Why Small Economy Cars Make Economic Sense for Automakers

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Courtesy GM

2011 Chevrolet Cruze RS

Is it better to sell one pricey luxury car at a hefty profit, or 10 reasonably priced compacts with much smaller, but still decent profits? Increasingly, car manufacturers are embracing the wisdom of the latter.

Historically, SUVs, sports cars, and luxury automobiles have tended to be the most profitable vehicles to make and sell. The bigger the sticker price, the more likely there’s a sizable profit to be earned.

More recently, though, it’s been the “value cars”—the Hyundai Elantras, Ford Focuses, and Honda Civics of the world—that are proving to be remarkably profitable for sellers. Edmunds AutoObserver reports that demand for compact cars has increased dramatically—and so, not coincidentally, has the average price paid for such vehicles over the past 18 months. In June 2011, the average transaction price for a compact car was $20,491—a significant rise compared to $19,159 in June 2010, and $19,263 in January 2010.

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Buyers are paying more lately because automaker incentives have all but disappeared for these fuel-efficient small cars. The incentives, in turn, have dried up partly because the rise in gas prices and the tsunami in Japan have caused an increase in demand and a drop in supply for many prototypical commuter cars. What automakers are finding is that drivers want these cars so badly that there’s no need to juice demand via special incentives. Why put something on sale if it’ll sell at full price?

Obviously, with higher prices, automakers and dealerships make more money. The super-hot Hyundai Elantra, for instance, is currently selling for roughly $4,000 more than older Elantra versions. The Chevy Cruze is also selling for about $4,000 more than the car it replaced, the Cobalt.

Even with higher prices, these cars are flying out of the dealerships. In June, the typical Elantra was sold just seven days after it arrived on the dealer lot. The Chevrolet Cruze, meanwhile, has gotten a sales boost from car buyers who come in curious about the all-electric Chevy Volt, but who wind up buying the less-pricey but still fuel-efficient doppelganger, the Cruze.

These are vehicles that may seem bland, but they sell quickly at decent profits, with little or no incentives required. No wonder automakers love them.

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Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.