Reduced incentive
spending doesn’t look sustainable, says Gareth
Hession.

 

Incentive campaign activity
is hugely significant in today’s automotive market. Manufacturers
are cost-conscious throughout the production process, then often
spend thousands of pounds per unit incentivising customers to
buy.

Effective monitoring and an
accurate understanding of competitor activity and perceived
customer value is vital to ensure this spend is focused for maximum
impact.

Reducing incentive spending
is a key target for manufacturers, as it hits the bottom line, but
also strategically. High incentive spending detracts from the value
of the brand and product. By its nature it’s a call to action for
consumers and a reflection of the relationship of demand to makers’
sales targets.

JATO Dynamics’ research on
incentive spending, including public offers and dealer margins and
campaigns, shows manufacturers are starting to win. Spending is
down in the past 12 to 18 months.

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But it’s not easy – today’s
consumers are savvy. They get used to certain brands offering high
incentives, and those brands’ ability to withdraw and build margins
becomes limited. When consumers see used vehicles on the forecourt
for far less than the list price, they worry how much value their
new purchase will lose. In many cases, a ‘falsely’ high list price
prevents products reaching the shortlist when consumers might have
considered them at the true transaction price level.

For this reason some bigger
downward trends in incentive spending have been matched by reduced
list prices. The result: a lower list price with taxation and
consumer shortlist benefits, plus lower incentive spending with
brand image benefits.

The residual value effect
related to brand and product value is also critical. In the UK
market, underwritten finance plays a huge role in new vehicle
sales, but even where it doesn’t, buyers are aware of the likely
depreciation of products they compare. Reduced incentives can help
increase residuals, which enables the product to increase its
attractiveness at the same lower incentive levels.

What manufacturers do comes
down to the length of time goals are set and their competitive
business environment. In reality, it should always be a balance
between short-term success and long-term margin development, given
the added benefit that greater volumes deliver through
manufacturing efficiencies of scale.

Short to medium term, the
trend for reduced incentive spending, in particular with volume
players, isn’t sustainable. In these austere times demand is weak,
particularly from retail buyers. Falling volumes and mixed sales in
more expensive fleet and captive channels is rising. Even
self-registration activity is showing signs of increase, despite
being less prevalent than a few years ago.

Turning off the production
tap isn’t easy and competition is getting tougher. Increasing sales
pressure will stem the trend for reduced incentives as makers are
forced to become more tactical. It may not be good news for
manufacturers, but consumers who can afford to buy, or raise the
finance, should find deals become more attractive again. The
challenge for manufacturers is to know where and when to channel
this support.

Gareth Hession is vice-president of research at JATO
Dynamics