Term Paper, 2005
19 Pages, Grade: A
List of Figures
2 Branding Strategy
3 Segmentation Strategy
4 Positioning Strategy
5 The Future of the VW Phaeton
Figure number Name of Figure
Figure 1 Management of the brand portfolio of Volkswagen AG
Figure 2 Increasing fragmentation of the automotive market
Figure 3 Market drivers at the beginning of the 21st century
Figure 4 Stratification of society
Figure 5 Brand positioning
This paper analysis the case study “VW Phaeton” by Röhm and Murphy (2005) about the launch of a luxury car by Volkswagen. Since the introduction of the VW Phaeton in May 2002, Volkswagen has been under pressure as the company did not reach their sales forecast, experiencing dramatic financial losses (Weernink, 2002).
It comments on the strategy of VW in terms of branding and positioning. It also considers segmentation, niche and mass marketing as essential issues for VW. Various aspects of these issues are discussed as well as their relationship to customer loyalty, and how they contribute to a business success. Finally, it is summarised why the future of the VW Phaeton is considered to be a bleak.
It could be shown that positioning is an outgrowth of segmentation, and therefore, presents an integral part of VW’s strategy. The paper shows that VW introduced the VW Phaeton to move up-market, and to polish the VW brand. However, the company did underestimate their own brand, which is associated with a people’s car. At the same time, Volkswagen missed to serve highly potential segments in the middle-class segment. In order to position the VW Phaeton in the upper-class, a comprehensive marketing campaign was launched, which could not add the missing emotional and prestige value to the VW brand. In the final section, it is argued why the future of the VW Phaeton is a bleak - mainly because of a strategic failure regarding the branding strategy.
In May 2003, Volkswagen introduced its first luxury car – the VW Phaeton (Handelsblatt, 2003). This paper answers the following two questions of the ‘VW Phaeton’ case study:
1. “Is the future a bleak as the case suggests? Comment and discuss the issues in the case summarising why you feel you agree or disagree” (VW Case Study, 2005).
2. “Comment on the strategy of Volkswagen in terms of branding and positioning; what issues should they consider, given that they appear adamant about entering and sustaining the luxury market for their product?” (VW Case Study, 2005).
Question one asks to ‘comment and discuss the issues in the case’ which are branding, segmentation, positioning, and niche/ mass marketing strategies. These present similar issues as in question two. Therefore, this paper comments on the strategy of Volkswagen in terms of branding, segmentation, positioning in the first place - as these are all issues which VW should consider when introducing a luxury car. This answers question two, and gives partly the answer to question one (‘comment and discuss the issues’). Finally, it is summarised why the writer agrees or disagrees if the future of the Phaeton is a bleak.
In order to answer question one and question two, it is worthwhile to identify and define what branding, segmentation, and positioning strategies are, their relationship to customer loyalty and how they contribute to a business success. This theoretical underpinning presents the bases to analyse and comment on the mentioned issues.
This section gives different definitions what branding means, its elements, functions, and why it contributes to a business success. Furthermore, the VW brand is discussed; what VW stands for, its brand values, brand groups, and finally, why a luxury car has been launched under the VW logo.
Doyle (2002) states that the purpose of marketing is “to create a preference for the company’s brand”. A customer who perceives a brand as superior will be willing to pay more for the product or service. But what is a brand? The literature provides various definitions from different perspectives. For example, Duncan (2002) defines a brand as a “perception of an integrated bundle of information and experiences that distinguishes a company and/or its product offerings from the competition”. A similar definition is given by Kotler (in Esch, 2000), a brand is a “name, term, sign, symbol, or design or combination of them which is intended to identify the goods and services of one seller or a group of sellers and to differentiate them from those of competitors.” This means that the function of the brand is mainly differentiation and identification. To reflect the importance of the brand influence on the buying decision, and to position the customer into the centre of branding; Bruhn (1999) defines a brand as a “promise to the customer”. This promise stands for a continuous supply of standardised quality to the customer. A further element of a brand is its added emotional value. The emotional notion leads to a psychological product differentiation. For example Coca-Cola has a strong emotional brand. Another essential aspect of a brand is its image, which is in the mind of the customer in the form of pictures, feelings, attributes, values, content of the brand etc. (Knoblich, 1992). The buying decision depends on the difference between the communicated brand image and the consumer’s personality. In summary, the various definitions include the three components: promise, emotional values, and rational values (see also De Chernatony, 2003).
