Uri Gneezy—
In 1999, just a few months apart, Toyota and Honda introduced their hybrid cars to the US market. They were the first, and much anticipated, hybrid cars in mass production. Although there was a bit of competition in the beginning, Toyota won the market in just a few years and made its Prius one of the best-selling cars ever. Honda’s hybrid lost. How did Toyota convince so many customers to purchase a hybrid car? And why did Honda fail?
The Advantage of Buying a Bad Car
The early hybrid cars were bad in nearly all dimensions, apart from fuel consumption. They were more expensive and offered less speed, acceleration, comfort, and safety than similarly priced nonhybrid cars on the market. You would imagine that offering such a bad car would not help Toyota win over customers. However, while these shortcomings certainly posed challenges, they also presented an opportunity, because getting an eco-friendly car, despite the car’s being objectively “bad,” sends a strong signal about the driver’s environmental intentions. Consumers who chose to buy hybrid cars in the early days were making it abundantly clear that they were environmentally conscious and were willing to pay more for less to help the environment. If they weren’t, why would they sacrifice their comfort and safety for it? Similar to investing in education, a hybrid car’s cost with regard to its value for money was high, whereas the major benefit was helping the environment. By choosing to buy a Prius, consumers were announcing to themselves and to the world that they were the kind of person who’s willing to sacrifice a lot for the environment.
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Today, buying a Prius no longer sends this kind of a signal—at least not as much as the early hybrid models did. The Prius is now a competitive car, even within the nonhybrid car market, offering an overall good deal that customers may find desirable regardless of their environmental leanings. For example, an Uber driver might find that a Prius saves a considerable amount of money on fuel, while also offering comfort and reliability. As such, many people today may choose to purchase a Prius even if they don’t care that much about the environment. Because consumers no longer have to sacrifice much safety and comfort when purchasing a Prius today, the environmental signaling power is weakened by the car’s other new advantages. If you are not convinced, think about the signal one sends by buying a Tesla—is it really all about the environment?
Prius Politics: Showing Off with the Bad Car
So, despite the inferior quality of these early hybrid cars, the ability to credibly signal one’s environmental stance created a strong incentive to buy them. And because enough people were willing to buy these bad cars just to make this statement, an exploitable market was born. As we have already learned, Prius gave Toyota a real advantage over many years in the hybrid car market. What, then, did Toyota do that Honda missed?
Let’s take a quick look at the companies’ sales first. The graph below presents the US sales (global sales figures were similar) of Toyota and Honda hybrid cars between 2000 and 2010.1 As you can see, it took some time for sales to pick up for both companies. Honda’s first hybrid car was the Insight, a small, two-seater car that never really sold. Honda concluded that potential buyers didn’t like the two-seater, and it introduced its new hybrid car, based on the best-selling Honda Civic. The reasoning behind that choice is intuitive, and this design decision also surely made things easier for its engineers: starting with an existing model and simply modifying it makes life along the supply chain much easier.
Toyota, on the other hand, chose a different strategy that proved to make all the difference. The first generation of the Prius, produced between 1997 and 2003, was designed based on the Corolla, one of Toyota’s best-selling cars. The second generation of the Prius was an improvement on many dimensions but had one crucial change that propelled it to success.
Instead of making the car look like any other sedan, with only a small plate on the back distinguishing it as a hybrid, the Prius was redesigned to have the distinct look that we are all familiar with now. When you drive into the parking lot at work with the newly designed Prius, everyone can see that you own a hybrid. This distinctiveness is extremely important for the people who buy the car to signal how much they care about the environment. After all, what’s the value in signaling to others if they don’t notice it? A small plate doesn’t send much of a signal, because the receivers simply don’t notice it—it’s not that useful as a signal. A completely redesigned look, on the other hand, is nothing if not noticed everywhere and by everyone.
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Prius owners like the fact that their car is unique and doesn’t look like what a typical person would consider “cool.” When others see a Prius, they think that only someone who really cares about the environment would get such a car.
As the graph shows, the increase in sales came with this second-generation Prius, introduced in 2003. Sure, the car was better than the first-generation Prius, but so was the Honda Civic as compared to the Insight. However, only a small fraction of the buyers who chose a hybrid went for the Honda Civic. They wanted the distinct-looking Prius—they wanted to be noticed.
This notion was confirmed in 2007 when the New York Times cited a study by CNW Marketing Research of Bandon, Oregon. The study found that 57 percent of the Toyota Prius buyers said they got it because “it makes a statement about me.” Only 36 percent answered that they bought it because of its fuel economy, and even fewer (25 percent) mentioned low emissions. The article was titled “Say ‘Hybrid’ and Many People Will Hear ‘Prius,’” and it hit the nail on the head. Its author, Micheline Maynard, started the article with a riddle: “Why has the Toyota Prius enjoyed such success, when most other hybrid models struggle to find buyers?” Her answer: buyers wanted everyone to know that they were driving a hybrid.2
Maynard interviewed people regarding their choice of the Prius to support her reasoning. She got similar messages across the board:
I really want people to know that I care about the environment.
—Joy Feasley, Philadelphia, PA
I felt like the Camry Hybrid was too subtle for the message I wanted to put out there. I wanted to have the biggest impact that I could, and the Prius puts out a clearer message.
—Mary Gatch, Charleston, SC
It wasn’t just ordinary people who felt this way, either:
The Prius allowed you to make a green statement with a car for the first time ever.
—Dan Becker, head of the global warming program at the
Sierra Club, San Diego, CA
In 2017, the Washington Post’s Robert Samuelson aptly called this phenomenon “Prius Politics,” arguing that people bought Priuses to show off more than to reduce pollution.3 In that same year, Honda’s CEO admitted that “releasing a Civic Hybrid with little visual differentiation from more plebeian Civics was a mistake”—and with that, Toyota won the hybrid car competition.
TAKEAWAY: Accounting for signals can make all the difference in attracting customers and winning in a competitive marketplace.
1. Alternative Fuels Data Center, “U.S. HEV Sales by Model,” accessed December 2, 2020, https://www.afdc.energy.gov/ data/10301.
2. Micheline Maynard, “Say ‘Hybrid’ and Many People Will Hear ‘Prius,’” New York Times, July 4, 2007, https:// www.nytimes.com/2007/07/04/ business/ 04hybrid .html.
3. Robert J. Samuelson, “Prius Politics,” Washington Post, July 25, 2007, https://www.washingtonpost.com/wp-dyn/ content/article/2007/07/24/AR2007072401855.html.
From Mixed Signals: How Incentives Really Work by Uri Gneezy. Published by Yale University Press in 2023. Reproduced with permission.
Uri Gneezy is the Epstein/Atkinson Endowed Chair in Behavioral Economics and professor of economics and strategy at the Rady School of Management at UC San Diego. He is the coauthor of The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life.
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