DeLorean CSI

In October 1982, the US government charged John DeLorean with cocaine trafficking in a deal he thought would stave off bankruptcy for his self-named company.

How did it all go wrong?

His DeLorean Motor Company sports car (A) came with several sales features. It had a rear-mounted engine, brushed stainless steel body panels, and its iconic gull-wing doors. Its original designation was the DMC-12, the “12,” reflecting its price, in thousands. But, when it came time to start taking orders, DeLorean dropped the name and raised the price.

The renamed DeLorean entered the market with 130 horsepower, priced at $25,000. As we see in B, no car with that amount of power came close to its price. The 1981 Audi 5000 Turbo, with the same horsepower, sold for $7,000 less.
Statistics reveal the sustainable prices for 1981 cars were a function of their horsepower and units sold (both P-values < 0.01).

As shown in C, the DeLorean’s predicted sustainable price was $15,500; its posted price was nearly three standard deviations too high.

To sell all 7,500 units it produced for $25K, D shows us its installed horsepower should have doubled to 262. As 1981 ended, it only sold 3,000.

Moral of the story: do market math.

#innovation #marketanalysis #valueanalysis #pricing #cars