Wednesday, August 19, 2009

Employee Pricing II

It was employee pricing that drove the old General Motors Corporation into bankruptcy. I’m not talking about employee pricing for employees, of course, but that time when, as a gimmick, they offered the employee discount to the general public. So many extra people went out and bought cars that there were no customers left to buy a car during the next two years. Sales tanked. To make matters worse, the linear thinkers at GM extrapolated the sales gains from the promotion and decided they needed to build lots of extra cars at the exact time when no one was buying them.

Well, here we go again. This time, it’s a government program that is providing a sudden spurt of car buying, this month and this month only. The Cash for Clunkers program is meant to improve our national fuel efficiency, and at the same time, allow Detroit to sell off its huge excess inventory so that maybe it could stay in business and not go bankrupt.

And GM’s response? Instead of taking the chance to reduce its inventory while it can, it’s making plans to boost production — not now, when the extra cars could conceivably be sold to the Cash for Clunkers shoppers, but around November, after it is too late to matter. After Cash for Clunkers, sales will fall off to a lower level than before, because many of the potential buyers will have made their purchases already. It will be the same thing that happened with the employee pricing promotion. GM will have a huge inventory on its hands and no one to buy it.

The new GM is repeating the exact same mistake that led the old GM into bankruptcy. And the result? Well, it’s hard to have a good feeling about it.