Quota kickbacks have a place in the automotive industry with benefits for both consumers and some dealers.
Programs that reward dealer volume sales, known as stair-step programs, are derided by a vast number of automotive professionals. Their effects on especially small dealerships and low-volume sales areas has been regarded as an unfair advantage for groups with deep pockets and big-city dealerships. Yet, stair-step incentives can have a profound positive impact on both ends of the retail spectrum.
Lower Sales Price
Simply put, it’s easier to sell cars with deeper discounts available. A large dealership who’s consistently able to achieve the top tier of their manufacturer’s stair-step incentives can confidently slash a price on the sales floor to pad the deal.
It’s especially valuable to capture the customers who are focused primarily on the best deal and not on the in-dealership experience. A lower sales price stair-step incentive programs allow for is the advantage that can help boost a dealer to the top-selling position in their zone.
Deeper Discounts Don’t Affect Profitability
A small dealer who can’t count on a month-end incentive to isn’t able to sell a vehicle below invoice without potentially taking a true loss on the unit. For the large dealers who are able to bank on the stair-step payoffs, it’s a calculated risk, and the risk is low. Providing massive price cuts might look bad on paper at first, but huge incentives bring those ‘red’ deals back into the black, often substantially.
Keep in mind that these deeply discounted deals can hurt the front-end gross badly, on which the salesperson’s commission is based. It’s a fine line to walk between volume sales to achieve monthly incentive levels and making true front-end sales profits.
Expanded Customer Base
The ability to sell more cars because of a more competitive pricing advantage is often regarded as a ‘foot in the door’, adding first-time car buyers to the dealership’s loyal customer base. 2016 NADA Data shows that average new vehicle net profit is $-217 per deal, yet average new car sales have increased. Yet, fixed operations sales are increasing handsomely according to the same report, inferring that new car sales brings money into the dealership in other capacities also. It’s the result of a larger pool of customers that buy other products and services.
More Units on the Road for Manufacturer
While the customers benefit from a lower selling price and dealers capitalize on a larger customer base, manufacturers are the winners. Stair-step incentives can create an influx of new vehicles rolled. Whether they are sold through small, family-owned dealers or large dealer groups is of little consequence to the manufacturer. Rather, it’s about the overall number of cars on the road.
With more vehicles selling annually, a manufacturer stands to earn more money from all facets. Collision repair components, parts and accessories, even F&I profits – it all results in earnings for the manufacturer when there are more cars on the road.
The effect of stair-step programs for small dealers is well-documented. However, it certainly has perceived benefits for the manufacturer, large dealers, and the end users. Striking a balance or fine-tuning programs based on demographics may contribute to a solution, but stair-step incentives will not soon be a topic that everyone agrees upon.
For more about Stair Stepping click here to read part 1 of this 3 part series.
