Hold the High Ground Trumps all Other Pricing Rules

 

Daimler’s Freightliner and Western Star brands held 40% of the US heavy truck business in 2014, followed by Paccar at 26% with its Peterbilt and Kenworth marques and Navistar and Volvo each come in at 12.5%. This is a low growth, mature and highly competitive industry. Paccar, the subject of this study, has not lost money since 1939 and, not withstanding the economic turmoil of 2008-2009, its return on equity has averaged 16% over the past thirty years.

 

Fleet Operator’s Viewpoint

 

Synonymous with quality, Paccar has two brands in its stable: Kenworth and Peterbilt which are widely regarded as the highest quality trucks made in North America and the company does not fail to receive JD Power awards for its trucks as well as for its service. Paccar maintains its high standing despite charging premium prices.

 

What is Paccar’s secret to being able to sell at a premium? There is none. It is able to show that its trucks run better, run longer and its cost to operate is lower than its competition. This is vitally important to the fleet operator who looks at a fraction of a cent per mile in making procurement decisions.

 

As an example, a 2015 Kenworth W900L Sleeper lists at around USD165 000 and if it is driven 125 000 miles a year, the operator has to budget around $125 000 every year in operating expenses for fuel, repairs and insurance and all of these expenses are in addition to wages and benefits. It was for this very reason that Kenworth designed low drag, streamlined trucks 4 decades ago, well before its competition.

 

Quality leadership is a tenuous place

 

Quality leadership of Paccar’s kind is difficult to hold and there are three reasons for this: one cannot say one has a long-lasting product unless one has a product that has lasted a long time. This reputation take a while to establish but can evaporate in an instant. The second is the complexity in building a very involved, large, high-quality machine. The store-house of knowledge is passed on from engineer to engineer only when the company provides a stable, collegial workplace and thirdly, owing to purchasers’ myopic vision, they tend to be steered by the selling price rather than by future savings.

 

Owner-Driver’s Viewpoint

 

Paccar addresses the obstacles by its strategy of being the quality leader. It looks at quality not through the eyes of the fleet operator but through the viewpoint of the owner-driver. Owner-drivers increase their pay by driving themselves and their rigs for longer, harder, sometimes driving 16 Hrs a day. They look at efficiency but also have a broader view since their truck is their office, home, lounge and TV room on the road. Also, with the Paccar brand comes a kind of Harley-Davidson aura. The dealers are highly trained and experienced and their configurator tools allow the purchaser to custom design their rigs. Since Paccar builds each truck to order, inventories are low, both of production items and finished goods.

 

Paccar’s strategy is to do something well and consistently over the long haul.

 

Paccar’s make to order model means its variable costs are higher. The higher margins endears it to its dealership base which is more dedicated and loyal. Paccar does not make small trucks, only large ones and in the large truck sector it does not make cheap products.

 

In the design studio, on the shop floor, in the executive suites all the talk and focus is about truckers and the truck industry. They have no need for consultants to come in and tell them where their core competency lies or who their main customer is.

 

This is Paccar’s strategy. Good strategy is about design and design is about fitting various pieces together so they work harmoniously together.