Good Marketing or Pure Evil?

Yesterday NY Times columnist Thomas Friedman had a column in which he claimed that a truly responsible presidential candidate would promise to institute Federal gas taxes which would set a per gallon price floor, and guarantee that gas prices would never go below $4/gal again. This, he argued, would give people the incentive to pull their heads out of the sand and adopt more fuel efficient lifestyles.

I don't think that's a particularly good idea, because if gas prices are up to stay, then $4/gal is not high enough to make any kind of a difference, and if they're not, then why hurt people for no terribly good reason? Generally speaking, price is a pretty good reflection of supply and demand (until you start mucking around with it artificially) and so why not let the price itself tell people that they need to conserve, if they do?

What particularly struck me, however, was a section where he laid into Daimler-Chrysler for their current promotion, where if you buy or lease a new Chrysler, Dodge or Jeep, they will subsidize your gas (for your first 12,000 miles per year) to a price of 2.99/gal for three years.

Cynical ideas, like the McCain-Clinton summertime gas-tax holiday, would only make the problem worse, and reckless initiatives like the Chrysler-Dodge-Jeep offer to subsidize gasoline for three years for people who buy its gas guzzlers are the moral equivalent of tobacco companies offering discounted cigarettes to teenagers.

I can’t say it better than my friend Tim Shriver, the chairman of Special Olympics, did in a Memorial Day essay in The Washington Post: “So Dodge wants to sell you a car you don’t really want to buy, that is not fuel-efficient, will further damage our environment, and will further subsidize oil states, some of which are on the other side of the wars we’re currently fighting. ... The planet be damned, the troops be forgotten, the economy be ignored: buy a Dodge.”

Now I'd seen this promotion a couple weeks ago, and it struck me as a pretty smart idea. Let's say that gas prices are likely to remain around 4.50 for the next three years (which maybe some consider optimistic, but I've got to pick a number). No the promotion actually only covers a specific number of gallons of gas per year, based on the published MPG of the model bought, and 12,000 miles per year. Let's pick an MPG of 20/MPG.

At that rate, Daimler-Chrysler would spend $900/yr on paying for the gas subsidy, or $2,700 over three years. That's actually pretty typical for the price of a new car promotion. You often see promotions with $3000 to $5000 in "cash back" or with "0% APR", which ends up being a value of $3000 to $5000 on a five year note which is not paid off early.

So the $2.99 gas promotion involves giving away about the same amount of money that Daimler-Chrysler normally gives away on a new car purchase, but it does so via a means which serves to illustrate the value of that give-away clearly. One of the difficulties in promoting high ticket items like cars is that people often turn off their price sensitivity when they sit down to pay more than a certain amount. When someone is spending $20,000 on a new care, getting $3000 off (or paying $3000 for a special "package" of features) doesn't actually seem like that much to them.

However, because we buy gas all the time we tend to be oversensitive to the cost of gas. Often I'll find myself driving an extra couple miles to go to the gas station which I know usually has prices $0.05 lower per gallon than other stations -- despite the fact that the five cent savings will amount to no more than one dollar even if I fully tank up.

So what Daimler-Chrysler is doing is finding a way to explain their usual $3000-$5000 promotion in a way that applies directly to a customer sore-spot.

More to the point, it's actually in Daimler-Chrysler's interest to sell more fuel efficient cars under this promotion, since they're only covering 12,000 miles worth of gas, regardless of fuel efficiency. And it's in the customer's interest to drive no more than 12,000 miles per year, which is a pretty modest amount for many Americans.

Frankly, I don't see what the fuss is about, though I suppose one gets to feel very righteous if one can figure out how "the man" is trying to get us all down while destroying the earth at the same time.