A Case Study In Management Decision Making

[mkennedy1996]

November 2018 R1S LE Reservation:

I am still in, but I am very concerned about the team at Rivian. I have met RJ twice and had a fair amount of time to talk to him in Atlanta. He is careful and measured. I never, in my wildest nightmare, imagined that he would run Rivian like it has been in 2021-2022.

Rivian has hired seasoned auto industry executives. They know their way around a P&L statement. They also know how to model production costs to project margins on the vehicles.

Claire McDonough has been the CFO for over a year. She is experienced and very well aware of the changes in the economy before and since she joined the company. She had to be modeling the margins regularly throughout 2021 as the plant came to life and labor and material costs changed. Someone didn’t put together a spreadsheet last week and realize that they needed to raise the prices 20%. They have been modeling this and watched the selling price required for profitability steadily rise.

For these reasons, the management team has to have been aware of the deteriorating margins throughout 2021. The comments from the former VP of Sales and Marketing, Laura Schwab, indicates this as well.

With that knowledge, they had a few choices to make:

Do we raise prices? With the information that I have, I would say that this is a simple question to answer. YES.

When do we raise prices? [Inflation was already above 5% by May 2021.] Should we raise the prices before we start the (delayed) deliveries in September? [By the time of the IPO, inflation was above 6%.] Should we raise the prices before the IPO so potential investors have a true picture of the business potential? [Note: A 20% price increase has a material impact on the segment of the market being targeted and how well they compare in that segment]. Or lastly, do we further delay deliveries into 2022 for “real customers” and then raise the price weeks before “real” deliveries are to start.

We know what they decided. I’ll leave it to others to fill in the why they chose the timing that they did.

When are the new prices effective? We were able to able to secure private equity funding and the largest IPO in the US since 2014, in large part, because we have 70,000 reservations. Do we feel any loyalty or obligation to these reservation holders for their confidence in us that allowed us to become the company that we are today? Do we make the new prices effective for all new orders as of 1 March 2022? Do we apply a tiered increase with little to no increase for those that came on board in 2018 to a level of no discount for those that reserved after 1 Jan 2022? If that averaged out to a cost of $5,000 per reservation holder and all 70,000 reservation holders actually purchased a vehicle, it would be a one time $350 million hit mostly in 2022. Is our customer’s loyalty and patience (many have waited 3.5 years and endured many delivery delays) worth $350 million?

We know what they decided. I am surprised that is the choice that they made.

How do we communicate the price increase? Many of our reservation holders have stuck with us for 3+ years. Do we send a personal letter from RJ that explains the absolute necessity of the price increase, thanks the reservation holders for their confidence in Rivian and sets a positive tone on how this makes Rivian a stronger company to support the incredible vehicles we are about to start delivering? Or, do we send some generic, vague email that obscures the size of the price increase and doesn’t convey any of the above sentiments?

We know what they decided. I just can’t imagine that the person that made this decision is still employed by Rivian.

This case may be taught when my kids get to business school.

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[mkennedy1996]

November 2018 R1S LE Reservation:

I am still in, but I am very concerned about the team at Rivian. I have met RJ twice and had a fair amount of time to talk to him in Atlanta. He is careful and measured. I never, in my wildest nightmare, imagined that he would run Rivian like it has been in 2021-2022.

Rivian has hired seasoned auto industry executives. They know their way around a P&L statement. They also know how to model production costs to project margins on the vehicles.

Claire McDonough has been the CFO for over a year. She is experienced and very well aware of the changes in the economy before and since she joined the company. She had to modeling the margins regularly throughout 2021 as the plant came to life and material costs changed. Someone didn’t put together a spreadsheet last week and realize that they needed to raise the prices 20%. They have been modeling this and watched the selling price required for profitability steadily rise.

For these reasons, the management team has to have been aware of the deteriorating margins throughout 2021. The comments from the former VP of Sales and Marketing, Laura Schwab, indicates this as well.

With that knowledge, they had a few choices to make:

Do we raise prices? With the information that I have, I would say that this is a simple question to answer. YES.

When do we raise prices? [Inflation was already above 5% by May 2021.] Should we raise the prices before we start the (delayed) deliveries in September? [By the time of the IPO, inflation was above 6%.] Should we raise the prices before the IPO so potential investors have a true picture of the business potential? [Note: A 20% price increase has a material impact on the segment of the market being targeted and how well they compare in that segment]. Or lastly, do we further delay deliveries into 2022 for “real customers” and then raise the price weeks before “real” deliveries are to start.

We know what they decided. I’ll leave it to others to fill in the why they chose the timing that they did.

