How the Rapid Demise of Entry-Level Cars has Increased Average Prices

The American automotive market as we know it today has changed drastically over the years. With newer technologies, better features, and improved performance potential, few segments have seen tremendous success.

At the forefront of this change is the SUV segment. By providing better space and a bevy of standard features, sport utility vehicles or simply SUVs have taken the market by storm. But amidst the rising trend of SUVs, a downward trajectory in the entry-level options has also caused the market to change.

The fall in the entry-level, especially hatchbacks and sedans, came in rather quickly in an evolving market. But the reasons for such a fall still remain under scrutiny. While the impact of the COVID-19 pandemic and a subsequent fall in profit margins and purchasing power can be attributed as a primary reason, the introduction of better-equipped and larger vehicles at diminutive price differences is also a rallying point.

Though some low-priced alternatives are still available, the disappearance of entry-level vehicles has caused the market to see an indelible increase in average prices. The reasons for such a rise in prices, stem out of two factors, which are either economical or personal and include:

• Profit expectations of automotive companies: With a subsequent decrease in the sales of entry-level vehicles, revenue streams of automotive companies have become rather restricted. As a result, companies either have started to register losses in the fiscal years or have seen a downward trend in their profits. Thus, to maintain a consistent level of performance, manufacturers sought to increase the prices of other high-volume products in the market. As a result, average prices of all models across the brand’s lineup have seen a slight increase in a bid to retain high-profit levels.

• Adjustment of inflation and increasing costs: With every succeeding year, the general rate at which prices increase or in other words, the rate of inflation tends to increase. As a result of inflation, the cost of operations rises and so does the cost of acquiring raw materials. But with the demise of entry-level vehicles, these added costs are distributed over a limited section of cars in the lineup only. In an attempt to cover added costs, automakers respond with higher prices and as a result, average prices have steadily seen a rise over the last few years.

• Buyers' demand for extensive and class-leading features: Perhaps, the increase in the luxury appetite of the buyers has led to a tremendous downfall in the entry-level car segment. The entry-level options were long considered as barebones with only the bare necessities available with them. However, as buyers wanted better products, brands have developed higher-level products with better features and a long list of optional specifications. As a result, the average prices of new cars have seen an upward trend over the past few years.

• Technologically advanced vehicles: Barring the few-entry level options still available in the market, buyers in the market are more inclined towards newer technologies including electric vehicles, mild-hybrid engine options, or PHEVs. However, all these vehicles are complex in their structure and require more time and money to be built. With the ongoing shortage of chips used in such vehicles, average prices of vehicles have gone for a toss. Due to the limited supply of these chips, buyers have found it difficult to match the demand of buyers and in every such economic situation, average prices of vehicles have started to increase.

  
  

  Once a revered segment, the entry-level car options have decreased shambolically over the past few years. While newer segments in the industry have already replaced the segment, even in its dying embers, the entry-level segment has had an undeniable economic impact in the industry. And when coupled with the ongoing pandemic, the automotive industry has fallen into a web of rising prices and while market corrections might start soon, average prices will slowly continue to climb the ladder.