According to Top Gear and various other news sources car makers (e.g. Ferrari, Lamborghini) often lose money on their top-of-the-line models (or at least, some of them). Specifically, they set a price and production-run size (number of units produced), at the outset, that yields less revenue than it cost to develop and produce the cars. AIUI most of Ferrari’s special/limited edition* cars fit this pattern
So, how do they survive doing this over and over? I get that sometimes products flop, or manufacturers misjudge the market. However, I just can’t understand intentionally making a product where you lose money on every sale.
the models where they produce less than a hundred units, and carefully evaluate each would-be buyer (presumably for their coolness and compatibility with Ferrari’s brand)
WAG, but it seems almost as if they set these model lines up as a cross between a market research focus group and a beta test group. Lets their engineers try out some new ideas, and based on what they learn they can make a better product for a line of cars with broader market appeal…
But I wouldn’t say that to somebody who just bought a limited edition Ferrari.
Jewelers and clothing designers give items for free to celebrities because they want their product associated with wealth and status. I’m guessing it’s the same with million dollar cars. Even if you lose money, the increase in demand due to your car being seen as a a status symbol makes up for it.
According to Wikipedia, Ferrari sold 8,000 cars last year. So even if they lose money on the 100-run prestige product, it might be worth it for the publicity. And from what I’ve heard on Top Gear and elsewhere, they may restrict sales of those prestige models to existing customers. So you might have to have bought, say, two or three lesser cars before they’ll let you purchase the exotic $2,000,000 one.
To add to what others have said most car manufacturers on the scale of Ferrari and Lamborghini have spent a lot of time in recent decades either owned by major car manufacturers, F was recently spun off from Fiat and L is part of VW, or changing hands often among private investors (some other niche car makers). IOW the companies themselves might at times be vanity projects.
That said I’d push back on the premise. Some extremely expensive cars are money makers. $2mil is a lot of money for a car and those cars for all their fantastic performance aren’t in some ways (producability, reliability, reaction to vibration, etc) as intensely engineered as regular cars. It’s not obvious you lose money at $2mil a car for a very small number. Then as others said the $2mil types could be a break even ‘halo’ product to get people to buy the $200-400k types in still small but many times greater volume. And back to ownership, the market seemed to think Fiat Chrysler was worth significantly less without Ferrari, small as it is.
These are often referred to as “Halo cars” - low volume, high cost vehicles that promote brand image. Nobody generally expects them to make much of a profit, they’re just there to make the guy drooling over a corvette feel more comfortable about buying a chevy cruze. Its the same reason companies put together formula 1 or rally teams. Brand marketing.
They can afford to lose a little money on the multi-million dollar cars because they make a shit-load of profit on the 250K-500K cars.
They love to tout how they’re “losing money” on these cars, but is it really a significant loss? It can’t be.
Ferrari’s main product line is in the 250K to 500K range. But the thing to remember is that people buying Ferraris aren’t looking for a consumer reports best buy, they’re looking for prestige and that’s what the company is paying for with the “lost” money from the specials.
Ferrari proves they’re hot shit with the ultimate cars and that prestige drives the whole product line.
This is somewhat of a WAG, but I suspect that it’s worth splitting this into two conversations.
Before the 90s, Ferrari, Lamborghini, etc. were their own companies who made high end vehicles. Usually, these cars were crappily made (but hand-made), and probably were sold for a profit.
Now that they are owned by large companies, then as others have suggested, they could be selling them at a loss so that they can sell their “low end” vehicles at a significant markup. But, it’s also possible that they are using these vehicles as Beta releases for new features. The customers get all of the new odds and ends that the company wants to trial, before everyone else (but less well-tested), and their experiences and car sensor data go into informing the company about how to engineer those features when they are moved into the mass production vehicles in their other lines. In a sense, they’re just paying the buyers to do their quality assurance.
Ferrari went broke a very long time ago and were bought by Fiat. They were on life support for almost their entire life. But being Italian, the Italian government (owner of Fiat then) were not about to let such a brand die. (But the entire purpose of the Ferrari car operation was to support the F1 team. Ferrari F1 is a national religion.) It is not clear that Lamborghini ever made any money. They were founded on the back of a successful agricultural vehicles business. (Owners meets in Europe will often feature a tractor or two along with the cars.) Lamborghini endured some terrible times, selling ony dozens of cars a year. Lamborghini was passed on from loss taking owner to loss taking owner for decades before Audi and thus VW group took them. Aston Martin had a similar life until Ford dropped about a billion on them to set them up properly, and then were forced to sell them when their fortunes went sour. (Ford had a wretched time, Volvo Cars, and Jaguar Land Rover went too.)
The problem is that owning a Ferrari, Lambo, or Aston may be seen as a top end status thing. But owning the companies Ferrari, Lamborghini or Aston Martin is also a status thing. It is astounding the losses the owners of these companies have sustained over the decades.
But as above, the halo effect is very important. Ferrari make these cars available to loyal customers. Which is a great way of promoting brand loyalty. The amount of page space and TV time devoted to these halo cars is insane relative to their market. Neighbour of my brother has an Aventador. Why is hard to understand.
