Ducati posts record sales in 2012, but it’s not just down to mechanical engineering – financial engineering plays a part, too.

Ducati-1199-Panigale-R

Despite their stratospheric price point, Ducati are churning out – and selling – record numbers of motorcycles. It sold around 44,000 units worldwide in 2012, an increase of 4 per cent on 2011 figures. Revenues were up by 16 per cent year on year, to total 606 million Euros. Sales in the US – Ducati’s most important market – totalled around 9,300 units, up by 21 per cent on 2011 figures.

Things look to be going just as well on the other side of the Atlantic. Last year, a number of UK dealers sold their allocation of Ducati’s flagship superbike – the 1199 Panigale – before their tyres barely had time to mark the showroom floors. One Ducati dealer I spoke to managed to sell every Panigale they had before their demo bike was even delivered!

For a niche manufacturer to grow by that much, in this economic environment, at their price point, is pretty good going. Ducati are asking at least £15k for the base model Panigale – serious money for a weekend plaything – yet punters are snapping them up like they’re being given away.

The obvious question at this point is: who has that sort of money to spend in today’s dreary economy? Well yes, you could argue that there probably are a few thousand people in the world rich enough to be able to drop £15k on a motorbike, but it’s more than that. Flick through a Ducati catalogue and you’ll find that none of its offerings are exactly at entry-level prices. And buying a motorbike of any description is a heady financial commitment, recession or not.

The more I think about it, the more fascinated I become. And I think their success can be distilled down to down to 2 main things:

  • The product: you’ve got to get people to choose Ducati over and above competitors’ offerings
  • The finance: structuring the finance deal to encourage people to sign on the dotted line.

The product

Let’s think about the product, first.

Or products, to be more precise. Ducati has expanded its range considerably over recent years and currently has 24 models on offer, under 6 different product categories. The company has used the strong Ducati brand – built from years of honing its products in the high-end sports and commuter street bike sectors – to attract new customers whilst still serving the Ducati stalwarts. Within this, though, lies another masterstroke: even the pure, sports-bike-mad veterans will want something a little friendlier to ride eventually. Ducati are giving them this option, whilst still allowing them to be part of the Ducati family.

Just where has the brand’s Herculean strength come from in the first place? Ducati has always seen a decent amount of success on the race circuit, having dominated the Superbike World Championship pretty much since its inception in the late 1980s: winning 13 rider’s world titles and 16 manufacturer’s titles in the 24 years the series has been going.

The old adage of ‘win on Sunday, sell on Monday’ doesn’t quite apply in the same way that it used to, but the Superbike World Championship is still an important shop window for manufacturers. To enter a bike in that championship (and its variants, Supersport and Superstock), there has to be a road-going version of it on sale to the public. It won’t be identical (the race bikes aren’t exactly bereft of the racing team’s engineering tweaks), but in theory you could toddle off down to your local dealer and order a bike that looks, sounds and (almost) goes like the ones on the TV.

But Ducati has done more than win races to make people want their product: they’ve actually made it worth having. Stand next to a Ducati in a showroom and it looks and behaves like a premium product. This wasn’t always the case.

Years ago, there used to be two foolproof ways to tell whether or not it was going to rain. One, cows would sit down. Two, Ducati electrics would go into some sort of anaphylactic shock. Nowadays, neither of these particularly rings true, with scientists discrediting the first and Ducati engineers putting paid to the second.

Ducatis have forever been capable of stirring deep, uncontrollable torrents of desire in even the most miserable and unfeeling of creatures, but historically, have never been all that reliable. However, thanks to falling servicing costs needed at ever lengthening intervals, the days of taking out a second mortgage to budget for a series of random running repairs are well and truly over. This no-nonsense approach to quality will appeal, even if you have to financially cripple yourself to get hold of one of the bikes in the first place.

Or do you? Ducati have done the first bit right and come up with something that people a) want and b) are prepared to pay for. But being prepared to pay and having the ability to pay can be two very different things. This is where the Ducati finance package comes in.

The finance

The Ducati Tri-Options finance package has been shipped over from the car world, so in one way or another, has been around in this basic form for a while. Variants of the Tri-Options Personal Contract Purchase (PCP) scheme exist all over the world, but the basic principle is the same throughout. The bargain you strike at the dealer has two sides to it. For their part, they let you take a shiny new motorcycle away in return for putting down a small fraction of what it’s worth upfront. For your part, you have to keep up the monthly repayments over the next few years of happy ownership, whilst trying not to put too many miles on your shiny, new pride and joy.

After three years with Tri-Options, you have a choice. You can either: part exchange the bike for a new one with your friendly neighbourhood Ducati dealer; pay off what you owe to own the bike outright; or hand the bike back to Ducati and renew your bus pass.

Sounds simple, right? Well yes, but look more closely and these finance packages are really a masterstroke of financial engineering. They’re designed around some key principles of behavioural finance to push all the right buttons inside our heads, hypnotising us into doing what’s in the best interests of the manufacturer.

Let’s have a look at a ‘representative’ example of the Ducati Tri-Options package:

trioptions

This comes from the Ducati UK website. This probably isn’t the first time you’ve seen something like this, particularly if you’ve bough a new or nearly new car fairly recently. But have you ever noticed that when these deals get presented, the good news always comes first?

