The Consequences of a Discounting Culture

Mar 09, 2017

By Richard Harrington

In a report that will concern a few but surprise no-one, it turns out that discounts from auto makers now cost these companies more per vehicle than direct labor costs. According to the Wall Street Journal, average sales incentives hit a record of $3,830, or more than 10% of the vehicle’s selling price, compared to $2,500 in labor.

I think about this in 2 ways.

The first is internal; with the auto industry being the cradle of lean manufacturing and the drive to eliminate waste in the production process, imagine how much effort has been made over the years to reduce direct costs to the level they are today while maintaining (or improving) the quality of the vehicle. How much time has been spent on controlling discounts? With dealers incented to move inventory, their goal is to make the sale, not defend price; so why would they not discount to get the vehicle off the books? 

Second, think about this from an external point of view. After reading this article, what is the amount of discount you expect when you purchase your next car? At least 10%! By discounting in this manner, you train your customers that the list price is meaningless and if they pursue a discount they will get it. Procurement will simply keep pushing for a bigger discount next time once they know there is no backbone around price. What about your loyal customers who paid close to list? Once they see this, they will feel they have been duped, eroding trust in the relationship and emboldening them to focus on price rather than value in the next negotiation. Congratulations, you just created a Poker Player. 

Contrast this with Tesla, whose CEO, Elon Musk, recently released a statement that everyone pays the same price for a factory Tesla and there will be no discounts. This emboldens sales people to sell on the value the vehicle brings to the customer and if the customer asks for a discount, they can simply point to the policy and say it is out of their hands. 

Lesson learned: Give sales people the executive support, the tools to sell value, and the right incentives to sell at the prescribed price and protect profits; otherwise discounting can hurt your reputation as well as your bottom line.


Category: Pricing

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