Rolls-Royce

A case study in promises priced in advance

Executive Summary

Rolls-Royce has sold the same thing for 120 years, and it has never been a product. It has been a promise about the future: a car that would not break down, an engine that would arrive on a date at a price, a guaranteed cost per hour of flight for the next twenty-five years. Promises are priced when they are made and paid for when they come due, and the gap between those two moments is where this company's entire history happens.

Each decision in this case is a version of that gap: how much to promise, at what price, and who pays if keeping the promise costs more than it looked. They run from a two-year-old car company with little capital to a maker of the engines that airlines pay for by the hour.

The case follows that promise through seven decisions over more than a century. Each is told up to the moment it was taken, with only what was knowable then.

Two Men and a Promise of Perfection, 1904-1914

On 4 May 1904, in the dining room of the Midland Hotel in Manchester, a 41-year-old electrical engineer met a 26-year-old aristocrat over lunch. The engineer was Henry Royce, who had left school at fourteen, worked as a telegraph boy, and built a business making electric cranes and dynamos before deciding that the motor cars available to him were badly made. The aristocrat was Charles Rolls, third son of a baron, who sold imported French and Belgian cars from a showroom in Fulham and had been complaining that none of them were British. The meeting was arranged by Henry Edmunds, a mutual acquaintance and fellow engineer, who had seen Royce's two-cylinder car and thought Rolls should too [6].

The deal they struck on 23 December 1904 was unusual in one respect that shaped the next century. Rolls agreed to take every car Royce could build [6]. Not a quantity, not a schedule: everything. The commercial side committed itself in advance to whatever the engineering side produced, which meant the engineering side never had to compromise to hit a number.

Rolls-Royce Limited was registered on 15 March 1906 with £60,000 of capital. Royce became chief engineer at £1,250 a year plus 4 percent of profits above £10,000; Claude Johnson, the commercial managing director who had run the Automobile Club, took £750 on the same profit share [6]. Johnson is the least famous of the three and arguably the most consequential. He was later called the hyphen in Rolls-Royce, and the phrase is accurate: he was the man who turned Royce's obsession into a market position.

Your call

It is March 1908 and you run the commercial side of a two-year-old British car company with limited capital. You currently sell four models, from a small twin to a large six, which is how a young manufacturer finds out what buyers want. Your chief engineer wants to build one car to a standard nobody else attempts, and the market for it is a few hundred wealthy buyers a year. Keeping the range spreads risk across price points and keeps the factory busy; dropping it bets the company on a claim about quality that no customer can verify before buying. You can keep all four models, keep two, or stop everything except the largest and most expensive. Choose, say how you would make the quality claim credible to someone who has never driven the car, and name what you would spend to do it.