The Incentive Dis-Incentive

I’ve been wondering lately whether incentives on new-car purchases are on their way to extinction. 

That thinking kicked up a notch this week when Edmunds.com announced that car incentives are at their lowest levels since 2005. The average incentive on a new-car purchase was $2,118 in April, down $515 from the same month a year ago. Each of the six largest global car manufacturers — General Motors, Ford, Honda, Toyota, Chrysler, and Nissan — posted significant drops in their average incentives. 

A quick online search yields multiple studies that illustrate the prolonged use of discounts and promotions have a detrimental effect on sales; customers hold off waiting for bigger deals or the promotion establishes a new pricing floor that crushes profit margins. Look at the past decade in the automotive industry as further proof. Incentives became a crutch following the 9/11 terrorist attacks, when manufacturers unveiled 0% financing. When that wasn’t attracting business anymore, they went to employee pricing. When consumers started to lose interest in that offer and the economy cratered in 2008, the auto industry met rock bottom. Incentive offers were replaced with bail-outs and Congressional hearings. Detoxing off the incentive addiction was a very long and torturous hangover for the auto industry. But it appears as though the message has gotten through. Car makers can proudly show off their pins and chips for prolonged sobriety. 

What is interesting about car-buying are the opposing psychological factors that are at work. Customers aren’t interested in haggling, but still want to walk away knowing they got the best deal possible. Incentives offered a happy medium. I wonder how the car-shopping dynamic will be affected with the decreased emphasis on incentives. 

The news about lower incentives, coupled with the improved financial health of carmakers and their captives, point to a very strong foundation on which the industry can grow.