Question: Tiny car, tiny price tag, tiny gasoline bill. The Smart Car, made by Daimler's Mercedes Car Group in Hambach, France, first appeared on U.S. roads in 2008, just as prices at the gas pump were hitting record highs week after week. The timing could not have been better. Tired of emptying their wallets every time they filled their gas tanks, many U.S. drivers were thinking about downsizing from a big sport-utility vehicle or pickup truck to a smaller vehicle. But were they ready for a 106-inch-long car that seats only two people? Daimler was ready to find out. The Smart Car had a good track record in other parts of the world. From 1998 to 2008, Daimler sold more than 900,000 Smart Cars in Europe, the Middle East, Asia, Australia, Mexico, and Canada. The car was cute, nimble, and unconventional--a good size for getting through crowded, narrow city streets and fitting into any tight parking spot. Not only was the purchase price highly affordable, but the excellent fuel efficiency made the car especially popular in countries where gas prices were generally high.

To bring the Smart Car to the United States, Daimler redesigned the body and engineering to meet U.S. safety standards. It added six inches to the car's length and included four air bags, an antilock braking system, a collapsing steering column, and other safety features. It also installed a fuel-saving 71-horsepower engine so that the Smart Car would go about 40 highway miles on a gallon of gasoline. Daimler set the list price of the Smart Fortwo Pure model-the basic version of the two-seater-at $11,590. The list price of the Smart Fortwo Passion Coupe, equipped with more features, was $13,590. The list price of the Smart Fortwo Passion Cabriolet, a convertible with leather seats and additional features, was $16,590. Buyers had the option of ordering extras, such as a metallic-paint finish or an alarm system, for an additional fee. Keeping the list price as tiny as the car allowed Daimler to build market share quickly. Rather than selling Smart Cars through its regular dealer network, Daimler contracted with the Penske Automotive Group to handle distribution and sales. In another unusual move, Daimler set up a website to let buyers reserve the model of their choice and choose from six interior colors and six exterior colors on the car body's removable panels.

Three of the exterior colors were offered as part of the purchase price, while the three metallic exterior colors were offered at an extra cost. The $99 reservation fee was applied to the buyer's purchase price once the ordered model became available. By the time Smart Cars arrived in U.S. showrooms, 30,000 people had paid for reservations. To build customer interest prior to the introduction, Daimler sent a number of Smart Cars on a 50-city U.S. tour. Nearly 50,000 members of the media and prospective car buyers took test drives. Although many reporters couldn't resist poking fun at the tiny car (USA Today called it a "breadbox on wheels"), they all noted its high fuel efficiency and low purchase price. Soon, demand became so strong that even buyers who had reserved their cars well in advance had to wait months for delivery. A few U.S. customers who didn't want to wait paid as much as $39,000 for European Smart Cars adapted to meet U.S. safety and emissions standards. Down the road, as more auto manufacturers gear up to bring gas-sipping cars to U.S. markets, will the Smart Car maintain its popularity?15 For more information about this company, go to www.daimler.com.

1. Why is bundle pricing appropriate for the various models of Smart Cars?

2. How is demand likely to affect dealers' willingness to negotiate prices with Smart Car buyers?

3. Imagine that Daimler is considering whether to sell unpainted Smart Cars and reduce the list price by $1,500. The Smart Car exterior consists of ten removable panels that can be easily painted. Buyers could paint their own panels, leave the panels unpainted, or pay the dealer an additional fee to personalize their cars by having the panels custom finished in almost any color or design. What are the advantages and disadvantages of this pricing idea?