As COVID-19 restrictions continue, automotive retailing is experiencing guarded consumer activity that has manifested itself in avoiding dealerships – whether shopping, taking test drives or processing paperwork on site. During the last six weeks, automakers and their dealer networks have moved aggressively to shift from incentives that promote option/trim convenience packages (the vehicle) to incentives that help the in-market shoppers feel more confident physically and economically. It’s been some time since the auto world has been this dependent on needs-based incentives as opposed to incentives that play to consumers’ wants and emotional desires.

While auto manufacturers and dealers are struggling with their cost viability, they are also simultaneously working together to create market demand with a series of financial offers, digital retailing upgrades and remote delivery incentives. These incentives are helping to keep a fragile industry afloat by enabling consumers who are concerned about the purchase process to feel more confident about shopping, buying and taking delivery of new, CPO and used vehicles through the dealer network.

Here is a quick assessment of the three key incentives strategies and how well the industry is implementing them.

1. Shopping Incentives

Most OEMs, dealers and even individual shopping portals are promoting online shopping tools (e.g., FCA’s newly-improved Online Retail Experience; GM’s Shop-Click-Drive; Accelerate My Deal by Autotrader) to help consumers better understand exact pricing and payment ranges online earlier in the process, as vehicle price and monthly payment details have become far more important as the economy slows.

Consumers are now able to better evaluate monthly budget requirements prior to engaging further down the purchase funnel. Likewise, dealers have implemented multiple price and payment tools which help consumers view, engage and structure transactions without having to visit the dealership. These initiatives, when done correctly, have the benefit of consistent pricing across all advertised platforms.

Currently the biggest unknown in any deal is used-vehicle values – the trade-in. Recent drops in wholesale values have made the process difficult and getting a true assessment of the quality of a trade-in is challenging online. Buyers with lease terminations and agreed on residual values will have the least amount of ambiguity throughout the process. Tools such as Kelley Blue Book Instant Cash Offer (ICO) can help, but still rely partly on owner assessment of the vehicle and can change the deal late in the process.

Assessment – MAKING PROGRESS. According to recent data from Cox Automotive shopping sites, including Autotrader.com and KBB.com, website visits were up 14% and vehicle description page views were up 17% over the same period last year. The improvements being made in digital retailing may be helping keep consumers engaged, but there are still opportunities to streamline the process.

2. Transaction Incentives

We are all in the same position of not wanting to overextend ourselves with the uncertainty of potential furloughs, layoffs and other employment cutbacks. OEMs and their dealers are addressing affordability concerns (0% up to 84 months) across their entire fleets in many instances, possible work interruptions (payment deferrals and payment forgiveness) and providing the ability to shop, evaluate and transact with financing options using captive and third-party lenders (banks & credit unions) from a mobile device or computer.

These are important steps to support transparent shopping and consumer benefits like introducing finance and insurance products online for the buyers to research as part of their purchase.

Assessment – WORKING. Data suggests that the many 0% offers are driving traffic and helping close sales. The percent of vehicles purchased with 0% financing has increased from 2.6% in January to nearly 20% in April, according to the Cox Automotive Industry Insights team. At least for consumers who are ready to buy now, 0% financing is an incentive that seems to be working. And our recent research indicates that 69% of consumers would be likely to purchase a vehicle sooner than planned for the right deal or incentive.

3. Delivery Incentives

Automakers, dealers and marketplace portals, such as Autotrader.com, KBB.com and Dealer.com, are offering a number of new services that help bring dealership capability directly to the customer, following safe, social-distant guidelines – home test drives, sales delivery, consumer workflows leading to electronic signatures where available, as well as service pickup and delivery. 

These fresh initiatives that help facilitate sales in a time of social distancing are reaching new levels of digital shopping and transaction creativity, which began nearly a decade ago and will likely become mainstream offerings in the months ahead.

Assessment – IMPROVING. Carvana and Vroom were big first-movers in the home delivery business model, which is now being adopted by many dealers. Dealertrack Digital Contracting is up 65% over the  same time last year. Dealer Home Services by Autotrader has been adopted by more than 10,000 dealers. Since this is a new way of operating for many dealers, more work needs to be done.

While our current bear market incentives are different from the OEM/dealer incentives offered earlier this year, we’re seeing consumers react positively to the new collection of financial incentives, digital retailing tools for shopping/purchasing, and new options for vehicle delivery. All these incentives can help stimulate confidence in the vehicle buying process right now, and some of them are also much-needed improvements that are long overdue for the automotive retail industry.

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.