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.
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?