A brand has various functions for a consumer as well as for the seller, which contribute to the success of a business. As mentioned above, a brand allows the producer to differentiate the product - through generic product advantages, emotional attributes and brand personality from its competitors (Esch, 2000). According to Porter, differentiation does not only protect the company from its competitors, it also increases customer loyalty and reduces price sensitivity (in Esch, 2000). This means a brand leaves the marketer more price flexibility. On the other hand, customer loyalty leads to long term profits, and positively supports brand transfers (Bruhn, 1992; Doyle, 2002).
For the consumer, a brand provides orientation in the ‘product jungle’, and facilitates the identification of a specific product among competitive ones. Furthermore, it lowers the purchasing risk, as the customer can trust the functional and emotional quality of the brand (Biel, 2000). Last but not least, a brand allows the customer to transfer the brand image to him. Bugdahl (1998) describes this as a personalisation function or ‘snob syndrome’, for example, a BMW owner has the physical respectively emotional experience of “being sporty and having friends” (Herrmann, 2000).
McKinsey (in Limbach, 2003) investigated the importance of brands, and therefore, the importance of branding. On a scale from 1 to 100, luxury goods including cars count 95 percent. This is followed by food/ drinks with 90 percent, telecommunications with 82 percent, ending with 2.5 percent for energy suppliers. This demonstrates the importance of branding and positioning in the automotive industry as the customers of cars are highly brand sensitive.
Volkswagen established an image of reliability and good, honest German engineering at an affordable price (Britt, 2002). The slogan of Volkswagen is ‘Aus Liebe zum Automobil’ (in English: ‘from love to the car’), which implicates the brand value of Volkswagen (Limbach, 2003).
VW groups his brands into two groups known as the ‘classic’ brands (VW, Skoda and Bentley) and the ‘sporty’ brands (Audi, Seat, and Lamborghini). The company is concerned with the proliferation of its brands. Consumer could notice that the Skoda made by VW is little different from the more expensive Golf (The Economist, 2002). This could lead to cannibalisation of cheaper VW cars, and therefore, reduce the overall profits.
On the one hand, Volkswagen gives his brand a little bit of a ‘hello’ by polishing the brand with the launch of the Phaeton. Rod McLeon the head of luxury cars at Volkswagen describes this launch as moving the centre of the VW brand more upmarket (Sweney, 2003). Mr Pischetsrieder admits that the Phaeton would not contribute to VW’s profits but would set a benchmark for excellence within the company to add emotion to the VW brand. His current vision is to break even with the Phaeton (The Economist, 2002). On the other hand, Volkswagen launched a luxury car under a brand, which is associated with a ‘people’s car’ and not a prestige product. Volkswagen employed a German advertising agent called Grabarz & Partner in order to establish the new Phaeton brand in the high-end segment. According to Britt (2002), the former VW group chairman had the dream to push the VW brand upmarket. The new chairman Ferdinand Piech wanted to make this dream reality.
Critical voices such as an international advertising executive did not believe in this dream, thinking that “it is harder to convince consumers to pay a lot of money for a model with a mass-market badge on it than for a luxury carmaker to tempt buyers with less expensive models” (Britt, 2002). He states that the more expensive the car, the more important the badge becomes. The consumer desires a Mercedes S class to demonstrate their power and prestige. This opinion is supported by others who think that “the idea of VW building a luxury is simply going against nature” (Hart, 2004). The head of Audi of America believes that VW did not understand the needs of the customers in the luxury car segment. He would not buy a Phaeton even it would be the best car because it has the VW logo. He thinks that Volkswagen made the mistake to brand a high luxury car with a people’s car logo, and to sell it in “VW dealerships where salesmen are used to selling Jettas and Golfs” (Kisiel, 2004), and that VW did not consider the importance of the brand aspect.
In summary, the VW Phaeton has mainly been introduced to polish the VW brand. However, the branding strategy of VW failed regarding its target segment, which does not want a luxury car with a people’s car logo.
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