Ducati could just as easily start by telling you about the total amount payable or what the APR is. It would be the same information, on the same deal, presented differently. So it wouldn’t really make a difference, would it?

As it happens, it does. The choices people make can and do depend on how that choice is put to them, or framed. This is something that’s consistently observed in the psychology and economics literature.

Let’s say I give you £100. I know, how generous of me! Then I give you the chance to double that money in a double or nothing gamble. I can present this gamble in two ways: I can tell you that if you gamble, you’ll have a 70 per cent chance of going home with £200. Or, I could say that if you take the gamble, you’ll have a 30 per cent chance of going home with nothing. It’s still the same gamble, so in theory, you should pick the same option whichever way the proposition is presented. But research has consistently shown that people have a preference for positive over negative frames: more people gamble when you tell them that they have a 70 per cent chance of winning than if you tell them that they have a 30 per cent chance of losing.

And so it is with bikes. The deposit is presented next to the cash value so that you can see how small it is in comparison. The small monthly payments are presented before the whopping final payment of £6k, to make it easier to swallow. The total amount payable and APR charges are left right until the end, so you’ll be too busy marvelling at the low deposit and low monthly payments to take it all in.

The finance company has to present this information by law, but do you think as many people would take up the offer if they hit you with the bad news first? Not likely.

But don’t people baulk at the prospect of having to fork out thousands in one go to keep the bike after year three? Not at the time of deal they don’t, because of something called hyperbolic discounting. In other words, people psychologically place much less of a weight on the value of something in the future than they do today. It might say £6k on the piece of paper, but it’s not. It’s £6k in three year’s time, which doesn’t feel nearly as bad. Findus may well have more chance of coming up with a 100 per cent beef lasagne than you have of paying that off; but you won’t let that bother you now.

And then there’s another question: why use this example? That’s down to anchoring. Anchoring happens because a person’s decision making can be affected by an original starting value (or anchor). For example, when asked to value the same property after being given different anchor values (i.e. someone comes up to them and randomly says ‘I think this is worth X’), estate agents have been consistently shown to come up with values that are correlated with the arbitrary numbers provided. The lesson: once you put a number into someone’s head, it sticks.

So, once Ducati have shown someone this example, it is likely that his or her end choice will be influenced by it in some way. In reality, these deals are fully flexible: you can put down a higher or lower deposit and change the monthly payments. But this is the deal that Ducati want you to see and anchor your choice to: dealers get a reasonable size deposit as collateral that brings cash into their businesses, whilst being able to make a few quid out of the finance, too.

And what happens when you’ve reached the end of your three-year tenure and reach decision time? Do you hand it back and walk away, cough up the remainder or get something shiny and new?

You’re unlikely to walk away with nothing, because of loss aversion. People have been shown to dislike losing something by roughly twice as much as they like gaining it. So unless you really can’t afford the monthly payments, handing it back and going without is going to be too much of a wrench. Lucky that Ducati have offered you a couple more options then.

Will you pay off the outstanding amount and owning the bike outright? Maybe, because there’s an endowment effect at play here. Experiments have consistently shown that we demand more money to part with something that we own than we would be willing to pay for it in the first place. Therefore, unless you’ve crashed it on the way to the showroom, it wouldn’t be hard to convince yourself that paying it off and keeping the bike would be a good decision. This is a good deal for Ducati, too, as they get the cash for your bike without having to go to all the trouble of re-selling it to someone else. Although they could probably make more money on it if they did.

Of course, you have to be able to afford the massive balloon payment. And if you weren’t thinking about that when you signed on the dotted line three years ago, you are now. A lot, I’d imagine.

If you’ve more chance of having six digits on your left hand than six grand in your bank account, there’s always the option of part-exchanging your 3-year-old bike for a new one. It’s good for you, because you get to try something new and still keep paying the manageable monthly payments. It’s good for Ducati, because you’re tied with them for at least another three years.

Of course, everything I’ve mentioned above also comes into play here, making thrashing out a new deal sound alarmingly tempting. It’s the best option for Ducati, too, as they can take your current bike off your hands and sell it on for a profit, whilst making more money out of you with the new finance deal.

So, what can we conclude from this?

Ducati’s two-pronged approach works because each plays its part: the mechanical engineers create a product that consumers want to buy, and the financial engineers create a route through which the consumer can buy.

The Tri-Options scheme seems ordinary enough, but really, it’s financial engineering genius. The points I’ve picked out come from 30 years and more of research about how human beings make decisions; and the finance companies have taken this knowledge and poured it into a refined set of products, aimed to push and pull at the very fabric of our decision making abilities. The masterstroke is that once Ducati have you, they make it very difficult for you to go elsewhere.

After all, so long as the product is good and the finance right, why would you?

REFERENCES:

If you want to read more about behaviour economics and it’s application to finance, see http://www.nottingham.ac.uk/business/forum/documents/researchreports/paper69.pdf 

 

3 thoughts on “Ducati posts record sales in 2012, but it’s not just down to mechanical engineering – financial engineering plays a part, too.

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