This blog first appeared as Steve Wunker's piece for Harvard Business Review
By Steve Wunker
The automotive press has been relentlessly critical of Chrysler CEO Sergio Marchionne — savior of Chrysler and Italy’s auto industry — about Fiat’s return to the United States. The company’s initial foray, the Fiat 500, sold only about 26,000 units in its first year, far short of Marchionne’s 50,000 unit goal. Yet the carping misses the conundrum faced by companies planning market entry — for Fiat to get big in the U.S. market, it had to start tiny.
Much of the pique stems from how Fiat built a stand-alone dealer network for a single, mid-priced car. This was expensive, with many dealers spending $3 million to create showrooms outfitted with espresso machines and other costly efforts to evoke Italian style. Conventional wisdom argued for launching the 500 through Chrysler dealers, which could have leveraged both physical infrastructure and the dealers’ flow of customers. Similarly, Fiat could have piggybacked on Chrysler’s service departments rather than create its own. Eventually, once the brand had become established, separate dealers could have sprouted.
This would have been a great way to strangle an excellent idea. If the 500 had been a run-of-the-mill car (like much of Chrysler’s recent line-up), then leveraging Chrysler would have made sense. But Fiat aimed to create a new market — a highly stylish vehicle (that even comes in a Gucci version) appealing to young, independent-minded buyers. That’s not exactly who comes to a Chrysler dealer shopping for a Dodge Caravan. (The B-52’s lyric “I’ve got me a Chrysler and it seats about 20” says it all.) Moreover, at $16,000 for the base model, the 500 costs considerably more than comparably-sized competitors such as the Nissan Versa or Toyota Yaris. Showing the car in a setting similar to its rivals would have fostered unfavorable apples-to-apples comparisons and downplayed the car’s distinctiveness. In a world of low-priced apples, Fiat is striving to be an orange.
Many big markets get their start in small footholds like the one Fiat has targeted. Red Bull first gained traction with young club-goers seeking a mixer. Smartphones began as two-way pagers (no voice capability) aimed at e-mail addicted executives. Once a new idea has captured the attention of the foothold market, the concept can be revised for scale-up, and the early customers can demonstrate to fence-sitters that the product is a good one. It is very doubtful that the 500’s foothold market was lurking in Chrysler showrooms, just waiting for the company to launch a stylish small car.
Other criticism has focused on the initially modest advertising budget. This also misses the point of a foothold approach. Perhaps Fiat could have goosed sales by spraying ad dollars around, but it also would have wasted money by communicating with irrelevant consumers. Many people don’t fit Fiat’s mold, and even individuals well-targeted by demographic criteria (which is how media is bought) might not be early adopters of a new brand. If a car company is trumpeting a modest extension to an existing category, advertising can increase the number of people considering the vehicle. But for a new category, many consumers are going to want to see others driving the car first. Inherently, these categories aren’t going to burst to life but rather germinate and grow.
I’m not saying the launch was perfect. Some dealers were in decidedly unstylish locations. Urban chic goes only so far when it’s set amid fast food restaurants and strip malls. The launch would have been stronger had it been coupled with other Fiat cars or the Alfa Romeo line, which will appear in the U.S. in the next two years. Perhaps service appointments could have been directed elsewhere, although this is where many auto dealers make the bulk of their profits. Marchionne has taken some blame for execution issues, but he doesn’t sound too sorry about the basic strategy. And he shouldn’t be.
Foothold strategies are counter-intuitive. They enable a concept to get big by intentionally starting small, in a channel dedicated to making the proposition stand out. They often target small sets of customers who are can be reached inexpensively. Because the customer is so well-defined, initial versions of the product don’t need to be all things to all people, so the concept can come to market relatively quickly and inexpensively. Feedback from initial customers can lead to rapid revisions of the idea. Even in the automotive industry, with its long development cycles and high upfront costs, Fiat could have held back on some vehicle options for its initial launch, and it could quickly revise the presentation of the 500 in its dealers and customer communications.
A foothold approach wouldn’t have been appropriate for a new Dodge minivan. But for a product attracting a new customer type, carving out a new market position, and highly reliant on image rather than pure function, it can be critical. Fiat’s initial U.S. launch may have disappointed, but the company is now set up well for long-term success.