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.
Although what you report on retail purchases is true, the incentivised residuals on leases has returned, to the detriment of the industry. Ford and GM are begining to subvent residuals, even on their best sellers, by thousands of dollars. This results in short term sales gains and long term headaches and eventual end of term losses. When the losses come, then leasing is blamed for them. Cheating the market is the same as cheating in cards. Eventually you get caught and have to deal with reality.
Very good thoughts. I think we will always have some sort of enticement. When it gets to the $1000 mark I think we can then say that incentives are not driving the sales. David’s point is right on as well in trying to get to a great marketable lease payment.
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@ David – Strangely, I’ve been looking at some subvented deals these days and seeing residuals 2K LOWER than ALG. They are reducing payments through cheap interest money and other lease cash. My guess is they know they will be releasing large numbers of the same vehicle into the market at the same time, and don’t want to deal with that. I’ll go back through my research to see which vehicles those are and let you know. In the meantime, I’ll be seeing you and Ricky in Chicago at NVLA!!
Regarding incentives – Unfortunately, the public has been trained since Joe Garagiola to expect us to pay them to take inventory of our hands. While I hope incentives can be kept under control, I don’t think they are going away any time soon. If there was ever a time for it, however, this would be it. We will be staring at a new vehicle shortage for a while!
Frank, read the article carefully. Marcie addresses your question in the 2nd paragraph under the heading “Key Findings”. And if the US Congress is so dumb, maybe you should run for office and straigten things out.