Various outlets have recently noted that overall incentive spending has declined this year, which theoretically translates into carmakers being more disciplined about their business. But there are time when laying down a few grand to get people to buy your product is a good idea, and here's why:
- Market share is good. This is simple strategy: If you get somebody to buy one of your cars, they haven't bought the other guy's car. These may be legacy buyers, or buyers you have "conquested" -- stolen from the competition. Either way, if they buy the car you make, they're more likely to keep buying the cars you make. The tradeoff is profits. But market share carries far more than symbolic value: it's effectively an investment in the customer.
- Pricing should be flexible. People spend -- or borrow -- a lot of money to purchase a car. Inflexible pricing has a certain superficial appeal, but it actually removes the consumer from the process. Japanese automakers, for example, have traditionally used incentives less aggressively than American automakers. When their cars and trucks were often of higher quality, this made sense. But now that Detroit has caught up, Toyota (TM) and Honda's reluctance to discount looks like they're relying on past glory rather the current market reality.
- Price corrections are necessary. Sometimes, it isn't that complicated. The car was priced wrong. According to date compiled by Edmunds.com, struggling Saab spent $6,500 on average to sell each car in April. Relative to its German competition, Saab's vehicles are overpriced: the 9-3 sedan, at around $35,000, costs about the same as a BMW 3-Series and more than a base Audi A4. A hefty incentive salvages what is actually a decent car that provides a sporty driving experience that's less twitchy than German rivals.
- Lower incentives mean that prices may be headed up. Here's a bit of punditry from Edmunds on the numbers it crunched: "This is the clearest indication yet that automakers are gearing up for inventory shortages," said Jessica Caldwell, director of industry analysis. "Demand for new cars has been growing as economic recovery has strengthened, but now the industry may experience a hiccup if consumers decide to wait for the next deal to come around, which may not be until the autumn." In other words, automakers are preparing to defend their pricing, so they can make as much as possible on the vehicles they do sell. Higher materials costs are already adding to sticker prices. Slackening demand may add more.
- The market is becoming less competitive. If an automaker isn't overproducing, then incentive spending can mean that it's trying to fight it out with other automakers is a peppy market. The problems that the Japanese are now enduring due to the earthquake and tsunami mean that U.S. carmakers will have to work less hard to sell their vehicles. This can give them a breather, but it also indicates that they're not going to fight for your business.