New vehicle incentives have been an industry staple since Joe Garagiola pitched “Buy A Car, Get A Check,” and have developed into a tool for OEM’s and dealers to leverage their marketing and advertising spend based on consumer needs.  The creativeness and use cases for incentives have grown and are an important part of the retail transaction.

Incentives are structured to support three types of deal scenarios:  cash purchase (write a check/direct loan via finance institute), incentivized finance (captive or OEM approved fico) and lease (typically through a captive) all of which are referred to as “guaranteed incentives.”  In addition to these types of transactions, all OEM’s utilize “conditional incentives,” those rebates and offers which are contingent on consumers qualifying based on eligibility and the compatibility of the offers.  It’s important to note that every deal is unique based on the vehicle and consumer (i.e. – military, college grad, credit score, etc.).  The combination of these discounts can be significant if the consumer is educated on availability either directly or by the dealer.

New vehicle incentives are a complex structure of offerings that are often reported as a percentage of the vehicle MSRP which nets to an Actual Transaction Price (ATP).  This is one way of tracking incentives, another way is how much of the total offerings were used and in what context were the incentives applied?  For example, out of a total incentive amount of $8,000 ($4,000 guaranteed and $4,000 conditional), how much of that amount was used toward the transaction price compared with allocating to trade over-allowance (compensate for negative equity), decreased incentives for 0% financing, or increasing incentive money for OEM captive standard finance rates?

From a retail perspective, working OEM incentive (VIN specific, regional/localized & loyalty/conquest offers, stair step and dealer cash) combinations allow for the flexibility needed to structure a deal that fits the consumer’s needs.  Digital Retailing (DR) has advanced the use of incentives through on line consumer workflow processes.  Whether online or in store, software and DR tools have transitioned the process of qualifying the buyer and structuring the transaction from complicated to simple, easy to understand deal term options.  This allows dealers to present multiple price and payment options to the consumer for meeting their budget while competing with other OEM’s and dealers.

Tracking incentives includes many different perspectives other than looking at a total percentage of MSRP or ATP figures.  This can be misleading and create an impression that the industry is unhealthy or in danger.  As long as production stays in line with demand, new vehicle incentives serve an important purpose for OEM’s to drive traffic through advertising, lower inventory levels, and win market share battles; all of which are measurements of success for our industry.

The real industry pulse is whether OEM’s and dealers are making money.  The flood of off lease used vehicles, tightening consumer budgets and ride sharing services pose much bigger challenges to the industry.  Subscription packaging is, and will become more of an option for buyers.   Incentives will continue to play a valuable part in shopper engagement through targeted advertising, marketing messages and financial affordability.