"When you've got multiple thousands of dollars of incentives on a particular model or brand, you end up debasing the value of that brand in the minds of the consumers." says Joe Phillippi, principal of Auto Trend Consulting.
Cash-back offers on volume nameplates are deemed the most damaging to brands. The pitch is price, price, price, and the product is secondary. Indirect incentives like factory-to-dealer cash, subsidized leases and low interest rates are thought to be the least damaging.
But these types of incentives are considered less effective in doing what they're designed to do-sell product-because the savings to car buyers aren't readily apparent.
After reporting U.S. sales fell 17% in January from a year ago, even Volkswagen of America succumbed to the incentives game, recently announcing it would increase incentives on its U.S. models. VW is expanding its Marketplaces dealership program and hopes to have 320 Marketplaces by the end of the year. As these dealers, which use similar design themes to enhance brand identity, upgrade their programs they win cash incentives from the manufacturer.
While the incentives are a large part of the program, VW expects these spruced-up dealers to provide a better selling environment for a tonier fleet that will include the $40,000 Toureg and $60,000-plus Phaeton in the next year.
trying to hold value
Volkswagen protects its brand by offering consumers low-interest rates instead of cash, says Karen Marderosian, director-marketing and advertising. She says the automaker is trying to maintain its brand message and the value of its cars. "What we've been doing is making sure that we still have a good schedule of [national] brand advertising," she says, with "our brand retail advertising" locally.
"The incentive-fueled market frustrates us," adds Ms. Marderosian. "We've done a lot of work since 1995 to really bring this brand back with new product and with not having to discount the brand. And so we don't want to lose everything that we've built."
For volume producers, it's cheaper to offer incentives for sales than it is to shut down plants.
In February 2003, the average incentive per vehicle sold in the U.S. was $2,135, up 10% from $1,939 in January, according to Edmunds.com, an online automotive information provider. That's a sizable 41.3% increase compared with February 2002.
Incentives are so prevalent that CNW Marketing/Research found it takes $3,700 to get new-car shoppers to even consider purchasing a particular brand. That amount can be composed of manufacturer cash incentives to the consumer plus the amount the dealer is offering in terms of a discount on the vehicle, and the amount a dealer offers on a trade-in.
"Two years ago, it was about $2,500, says Art Spinella, VP at CNW Marketing/Research. "Without that incentive, what we see is a 5% to 10% drop in the number of people who say they would consider buying a new vehicle."
Indeed, analysts say that without incentives, the sale of light vehicles would be less than 16 million units annually. Last year, sales were 16.8 million units.
"Because of low-cost financing and all the other things that bring people into the market, because of our reputation, it's bringing some business to us that we're really not spending money for," says Alan DeCarr, group VP-sales at the Toyota Division of Toyota Motor Sales USA.
According to Edmunds.com, Toyota's average cash incentive per vehicle is the second lowest in the industry at $1,000.
Incentives have been around a long time, says Dave Andrea, managing director of the Center for Automotive Research. They used to be part of a total package in terms of brand positioning and image.
But all that has changed. "I don't remember seeing anything as aggressive across the board as we're seeing," says Mr. DeCarr.
General Motors Corp. ratcheted up the stakes with its "Keep America Rolling" campaign. Introduced in the wake of the Sept. 11, 2001, terrorist attacks, the program offered 0% financing on every GM product.
Although GM's offer was supposed to end on Oct. 31, 2001, 0% financing continues to be offered by some automotive brands.
incentives & brand building
"If the only thing we were doing was incentives, then we would have a concern over brand equity," says John Middlebrook, VP-vehicle brand marketing and corporate advertising at GM. "But we are pounding into the marketplace a lot of brand-building activities including seven new divisional ad campaigns during the last year."
Those campaigns are aimed at building and rebuilding the image of GM's brands. If GM's marketing pitch were based solely on incentives, Mr. Middlebrook says, "then you're going to eventually destroy the equity of the brand. It has to be a balance."
In the latest round , Ford Motor Co. and the Chrysler Group selectively matched GM's 0% five-year financing promotion on all of its products except Hummer. The pump priming is expected to boost April's seasonally adjusted annual selling rate to about 18 million units.
Chrysler, part of German carmaker DaimlerChrysler, needs to balance its need to remain competitive in an incentive-fed market as it tries to launch the Crossfire sports car and Pacifica hybrid sport-utility vehicle without cash inducements.
It's a challenge given that Chrysler's customer cash-incentive average is the third highest in the industry at $2,875 per vehicle, according to Edmunds.com.
"If there's not much aspiration for your product, then you default to the lowest common denominator, the cost or the payment," says Tom Marinelli, VP-Chrysler marketing. "And the quicker you get to that concern, the more dependent you are on it. So the long-term goal is to build an aspirational brand."