Do incentives work in getting consumers into showrooms, where they hand over a check and drive away with a new set of wheels?
The answer, it appears, is that incentives do work, but not the same way they once did.
This is in large part because incentives aren’t viewed by consumers today the way they were when former Chrysler Corp. Chairman Lee Iacocca, father of the rebate, proclaimed: “Buy a car, get a check.”
“Chrysler started rebates back in the ’70s, and rebates proved to be incredible at that time. People who weren’t in the market for a new car suddenly were offered rebates and went out to buy a car in order to save some money. Chrysler offered $50 rebate checks, and it got people into the showrooms,” said Art Spinella, general manager of CNW Marketing/Research, the Bandon, Ore., company specializing in determining why people buy the vehicles they do.
But times have changed.
“If you offered a $50 rebate today and expected to attract people into a showroom, it better be a showroom offering $50 off on $100 worth of computer software,” Spinella said in noting how rebates have swelled to several thousand dollars in some cases.
And though the only incentive initially was a rebate, automakers have tossed in a choice of lures–a check or discount financing.
“It’s not that consumers have become immune to incentives, they still get people in the door, but they aren’t as effective as they used to be when Chrysler started offering them,” Spinella said.
When rebates surfaced, consumers rushed to the stores to grab those checks while they could. After all, even $50 was a price cut, something for which the auto industry hasn’t been known.
Until Iacocca came along with his offer of a check, about the only price cut consumers enjoyed occurred in the fall of 1971, when then President Nixon got automakers to roll back announced price increases on 1972 models to 1971 levels.
The major change in rebates is that when rebates first were offered, they got people who had made up their minds not to buy a new car or who hadn’t even considered buying a new car, to run down to the showroom. They meant plus business.
“Today, it’s not that rebates or low APRs [annual percentage rate financing] get people to buy any sooner or get fresh new blood into the marketplace as it is rebates or low APRs come in near the end of the car-buying decision, after people already have decided they are going to buy a new vehicle and use incentives as a means of shopping for price,” Spinella said.
Today, rebates get people who plan to buy to choose a vehicle based on the best incentive. So sales rebates simply push back or pull ahead sales that would have happened anyway.
“It used to be that incentives pulled consumers into the market sooner than those consumers had planned. Today, rebates and financing offers aren’t drawing new buyers sooner, they aren’t bringing in new blood to the showrooms, they aren’t pulling future sales ahead,” Spinella said.
“Today, if a consumer has Mercury, Ford and Olds on his or her list of vehicles to shop, and Olds comes up with a low APR incentive and the others don’t, then the consumer moves Olds up from No. 3 on the shopping to No. 1,” he said.
Initially rebates were small and offered for a limited time so consumers acted on the automaker’s largess as quickly as possible before the prices, in effect, went back up.
As offered, incentives were a way to get people into showrooms to help reduce inventories of cars. When stocks grew, rebates appeared.
Consumers grew so accustomed to rebates, they’d wait to buy until inventories grew.
“In the ’70s it was the $50 rebate, in the ’80s it was the $500 rebate, today anything goes,” Spinella said. “If you offer $1,000, people will put you on their list to shop, but if you want to get people to buy, it better be at least $1,500.”
As is typical in the auto industry, Chrysler didn’t stand alone in offering rebates for long. Soon the other manufacturers, domestic and imports, joined in.
Discount financing eventually came into play in the ’80s to help ease the automaker’s money drain. Rather than a $100 to $1,000 outlay, the automaker reduced the loan rate to those who used the in-house financing arms.
That way, rather than pay out a rebate once, the automaker took in a loan payment each month. The volume of financing contracts offset any losses from cutting the financing rate by 1, 2 or 3 points.
“Today, discount financing or low APRs build showroom traffic faster than rebates, and you find when automakers offer low APRs, they typically will say it represents `a saving of up to $2,500′ or some other dollar figure to put it in terms people can better understand,” Spinella said.
Discount financing proved to be a moneymaker. Rather than buy a car and finance it through a local bank or savings and loan, consumers had to finance the car through the automakers’ captive company, so the automaker made money on the sale and on the financing.
Consumers have grown to expect incentives, wise to the fact that, besides reducing inventories, incentives are used to help an automaker keep its share in a market segment. When a rival would introduce a minvan in the segment dominated by Chrysler, for example, Chrysler would counter with an incentive on its minivans.
This is one reason automakers complain about the profit drain from rebates. An automaker might be willing to offer a $500 rebate to hold onto its share of that segment or to reduce inventory of a vehicle that would earn it $1,500 each when sold. But if the competition raises the rebate ante to $750 and you have to go to $1,000 to reduce your inventory or sell enough to hold on to market share, rebates lose much of their allure for the automakers.
And while consumers still consider incentives price cuts, they no longer rush out to take advantage of the first incentive advertised.
Often consumers will wait until an incentive is about to expire before making a purchase, hoping to hear first whether a higher cash rebate or lower finance rate, is going to replace the current one or if the incentive has been so successful in moving inventories that it is going to be lowered or removed after the expiration date.
“It happens many times, people waiting for an even better rebate, but sometimes they wait too long,” said Lee Weinman of Bert Weinman Ford in Chicago, “not realizing that the big rebate offered over the winter when people buy fewer vehicles probably won’t be offered in the spring when people buy more vehicles.
“Or, they are so accustomed to rebates they don’t understand the effect of supply and demand. I have people asking me when Ford will offer 1.9 percent financing on the new Escape sport-utility vehicle. I tell them that I have two Escapes in stock, both with manual transmission, and that if you order one today with automatic, you aren’t going to get it until May because the vehicle is sold out until then. And if you want to wait for a rebate, you may have to wait until 2002 ort 2003,” Weinman said.
As for the common belief that dealers know of rebate changes coming, most say the day the automaker announces the change to the media is the day they are first told what the changes will be.
