Tiny car, tiny price tag, tiny gasoline bill. The Smart Car, made by Daimler's Mercedes Car Group in Hambach, France, first appeared on U.S. roads in 2008, just as prices at the gas pump were hitting record highs week after week. The timing could not have been better. Tired of emptying their wallets every time they filled their gas tanks, many U.S. drivers were thinking about downsizing from a big sport utility vehicle or pickup truck to a smaller vehicle. But were they ready for a 106-inch-long car that seated only two people? Daimler was ready to find out.

The Smart Car had a good track record in other parts of the world. From 1998 to 2008, Daimler sold more than 900,000 Smart Cars in Europe, the Middle East, Asia, Australia, Mexico, and Canada. The car was cute, nimble, and unconventionala good size for getting through crowded, narrow city streets and fitting into any tight parking spot. Not only was the purchase price highly affordable, but the excellent fuel efficiency made the car especially popular in countries where gas prices were generally high.

To bring the Smart Car to the United States, Daimler redesigned the body and engineering to meet U.S. safety standards. It added six inches to the car's length and included four air bags, an antilock braking system, a collapsing steering column, and other safety features. It also installed a fuel saving 71 horsepower engine so that the Smart Car would go about 40 highway miles on a gallon of gasoline.

Daimler set the list price of the Smart Fortwo Pure modelthe basic version of the two-seaterat $11,590. The list price of the Smart Fortwo Passion Coupe, equipped with more features, was $13,590. The list price of the Smart Fortwo Passion Cabriolet, a convertible with leather seats and additional features, was $16,590. Buyers had the option of ordering extras, like a metallic-paint finish or an alarm system, for an additional fee. Keeping the list price as tiny as the car allowed Daimler to build market share quickly.

Rather than selling Smart Cars through its regular dealer network, Daimler contracted with the Penske Automotive Group to handle distribution and sales. In another unusual move, Daimler set up a website to let buyers reserve the model of their choice and choose from six interior colors and six exterior colors on the car body's removable panels. Three of the exterior colors were offered as part of the purchase price, while the three metallic exterior colors were offered at an extra cost. The $99 reservation fee was applied to the buyer's purchase price once the ordered model became available. By the time Smart Cars arrived in U.S. showrooms, 30,000 people had paid for reservations.

To build customer interest prior to the U.S. launch, Daimler sent a number of Smart Cars on a 50-city U.S. tour. Nearly 50,000 members of the media and prospective car buyers took test drives. Although many reporters couldn't resist poking fun at the tiny car (USA Today called it a "breadbox on wheels"), they all noted its high fuel efficiency and low purchase price. Initial demand was so strong that even buyers who had reserved their cars well in advance had to wait months for delivery. A few U.S. customers who didn't want to wait paid as much as $39,000 for European Smart Cars adapted to meet U.S. safety and emissions standards.

Then gasoline prices fell from their record-high levels and the global economy plunged into recession. By 2009, the downturn was so severe that car sales plummeted across the board as U.S. consumers and businesses clamped down on buying. The combination of significantly lower gas prices and a sluggish economy put a serious dent into U.S. sales of the Smart Car. To reignite customer interest, Daimler offered low-interest financing and, for the first time, its U.S. dealers discounted the car's retail price. In 2010, the company also introduced a limited edition electric Smart Car to appeal to buyers interested in eco-friendly alternatives to traditional gas-driven cars.

Today, Daimler continues to face intense competition in the small-car segment. Looking ahead, what else can it do to accelerate purchases of its stylish Smart Car without depending on constant discounts, rebates, and other price-cutting measures?

Sources: Chris Reiter, "Smart Car Sputters in U.S. as Daimler Hunts for Partner," Toronto Sun, January 12, 2010, p. B6; Bernard Simon, "Daimler Discounts Smart in US," Financial Times, November 13, 2009, p. 21; Steve Miller, "Vroom for Two," Brandweek, June 2, 2008, pp. 20+; Bill Marsh, "Welcome, Little Smart Car, to the Big American Road," The New York Times, January 6, 2008, sec. 4, p. 3; Chris Woodyard, "America Crazy about Breadbox on Wheels Called Smart Car," USA Today, November 11, 2007, www.usatoday.com; Royal Ford, "Smallest Car, Biggest Market," Boston Globe, December 6, 2007, p. E1.

Question

What trends are influencing the market potential of the Smart Fortwo car?