Having a top-end model which, although very expensive, still loses money, is a common marketing ploy, I think. As others said it provides publicity, but it can also move a customer to buy 2nd tier instead of 3rd tier. “No dear, I didn’t just waste our money on the most expensive Ferrari — they have models far more expensive than this!”
Back in the 1970’s, IBM’s System 370/195 (their biggest and fastest mainframe) brought this idea home to me. That machine was $9 million-plus but was never intended to be profitable. OTOH, IBM did sell a lot of Models 168 and 158.
Nobody wants to mention that Ferrari grossed over $400 million in 2015 from “sponsorship, licensing, and brand”? That was 15% of their revenue. This is basically licensing their name on Ferrari jackets, stores, theme parks, etc. It’s almost all profit.
Ferrari needs to be viewed as the best car maker in the world to license their brand. The F1 team goes a long way but it helps to have a few high-tech, class-leading cars on the road to maintain that brand. Selling a few loss-leaders at the high end helps them maintain their image.
The last thing Ferrari wants is to fall into Jaguar’s trap. Jaguar once proposed a range-topping car that would exceed 220 miles per hour. They took deposits for this V-12 wunderkind, called the XJ220. Then, they delivered a car with a turbo six cylinder engine that couldn’t reach its targeted top speed. Jaguar had to sue customers to get them to buy the cars. This was not good for the brand.
Lamborghini has never lost money on its range topping vehicles, at least not to a greater extent than it has on other vehicles; for most of its existence, Lamborghini has been unprofitable.
Ferrari doesn’t lose money on anything it sells, either. Its [del]cheapest[/del] least expensive model, the 488, is $245,000. It has a years-long waiting list. We think of Ferrari and Porsche as natural rivals, but in truth Ferrari is far more exclusive. Porsche builds more cars every year than Ferrari has in its entire existence.
There is a tendency for high-end vehicles to be loss-leaders, but only among those who can afford it. As some mentioned, most high-performance cars are halo models, which lose money but add cachet to the rest of the range. The Nissan GT-R is a perfect example, though Nissan seems to have more or less broken even given its long production run.
Sage Rat also touched on another loss-making strategy: testbeds. Under Ford ownership, Jaguar and Aston Martin were used to trial new technology that would later filter down into more mundane road cars (like satellite navigation). Their sales volumes were so tiny - relative to Ford as a whole - that they could lose heaps of money and still add to the Ford Group’s bottom line. VW today uses Bugatti, Bentley and Lamborghini (and to a lesser extent Porsche and Audi) as a sort of test program. Aluminum monocoque construction was first trialed on Audi’s low-volume A8 in the 1990s, and today it’s almost universal in the luxury bracket and increasingly common in the midrange market. Mercedes has introduced almost every major safety advance in the last 40 years on the low-volume S-Class (though the model actually makes money).
ETA: Nobody was upset about Jag building the XJ220 around a V6, or that it didn’t quite manage 220 miles per hour. Most customers were trying to get out of their deals because they lost their shirts in the early 1990s recession, and because Jaguar suddenly decided to offer the more exclusive XJR-15 at the same time.
Missed edit window: by the time the concept car was shown it already had a V6, and thereafter the production variant was always going to use a turbo V6. The V12 was dropped during development after the Group B rules were scrapped.
Note that production and sales aren’t the only cost factors. They also make money on maintenance and repairs. People who buy high end cars tend to only go to that brand’s official repair venues. Plus there isn’t a lot of knock-off stuff being made in the replacement parts area for these brands.
It used to be said that Ford could give cars away and still make money if everyone had to go to a Ford dealer for maintenance and repair. There’s one really big flaw in this claim but it does highlight the possibility profitability of after sales services.
It actually isn’t. The only other aluminum space frame car on the market is the Jag/LR line of unibody cars and SUVs, because JLR arrived at aluminum construction on its own seperately. The next A8 itself will have steel B-pillars, roof rails and door frame, i.e. most of the strucutral parts.
Even lower cost cars can be halo vehicles. The Buick Cascada, a convertible only, low production car based on an Opel, is such a car. I used to sell Buick and GMC vehicles, and my new car manager and I looked at invoice vs MSRP on these cars, and I was surprised to find that invoice on the non-premium trim Cascada was actually slightly higher than the MSRP. For the Premium trim model, MSRP was only $180 over invoice.
These cars sell in the mid to upper 30k range. And they are heavy, slow and laden with an older generation of technology. But hey, a convertible Buick! That’s not a Buick!
and those cars for all their fantastic performance aren’t in some ways (producability, reliability, reaction to vibration, etc) as intensely engineered as regular cars. It’s not obvious you lose money at $2mil a car for a very small number. Then as others said the $2mil types could be a break even ‘halo’ product to get people to buy the $200-400k types in still small but many times greater volume. And back to ownership, the market seemed to think Fiat Chrysler was worth significantly less without Ferrari, small as it is.