Debunking the myth around dealer cash incentives

Author’s Note: The catalyst for this series was the eye-opening discovery that over the last 20 years, the dealer invoice price has been turned into a bloated imposter that has nothing to do with any true vehicle cost — a fact which torpedoes the foundation for the ubiquitous “target price” negotiating advice on the Internet. The indisputable evidence of that fact is in Part 1 of this series. You can see the response I got in Part 2 when I presented that evidence to the senior executives of five major new-car pricing services over two years ago. Now read Part 3…

The myth about dealer cash incentives

Once upon a time, virtually all automakers ran frequent programs that paid dealers cash incentives for each sale of specific models within certain time periods. Dealers could keep that cash or pass some or all of it along to consumers, thus lowering transaction prices. Unlike factory-to-customer cash rebates, these incentives were not advertised, and new-car shoppers knew little or nothing about them.

But we live in a time when ‘the way things are’ becomes ‘the way things were’ at warp speed, and if you blink, you miss it. As JFK said, ‘Time and the world do not stand still. Change is the law of life.’

Some websites still spread the myth that vehicle-specific cash is in broadscale use today. Sorry, fellas, but you blinked and missed the major reconstruction of dealer incentives.

A few brands still use that incentive type periodically, but today about 90% of “dealer cash” dollars are allocated to secret, “below-the-line” programs that are typically tied to multi-month total sales targets and other non-sales objectives that are set dealer-by-dealer. And no one can tell you who’s got what targets, where they stand against them, or even when those programs start and end.

I get the straight skinny on these programs right from the horse’s mouth.

I have a major advantage over every other new-car information source: For two decades, I’ve kept abreast of the sea changes in the retail car business through personal contacts with tens of thousands of new-car shoppers. The kinds of reports I get regularly are illustrated below. (Note: The transaction prices they report exclude the impact of any cash incentives.)

• A woman who got her popular import-brand midsize sedan for $800 below invoice was thanked by the sales manager, who told her that her purchase and the others that day got the dealership to the automakers’ multi-month sales target, earning them another $1,000 for each vehicle sold. (That brand’s average dealer sold 1,197 new vehicles last year, 100 per month.)

• When a couple paid $2,000 below invoice for Detroit’s best-selling pickup in December, a friend at the dealership told them, “Your purchase got us to the sales level for that truck that earns us an extra $750 for every unit we’ve sold this year.”

• A customer paid $2,317 below invoice for one of the most popular Japanese midsize sedans. The sales manager said he lost over $1,500 on the sale. Then he added, “I did that because the automaker has us on a ‘stair-step’ incentive program. As we reach each higher total sales target, we get more money per car for all the cars we’ve sold. Your sale got us to the next plateau.”

• A Detroit automaker ran an “Employee Price” consumer promotion. That was about 5% below the total dealer invoice. But at the end of two quarters some Fighting Chance customers bought their vehicles for as much as $2,000 below that price. A salesperson told one of them: “The factory is running quarterly promotions in which we can earn six-figure bonuses by reaching our sales targets. So we didn’t care how much we lost on your deal.”

• It can be tough to deal on an all-new design because the early demand usually exceeds the early supply. But a customer’s wife wanted a “hot” redesigned import sedan in its first week on the market, and as he told me, “It’s a lot cheaper to trade in cars than to trade in wives.” Nine of the ten price proposals he received were at the full MSRP. But one dealer sold the car for $2,500 less, $500 to $600 below the invoice price. In week #1! The owner took him aside quietly and said, “Here’s why I did that. My sales target is 1,000 new cars. I’m so close to that bonus check I can almost taste it.” I guessed that was about $500 per vehicle — a half million bucks. I learned later from a reliable source that the real number for that brand was $1,200 to $1,800 per vehicle. (You can do the math.)

Even that rock-ribbed bastion of capitalism, The Wall Street Journal, has caught up with the truth. In a 1/14/14 article about new-car supplies getting higher and car sales slowing to single-digit yearly gains, it acknowledged, “That turns up pressure on auto dealers, . . . . as car makers tie payments to dealers to hitting certain sales quotas.”

Vehicle-specific cash has been only a small percentage of dealer incentives for years

A small number of brands still use dealer cash incentives periodically, typically on vehicles that are: (1) well behind their sales objectives, (2) “leftovers” at the end of the model year, (3) about to be replaced by all-new versions. They also appear in December, when automakers may be competing for bragging rights as “the best-selling brand” in their price categories (as Mercedes and BMW have been in recent years).

To illustrate the fading role played by these programs, I analyzed the January 2015 incentives reported for all 2015 models in the Chicago market on websites I trust and combined it with the info in the bi-weekly national CarDeals report in the Fighting Chance info package. Here’s what I learned — Only the following nine brands were offering vehicle-specific dealer cash there in January:

• Acura and Honda never use customer cash rebates. Both brands had disappointing 2014 results, losing market share. The auto market gained 5.9%, but Acura sales increased just 1.5% and Honda’s were up only 1.3%. Acura’s model-specific cash was on the ILX, RDX and RLX. Honda’s included the Accord, Civic, Crosstour, Odyssey & Pilot. But there was just $500 on Accords and Civics, more of a “defensive” offering than one that would drive sales aggressively.

• Infiniti, Volkswagen and Volvo had vehicle-specific cash on all their models. All three performed relatively poorly last year and wanted to jump-start the new year. (Infiniti inched up just 0.8% in 2014; Volvo sales fell 7.9%; and VW nosedived a whopping 10.0% in a market that gained 5.9%.)

• Mazda had a fine 2014 (sales up 7.7%), but wanted to reinvigorate both its best seller, the Mazda 3 sedan, whose sales were flat last year, and the Mazda5 minivan (down 16.4% in 2014). The company also wanted to boost sales of its CX-5 and CX-9 crossovers and its flagship Mazda6 sedan.

• Jaguar put dealer cash on the XJ sedan, Nissan on its $100,000+ GT-R coupe, and Mitsubishi–hanging on in the U.S. by its fingernails–offered it on the Lancer sedan and Outlander crossover.

That’s it. The other twenty seven brands offered no vehicle-specific dealer cash in Chicago, a typical major market, in January 2015.

The models with dealer cash accounted for just 11.6% of 2014 U.S. auto sales. And if you remove the Honda Accord and Civic, which carried meager $500 dealer incentives, the balance of the impacted models represented only 7.3% of last year’s sales. In an identical analysis in Chicago in May 2013, the nameplates carrying dealer cash accounted for only 10.7% of total 2012 sales.

I’ve been studying these incentive numbers for 20 years, and this is typical of the result you’d get most months in any major market. Few major-volume brands use vehicle-specific dealer cash, except sporadically and very selectively. So if you’re shopping for one of the more popular, better-selling vehicles that’s not near the end of its model year or about to be replaced by a redesign, you may be more likely to win the lottery than to find dealer cash attached to it.