Question

In 2003, Porsche unveiled its new sports utility vehicle (SUV), the Cayenne. With a price tag of $40,000 (2003 dollars), the Cayenne went from zero to 62mph in 9.7 seconds. Porsche’s decision to enter the SUV market was a response to the runaway success of other high-priced SUVs such as the Mercedes Benz M-Class. Vehicles in this class had generated years of high profits. The Cayenne certainly spiced up the market, and Porsche subsequently introduced the Cayenne Turbo S, which goes from zero to 60 mph in 3.8 seconds and has a top speed of 176 mph. The price tag of the Cayenne Turbo S in 2018 was around $130,000.

Some analysts questioned Porsche’s entry into the luxury SUV market. The analysts were concerned not only that Porsche was a late entry into the market, but also that the introduction of the Cayenne would damage Porsche’s reputation as a maker of high-performance automobiles.

Question: In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of ots image and the performance of the Cayenne?

Answer 1

Question:

In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the Cayenne?

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In any market, profit margins can exist as long as the seller is able to charge a much higher price, than the cost of production. In markets like monopolies and oligopolies, such margins can be maintained.

Porsche can't assume that the profit margins will remain forever. There are many more brands that have now entered, and the automobile market is now a global market.

As markets become more competitive, the profit margins are bound to go down. Porsche's pricing decision will also depend on that of competitors. The freedom of charging any price is likely to be lost.

Maintaining the profit margin will be a challenge for Porsche, in the longer run. In the short run, Porsche can bank upon its image and its legacy. While the performance of the Cayenne is exemplary, it is nothing unique in today's global market.

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As is mentioned, the entry of the Cayenne was in response to certain competitors. The entry was quite late, and that class of the market had already generated high profits.

If a market has generated substantial profits for a long period of time, new entrants will enter. This will actually reduce the profit margin. Porsche's entry has been considered quite late by experts. Further, the Cayenne is more of an SUV, and doesn't fit well with Porsche's sporty image.

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Due to all such reasons, it will be difficult to maintain profit margins. The market has become more competitive and Porsche has also diluted its own image.