Automotive Industry: Avoiding the End Customer Incentive Trap in Five Steps

September 14, 2018

car sells man with people

When incentive structures aren’t fit for purpose, they can be a drain on profits for automotive manufacturers, distributors and dealers. Unnecessary complexity results in confusion for staff and customers, while the incentives themselves are often unattractive to potential buyers or don’t make financial sense for the company. However, there is a way to avoid the customer incentive trap and reduce expenditure.

“Half the money I spend on advertising is wasted;
the trouble is, I don’t know which half.”

- J. Wanamaker

These famous words encapsulate the situation with cash discounts and other customer incentives in the car sales arena today. With high cost and little clarity, manufacturers, distributors and dealers spend between 4 and 14 percent of their gross revenue on customer incentives, often without knowing what actually works. There is no “silver bullet” for decreasing spending without risking a drop in volumes; however, the five key steps presented here offer support in managing customer incentives more professionally and more profitably.

1)  Plan your promotions carefully

Cash discounts, trade-in bonuses, attractive leasing rates, free services, special editions – the list of potential incentives for customers is very long. Which is why it is all the more important to select the right promotions at the right time and keep track of the incentives that have already been used. Many vehicles are sold with three or more customer incentives. However, the greater the number of promotions running in parallel, the more confusing and non-transparent the actual discount level is for customers and sales staff; their impact simply evaporates. The negative consequences of having too many uncoordinated sales promotions also include additional expenditure per vehicle, decreased variable margin, and jeopardized profits. These difficult circumstances can be avoided by creating transparency, reducing complexity, planning and managing promotions and customer incentives carefully, and keeping tight control of your margins.

2)  Select the best incentives

Conventional cash discounts are by far the most common approach when trying to motivate customers to buy a new or used car. Just how attractive are these cash discounts for your customers compared to other customer incentives, such as warranty extensions, free additional equipment, gas vouchers, or free services? By conducting smart customer surveys, you can determine how attractive each of your customer incentives is from the customer’s perspective and compare this against the money you spend. A cash discount of 1,000 euros costs you 1,000 euros. However, other incentives, such as equipment or accessories, may be just as valuable to the customer but cheaper for you.

Cost-to-value relation per incentive

On top of that, market research shows that a 3,000 euro cash discount might not exactly be three times as valuable as a 1,000 euro cash discount for the customer. Hence, the relationship between incentive levels is another key element to consider.

For these reasons, it is important to assess the value of each incentive and incorporate the cost-performance ratio into your approach to maximize your volumes and profit.

3)  Follow a clear set of rules

Even if you put a lot of effort into planning and setting up your sales promotions - don’t forget about the approval process. It will clarify which promotions can definitely be given the go-ahead and under which circumstances additional resources can be approved for sales promotions. Determine what the most important aspects of the promotion are before it begins. You will need to ask a number of key questions: What volumes and margin impacts are realistic? Which proposals can be ruled out instantly due to unrealistic predictions? In addition, remember to take into account factors such as the specifics of the target customer segment, the product’s life-cycle, and the ways in which competitors are likely to react.

Having a systematic approval process with a clear set of rules will enable you to determine how customer incentives should be granted. This generates security for everyone involved, as it ensures discounts are granted in a controlled manner.

4)  Ensure customer incentives can be implemented flexibly

Many salespeople feel very restricted by sales promotions. They are often given extremely precise instructions about the scope of each promotion. The consequence of this is that sales agents generally grant customer incentives in an undifferentiated way, giving different types of customers the same incentives at the same level. Yet, not all customers react in the same way to every incentive. For example, one customer might value services very highly, while another customer might only make a purchase when there is a discount and not pay much attention to the other elements of the offer. Your sales staff interact closely with customers and are often able to distinguish between different customer types with ease.

Incentive profile
Give your salespeople more freedom to set incentives. It is easier to tap customers’ individual willingness to pay when sales staff are able to choose and adjust the type and level of incentives according to customers’ behavior. Develop incentive profiles for different customer types with your salespeople and help them create customer-specific offers.

5)  Test the success of your promotions

Managing incentive campaigns and sales promotions is undoubtedly an ongoing process that has to be continually assessed and improved. For this reason, you should measure the impact and success of every promotion, incorporate your findings into your future planning, and implement actionable improvements. Methods for measuring success include surveying customers and dealers as well as conducting regression analysis. It is also beneficial to divide each promotion into individual phases and evaluate them from different perspectives: To what extent was each dealership involved in the promotion? Did the promotion run for too long? Were drops in volume noticed during the promotion? Did the promotion lead to higher sales volumes overall?

Examine previous sales promotions in detail: Work out what impact they had on your sales volumes and systematically assess the extent to which targets were reached.

Professionally managed customer incentives offer real profit potential!

When working through these five steps, it isn’t enough to focus on specific areas of your business – your entire organization needs to be aware of the money that is being spent and the huge potential that can be unlocked by managing customer incentives more professionally. A joint effort by marketing, sales, controlling, and finance can lead to significant improvements. Work this out for yourself: What would it mean for your company if you were able to save just one percent of the money you currently spend on customer incentives?


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