A study by Boston market researcher Compete gives return-on-investment ammunition to proponents of spending more on advertising and less on incentives to move the metal. Currently the pendulum swings the other way when it comes to expenditures: Automakers laid out $20.3 billion on incentives in the first half of 2006, according to Edmunds.com, more than double the $9.8 billion the industry spent in measured media during the first half, according to TNS Media Intelligence.
But Lincoln Merrihew, Compete's managing director, said that if an automaker has $100 million to spend, it's generally more effectively allocated to advertising than incentives, although he cautioned results can vary from model to model.
Two research scenarios
To develop its theory, Compete created two different scenarios for boosting retail sales for a client, Nissan's Altima. One was based on driving more demand (by spending more on advertising) and relying less on conversion (lower incentives); the other focused on driving conversion (higher incentives) and less on creating demand (lower ad spending). The goal in each case was boosting retail sales 10% to 21,662 units in July 2005 over June.
Compete's exercise found that in the first scenario, if Nissan had spent more ($20.1 million) on advertising and less on incentives ($48.6 million), it could have generated 116,160 shoppers and saved itself a total of $3 million in the month to boot. In the second scenario, it found that if Nissan had spent more on incentives ($53.5 million) and less on advertising ($18.3 million), it would have generated 105,600 shoppers -- some 10,560 fewer than in the first scenario.
If the $3 million savings was extrapolated over one year and all its models, the potential windfall to Nissan could have been $396 million, Compete said.
But not everyone agrees with Compete's findings.
Ian Beavis, VP-marketing of Kia Motors America, said that consultants his company has employed have found that incentives outperform advertising in cost-per-shopper efficiencies. Mr. Beavis said Compete partly relies on data from carmakers, which may be holding back some information for competitive reasons.
Jeremy Anwyl, president of Edmunds.com, said comparing advertising and incentives is like the apples-to-oranges adage. "I don't think the two connect. They are two different activities."
Advertising is a form of communication and incentives are a form of pricing. Mr. Anwyl said most of the data he's seen show that auto incentives accelerate sales a carmaker would have gotten anyway. "In theory, advertising may influence the buy," he said, "but may not influence when."