When are the new prices effective? We were able to able to secure private equity funding and the largest IPO in the US since 2014, in large part, because we have 70,000 reservations. Do we feel any loyalty or obligation to these reservation holders for their confidence in us that allowed us to become the company that we are today? Do we make the new prices effective for all new orders as of 1 March 2022? Do we apply a tiered increase with little to no increase for those that came on board in 2018 to a level of no discount for those that reserved after 1 Jan 2022? If that averaged out to a cost of $5,000 per reservation holder and all 70,000 reservation holders actually purchased a vehicle, it would be a one time $350 million hit mostly in 2022. Is our customer’s loyalty and patience (many have waited 3.5 years and endured many delivery delays) worth $350 million?

We know what they decided. I am surprised that is the choice that they made.

How do we communicate the price increase? Many of our reservation holders have stuck with us for 3+ years. Do we send a personal letter from RJ that explains the absolute necessity of the price increase, thanks the reservation holders for their confidence in Rivian and sets a positive tone on how this makes Rivian a stronger company to support the incredible vehicles we are about to start delivering? Or, do we send some generic, vague email that obscures the size of the price increase and doesn’t convey any of the above sentiments?

We know what they decided. I just can’t imagine that the person that made this decision is still employed by Rivian.

This case may be taught when my kids get to business school.

I left out a possible scenario.

Rivian actually did give reservation holders a break.

Their modeling may show that a 40% increase was actually needed to be profitable at the level they desire. And they only raised prices half of that for the reservation holders. The next 20% price increase may come once this batch of reservations are filled.

 

[lostpacket]

That's a thoughtful and considered take on what might be going on but let me posit an alternative theory.

Have we considered that aliens could be mind controlling the executive team?

 

[COdogman]

November 2018 R1S LE Reservation:

I am still in, but I am very concerned about the team at Rivian. I have met RJ twice and had a fair amount of time to talk to him in Atlanta. He is careful and measured. I never, in my wildest nightmare, imagined that he would run Rivian like it has been in 2021-2022.

Rivian has hired seasoned auto industry executives. They know their way around a P&L statement. They also know how to model production costs to project margins on the vehicles.

Claire McDonough has been the CFO for over a year. She is experienced and very well aware of the changes in the economy before and since she joined the company. She had to be modeling the margins regularly throughout 2021 as the plant came to life and labor and material costs changed. Someone didn’t put together a spreadsheet last week and realize that they needed to raise the prices 20%. They have been modeling this and watched the selling price required for profitability steadily rise.

For these reasons, the management team has to have been aware of the deteriorating margins throughout 2021. The comments from the former VP of Sales and Marketing, Laura Schwab, indicates this as well.

With that knowledge, they had a few choices to make:

Do we raise prices? With the information that I have, I would say that this is a simple question to answer. YES.

When do we raise prices? [Inflation was already above 5% by May 2021.] Should we raise the prices before we start the (delayed) deliveries in September? [By the time of the IPO, inflation was above 6%.] Should we raise the prices before the IPO so potential investors have a true picture of the business potential? [Note: A 20% price increase has a material impact on the segment of the market being targeted and how well they compare in that segment]. Or lastly, do we further delay deliveries into 2022 for “real customers” and then raise the price weeks before “real” deliveries are to start.

We know what they decided. I’ll leave it to others to fill in the why they chose the timing that they did.

When are the new prices effective? We were able to able to secure private equity funding and the largest IPO in the US since 2014, in large part, because we have 70,000 reservations. Do we feel any loyalty or obligation to these reservation holders for their confidence in us that allowed us to become the company that we are today? Do we make the new prices effective for all new orders as of 1 March 2022? Do we apply a tiered increase with little to no increase for those that came on board in 2018 to a level of no discount for those that reserved after 1 Jan 2022? If that averaged out to a cost of $5,000 per reservation holder and all 70,000 reservation holders actually purchased a vehicle, it would be a one time $350 million hit mostly in 2022. Is our customer’s loyalty and patience (many have waited 3.5 years and endured many delivery delays) worth $350 million?

We know what they decided. I am surprised that is the choice that they made.

How do we communicate the price increase? Many of our reservation holders have stuck with us for 3+ years. Do we send a personal letter from RJ that explains the absolute necessity of the price increase, thanks the reservation holders for their confidence in Rivian and sets a positive tone on how this makes Rivian a stronger company to support the incredible vehicles we are about to start delivering? Or, do we send some generic, vague email that obscures the size of the price increase and doesn’t convey any of the above sentiments?

We know what they decided. I just can’t imagine that the person that made this decision is still employed by Rivian.

This case may be taught when my kids get to business school.

All very good points. Rivian essentially decided it would be preferable to start over branding their company rather than offer anything at all to those who had attended all of those events and made their reservations on day 1. I don’t know as much about what is/ isn’t illegal when it comes to running a publicly traded company (I run a very small company), but Rivian is already being sued by Laura Schwab who mentions that she brought up many times that Rivian *could not* build the vehicles at the prices they gave all of us, then eventually admitted internally they would need to raise pricing AFTER the IPO. Her accusation looks pretty accurate at this point, so I wouldn’t be surprised if they are investigated for this at some point.

