The Real Problem with Stair-Step Incentives

Almost one year ago I wrote a post examining stair-step incentives and their impact on vehicle sales. (Stair-step incentives: Good or bad for business?) In that piece I noted several problems associated with stair-steps, but netted out by observing that manufacturers liked stair-steps because they  aligned dealer and manufacturer interests around volume.  In other words, they work.  Because of this I expected the use of stair-steps would continue, despite all their flaws.

This week, Automotive News has a piece that reports "fresh dealer grousing" on the stair-step issue, with many dealers stating that stair-steps have gotten worse.

This shouldn't be a surprise. It can't have gone unnoticed by dealers that even while unit sales have been at "healthy" levels, competitive pressure have been increasing. Manufacturers looking to increase — or even to just to protect share — find the short term impact of stair-steps alluring.

Dealer arguments against stair-steps tend to focus on the arbitrary nature of the goals, or the dissatisfaction that customers may feel when then encounter a stair-step driven variation in market prices. But in recent conversations with dealers, I have run across another issue that is more subtle, but at the same time, very important.

One of the points I have been making when meeting with dealers is that new technologies and a vibrant marketplace combine to offer an opportunity to increase sales volumes and profits in a very significant way. There are several steps involved in taking advantage of this opportunity, but one of the most important is to develop specific dealership processes; processes that result in a consistent value-added experience for customers. Once these processes are in place, a dealership can incorporate these as a promise of what to expect when a customer visits the store. This promise, in effect, is the dealership's brand.

And we all know that if you promise something to the consumer, you better make sure it is delivered. So it follows that breaking a promise is a sure way to destroy a brand.

Underlying all this is an important point. Consistency is so important, so critical to building a brand that it is worth occasionally leaving money on the table. Put another way, a dealer will be far better off if he makes a bit less on each deal, but has a vastly higher volume. In the real world, the rub is that any money that is left on the table is real money, today. And building sales volumes from a stronger brand represents the potential for greater profits in the future. So, I am not saying this is easy.

Now factor in stair-steps. It is hard enough for a dealer to invest in building a stronger, branded business under normal circumstances. Just how hard do you think it is when there may be thousands — even tens of thousands of dollars riding in a single customer? I am glad I am not the manager or dealer having to make that call.

Stair steps will help manufacturers achieve short term sales goals. But they undermine the greater value of building a network of strongly branded dealerships. Dealerships that can actually carry a greater portion of the market load, over time.

I get that manufacturers have sales targets and the price for not hitting these targets is high. But we should also consider that the use stair-steps is a case short term gain, but long term pain — for both the manufacturer and their dealer networks.