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Mike Gorun

Mike Gorun Managing Partner/CEO

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Discounts: They Work But Can Do More Harm than Good

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It’s no secret that dealerships have been in a crazy race to the bottom in terms of profit per vehicle. Consumers are always looking for the best deal and automotive Internet resources are providing them with more ammo to negotiate with. Dealers have been complaining for years about decreasing profit margins on vehicles, blaming manufacturers for lowering margins and third-party sites for information sharing. Yet many still offer discounts in a never-ending effort to move more metal.

 

According to an article by Internet site, Bitmatica, businesses should avoid offering discounts, as they can be more harmful to the business than many of us may think. I understand that loss-leaders, manufacturer rebates and trunk money are very tempting tools to use when closing a car deal. I also understand the typical thought-process of “If I don’t give it to the customer, my competitor will.” Dealerships do have to be competitive, especially in dense markets where consumers have the ability to shop multiple franchises, all within a reasonable driving distance. When you’re facing the consumer attempting to close the deal, the path of least resistance is to reduce the price – even if that reduction is minimal. You may close the deal and win the sale, but what else have you accomplished?

 

According to the Bitmatica article, this is what that discount accomplished:

 

  1. You’ve diluted the value of your brand. By selling that $50,000 truck for $40,000, you’ve essentially told your customer that your truck is only worth $40,000. How many customers have you given a deal like this just to find them back in your dealership 3 years later shopping for a new truck and expecting a similar price? That’s because you trained them that your trucks are worth less.
  2. You’re attracting the wrong customers. Think about it. That customer who grinded you through the Internet or in-person is not only more likely to give you a poor CSI review,  but is also the one that probably won’t ever service with you. This is the customer who will drive 100 miles to save $500 and you’ll never see them again. Good deals are subjective by their very nature. Almost every dealer will tell you that the customers they make a good profit on are usually the happiest.
  3. You probably threw any loyalty out the window with the sale. Using the example from point 2, this customer who you gave the huge discount to most likely still thinking they left money on the table – that they could have negotiated an even better deal than they got. No matter how much you try to convince them you’re losing money, or not making any, they don’t believe you. And, without trust, you’ll never earn loyalty.
  4. Once you’ve discounted your product, they will expect discounts on everything. Theses aren’t the customers that are going to come in for a normal priced service when their car needs it. They’re the ones that are either going to wait for a coupon, or go to an independent to save a little money.
  5. The more times you discount your vehicles, the more times your competitors will have to. It’s a big circle of ever decreasing profit.

 

So, what’s the solution? Perhaps a strategy is to offer value to your customer in place of revenue. Customers who accept value over price are telling you that they are going to stick around. These are the customers who bring high lifetime values and are the foundations of your business. If a customer is willing to walk away from a deal over $100, he may not be the customer you want. There are many ways to offer value in place of giving up gross profit. Some dealers offer lifetime oil changes, free car washes, customer loyalty programs, or the same value discount but in dealer currency, for future products and services, etc. The next time you find yourself in a position whereby you need to dig a little deeper to make a deal, consider negotiating with value or services. If you succeed, you retain the immediate revenue and give your customer a reason to return. And those are the customers that you want to keep.

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