 

[kurtlikevonnegut]

All very good points. Rivian essentially decided it would be preferable to start over branding their company rather than offer anything at all to those who had attended all of those events and made their reservations on day 1. I don’t know as much about what is/ isn’t illegal when it comes to running a publicly traded company (I run a very small company), but Rivian is already being sued by Laura Schwab who mentions that she brought up many times that Rivian *could not* build the vehicles at the prices they gave all of us, then eventually admitted internally they would need to raise pricing AFTER the IPO. Her accusation looks pretty accurate at this point, so I wouldn’t be surprised if they are investigated for this at some point.

Laura Schwab already settled through arbitration, that is no longer an active suit and the outcome will never be public. Whether Schwab would be able to testify (and whether or not she would want to) to the SEC about malfeasance may be dependent on the stipulations of that settlement.

In terms of the brand, I personally think that participants in this forum and the Rivian Community writ large are guilty of groupthink and myopia. Since many of us have been emotionally (and financially) invested in Rivian for so long, some since day 1 of the public release, we have lost perspective to the big picture for Rivian as a company and a brand. We represent a few thousand prospective buyers but are relatively insignificant to Rivian's goal of 10% market share which represents about 1.4 million cars sold in the US annually.

I think many of us have been looking at the widespread launch of the R1 series as the finish line for Rivian because it represented our finish line after a long journey however it only represents a very early milestone for Rivian towards a much greater goal. RJ has said multiple times that the R1 series is the means to an end with the end being widespread proliferation of affordable and sustainable adventure vehicles (R2 and beyond). If Rivian achieves their goal this will be a relatively small hiccup that very few people will remember in 10 years.

 

[Sean]

The current situation reminds me of New Coke. They are not that smart and they are not that dumb.

Still early, but its not a conspiracy. Raising prices has been a constant backburner topic that even people on this forum would mention but no one wanted to explore. The execution of the price hike and the amount are what's driving the backlash more than anything. Everyone had all this information (from the lawsuit) prior to the price hike but it has just made people re-focus on it.


-Thinking you need to make a change
-Make the change/ huge backlash
-Backtrack / huge rebound - TBD

 

[mkennedy1996]

How do we communicate the price increase? Many of our reservation holders have stuck with us for 3+ years. Do we send a personal letter from RJ that explains the absolute necessity of the price increase, thanks the reservation holders for their confidence in Rivian and sets a positive tone on how this makes Rivian a stronger company to support the incredible vehicles we are about to start delivering? Or, do we send some generic, vague email that obscures the size of the price increase and doesn’t convey any of the above sentiments?

Today's letter from RJ is exactly what I was talking about. Well done RJ.

 

[Sean]

The current situation reminds me of New Coke. They are not that smart and they are not that dumb.

Still early, but its not a conspiracy. Raising prices has been a constant backburner topic that even people on this forum would mention but no one wanted to explore. The execution of the price hike and the amount are what's driving the backlash more than anything. Everyone had all this information (from the lawsuit) prior to the price hike but it has just made people re-focus on it.


-Thinking you need to make a change
-Make the change/ huge backlash
-Backtrack / huge rebound - TBD

Backtrack - confirmed / huge rebound - TBD

 

[moosehead]

Deleted. I'm trying.

 

[COdogman]

Laura Schwab already settled through arbitration, that is no longer an active suit and the outcome will never be public. Whether Schwab would be able to testify (and whether or not she would want to) to the SEC about malfeasance may be dependent on the stipulations of that settlement.

In terms of the brand, I personally think that participants in this forum and the Rivian Community writ large are guilty of groupthink and myopia. Since many of us have been emotionally (and financially) invested in Rivian for so long, some since day 1 of the public release, we have lost perspective to the big picture for Rivian as a company and a brand. We represent a few thousand prospective buyers but are relatively insignificant to Rivian's goal of 10% market share which represents about 1.4 million cars sold in the US annually.

I think many of us have been looking at the widespread launch of the R1 series as the finish line for Rivian because it represented our finish line after a long journey however it only represents a very early milestone for Rivian towards a much greater goal. RJ has said multiple times that the R1 series is the means to an end with the end being widespread proliferation of affordable and sustainable adventure vehicles (R2 and beyond). If Rivian achieves their goal this will be a relatively small hiccup that very few people will remember in 10 years.

Totally agree that most of us here are a very loud and engaged minority of Rivian customers/ fans. And 10 years from now this might have been forgotten. But even a big company can make a stupid mistake that requires fixing. Otherwise you end up like Facebook, ignoring all of your problems and changing your name to hide In plain sight. Rivian is a young company and this was a totally avoidable mistake. An investigation of their business practices could still be sparked just by the information that was already publicly available. It doesn’t mean they would be penalized or found guilty of anything. We all know how those often go.

 

[lostpacket]

I'm glad to see the executive team has wrested control of their minds back from the aliens

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