Dealer Incentives

What Are Dealer Incentives?

Dealer incentives are financial inducements that automakers give to dealers to boost the sale of cars by offering them at a lower price than they normally would.

Deeper Definition 

Dealer incentive is a strategy manufacturers use to motivate dealers to sell more of a product faster. To boost sales of a specific model, a manufacturer may lower the dealers’ cost for buying the model. The discount in price then allows the dealer to lower the price when selling to customers.

Dealer incentive should not be confused with dealer holdback. Both terms are different and serve different purposes. The dealer holdback is a percentage the manufacturer pays the dealer on each new vehicle they sell. It is to help dealers make a profit and cover the operational cost. On the other hand, a dealer incentive is a discount or payment to motivate dealers to make more sales.

There are several ways dealer incentives can take form. A manufacturer may offer a discount to dealers when they purchase a particular model or offer a cash payment to dealers each time they sell a model or offer a rebate to customers for purchasing a model.

Dealers are not required to disclose the incentive they receive or inform customers that they exist. Also, dealers may choose not to pass the discount they receive to customers in form of lower prices and instead keep it as extra profit. As long as dealers can find a way to get customers buying, the manufacturer’s goal is achieved.

Manufacturers apply dealer incentives to sell old inventory, slow-moving car models, or boost sales in general.  Since dealers are not required to disclose incentives to customers, most customers may not know they exist. However, an experienced car buyer may be able to tell which models have disappointing sales and could be subject to dealer incentives. Such a customer can negotiate a lower price or a better deal on the car. 

Dealer incentives may take the form of cash payments from the manufacturer to the dealer after each sale. More often than not, the incentives are structured in a way that more sales attract more incentives. Dealers may be willing to take a loss on some sales to get greater rewards.

Dealer Incentives Example 

The major auto manufacturer, Ford, has 30,000 units of the Ford Focus that they want to sell. They usually sell these cars to dealerships for $40,000. As they want to sell these cars quickly to avoid having to store them longer, they are offering dealerships a discounted price of $38,000 to take the cars off their hands. This is beneficial to the dealer as they may be able to generate more profit from these cars.