnStar service. Then comes the annual fee to maintain OnStar service.
Assume the life of a car is 5 years. At $200 a year, for the Safe & Sound plan, a typical GM customer can spend $800 extra to maintain Onstar, which is essentially a convenient insurance program. It gives customers piece of mind while driving. GM sells approximate 4.5 million cars in the US, each available with the Safe and Sound plan. Assuming GM retains 50% of those customers for the next year, at $200, that’s $450,000,000 in additional revenue. GM has already incurred the cost to develop and deploy the infrastructure for Onstar. What does this mean for GM?? A massive infusion of ready cash!!!
Now we know that there is a Direction & Connection system for Onstar at $400 a year. Now assume of the 50% that decide to renew Onstar, 10% go for Direction and Connection.. That’s $495,000,000 in additional revenue.
Now GM has announced Onstar Turn-by-Turn Navigation for an additional $100 added to the Safe & Sound plan. According to GM, by 2007, there will be 2M cars capable of using the Turn-by-Turn service. Assume 25% of those customers choose to retain Turn-by-Turn Navigation. That’s $150,000,000 extra in GM’s pocket.
Obviously, GM’s finance department has run far more complex and “real world” scenarios based on their ready data, but you get the picture. GM is attempting to monetize their existing services further in order to gain additional revenue. This ultimately will support GM’s bottom line. Also, this support the perception of GM’s cars. No other car company has a support system as extensive or as advanced as Onstar. The added security of using Onstar as a lojack system or an emergency system appeals to many customers.
What I find the most intriguing is the convenience of getting an email with the status of your automobile’s systems is something many customers find important, as many live busy lives and don’t have the time to know when to take their car in. However, this also has the added effect of subtly reminding the customer to get their car to the dealership to spend more money on GM parts and services and to support the GM dealership network. The effect is, a GM customer goes to a GM dealership to service their GM car. A relationship is formed between the customer and the dealership, and as that relationship is formed, the customer will tend to go back to that dealership perhaps in a few years to trade in their car or buy a 2nd or 3rd car. This again gives GM an advantage for gaining and retaining long term customers.
But there is a certain subset of customer that don’t want to pay for these services. Many would prefer the upfront cost of a $1500 DVD-based navigation system over a $300 annual service. Plus there is the added perception of having navigation screen over a smaller, perceived lower-tech LCD screen. Also, many customers can view GM’s new services as a way of “nickel and diming” you after you’ve bought your car. Many people just want their car with no additional for-pay services attached, and they will see it as a nuisance.
Ultimately, if GM offers cars with a navigation option instead of forcing customers to resort to the Onstar paid services, then this negative perception is really unfounded as GM is providing the choice. But GM would prefer you pay for the Onstar service. It’s additional money in their pocket with minimal investment on their part. And for GM... That’s not a bad thing.
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