New Dealer Programs Could Mean Lower Used-Car Prices

2012 Honda Accord

When dealers chase incentives and sell at a loss, used-car prices take a dive soon afterward.

Certain incentives from automakers, called stair-step incentives, are coming back in a big way. For consumers, that means good deals are available, or will be soon, on many new and used cars. For dealers, it can mean significantly less money if the gamble to offer discounts doesn’t generate enough sales.

Stair-step incentives artificially depress the price of some vehicles while targeting certain other models for which the automaker hopes to boost sales. Do they work? That depends, of course, on who you ask.

Typical incentives from automakers are directed at consumers in the form of cash-back offers. We’ve all heard those advertisements! Stair-step incentives are aimed only at the dealers, and they pay escalating bonuses as sales targets are met. For example, if a dealer has a target of selling 100 vehicles in a month, he might get anywhere from $100-$750 from the automaker for each vehicle sold within a few percentages of the target.

Graphic from Automotive News

Automotive News says,

But many dealers say stair-step programs wreak havoc on local retail markets. Dealers gunning for their sales bogeys in the final days of a program often slash prices well below cost—willing to sustain, say, $30,000 in losses in hopes of a $100,000 volume-based bonus at the end—and drag down other dealers’ prices in the process.

Consumers, of course, care only about getting the lowest price. Once one dealer in an area offers a drastically low price, other dealers are hard-pressed to not make the same offer. Eventually those lower prices trickle down to the used market (keep an eye on the CarGurus used listings for that).

It’s hard to see how lower prices hurt the consumer, unless, of course, dealers sell at a loss and don’t earn their bonuses. Do that enough times and pretty soon there is no more dealer. That translates to less competition for other dealers and, ultimately, higher prices.

I’d rather see consumers negotiate a fair price on a car than have a dealer take a large loss in hopes of receiving a bonus. How about you?

-tgriffith

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  1. Randy
    May 23rd, 2012 at 06:42 | #1

    Jim, you can’t just turn production on and off like a light bulb. It’s a very complex dance involving thousands of people and hundreds of suppliers, and in the case of union assembly plants, the workers tend to get paid about the same whether they’re working or laid off. When demand peaks, it’s can be hard to meet the demand quickly because most production systems are designed to produce only a cerain number of cars per day. Manufacturers have whole departments full of people just to be able to predict demand and balance production to meet it.

  2. Jim Redd
    May 22nd, 2012 at 13:09 | #2

    Same old sales tricks that led to the auto problem in the first place. How about they just build enough cars that the market demands?

  3. Randy
    May 22nd, 2012 at 07:26 | #3

    I did see something recently about when to buy a car, and the end of the month or quarter was listed, probably because of these incentive techniques. I have noticed that locally, American nameplates seem to be the best deals by far, and brands I traditionally associate with low prices are actually high– Like Hyundai, which seems to be advertising similar lease prices as American brands but requiring very large down payments.

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