Audi and Mercedes Are Playing Chicken Over ‘Affordable Luxury’ Cars

Not too shabby.

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Audi just announced its new A3 sedan will be priced at $29,900—which, by no small coincidence, is the exact same sticker price as Mercedes’ much-hyped, luxury-for-less CLA.

Starting at the beginning of 2013, and continuing on with a Super Bowl ad featuring swimsuit model Kate Upton, consumers have been hearing about Mercedes new CLA line for months. The hype mostly centers on the price point of the model (the CLA, not Upton). With a sticker starting at an unprecedented (for Mercedes) $29,900, the CLA has been described as “attainable” and “brand-extending,” among other things.

Some have questioned the wisdom of such an “affordable luxury” option. It could devalue the brand. One can easily imagine a customer who might otherwise purchase a $60,000 Mercedes to decide to buy a Mercedes for half the price instead. Or perhaps decide that they’re no longer interested in a brand that’s within reach of the middle class. Nonetheless, because of the possibility of attracting consumers who otherwise wouldn’t consider a Mercedes at this point in their lives—because they’re young or just aren’t in the financial position to buy a car for over $50,000—the automaker made its move.

“We are going to offer people a whole new way to enter the Mercedes family,” Joachim Schmidt, head of sales and marketing for Mercedes, explained to the Detroit Free Press when the car was introduced in January. “It will be much more attainable … and win over customers who never thought they could consider a Mercedes.”

(MORE: That Sub-$30,000 Is Going to Cost More Than Advertised)

At least initially, the strategy seems to be paying off for Mercedes. As Bloomberg News reported, during the first week it was on sale in September, Mercedes sold more than 2,300 CLAs, boosting sales 6.7% for the automaker compared to the previous year and giving Mercedes a large lead over BMW in the overall battle for 2013 luxury car sales.

It’s not clear whether the CLA or any of the other luxury models in the vicinity of $30,000 will be particularly profitable. Presumably, an automaker makes a bigger profit by selling a car for $75,000 rather than one for $35,000. But the lower end of luxury is being viewed as enormously important because as Steve Cannon, CEO of Mercedes-Benz USA, puts it, the CLA is considered a “gateway” to the brand. Consumers tend to get attached to brands when they’re in their 20s and 30s, long before they typically have the wherewithal to afford top-of-the-line luxury. Mercedes’ strategy is based on the idea that that drivers who buy CLAs now are more likely to be Mercedes’ customers for life, ideally ones who are willing to shell out more and more for increasingly more luxurious wheels as they grow older and richer.

Clearly, Mercedes isn’t alone in this line of thinking. Audi just announced that its new A3, available next spring, will start with the exact same sticker price as the Mercedes CLA ($29,900). Audi’s pricing strategy appears to be a direct challenge to Mercedes. “Let the compact luxury wars begin,” Automotive News declared, upon news of the A3′s starting price. “Houston, we have a price war,” the Los Angeles Times chimed in.

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“A lot is at stake here,” Jesse Toprak, senior analyst for Truecar.com, told the LA Times. “Automakers want to get [buyers] while they’re young, and as they become more affluent they’ll buy the more expensive version of the brand.”

Audi has already begun in a little trash talking with regards to how the A3 stacks up to the CLA. “We have a screen that’s as thin as an iPhone, fully retractable coming out of the dash, made of magnesium — a stunning piece of engineering,” said Audi of America President Scott Keogh, according to Automotive News. “What they put on? You can debate it, but it’s basically just a rubber piece screwed on a screen, and the screen’s just sitting on the dash … People will see the difference.”

Bear in mind that neither the Mercedes CLA nor the Audi A3 will be quite as cheap as advertised. The automakers will surely succeed in turning more heads by sneaking just under the $30,000 mark, but the true starting price is closer to $31,000 once destination costs are factored in. What’s more, as Edmunds.com post noted, a base-price CLA could be a “never-to-be-found showroom unicorn,” as dealerships are likely to only offer more-profitable models that automatically include extras—at an additional price, of course. Mercedes expects the average CLA250 to sell for closer to $35,000.

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