By Karin Gelschus
Discounting inventory has its purposes and sometimes exceptional bonuses, but if the process is done incorrectly or for the wrong reason, it can be damaging to dealerships bottom lines, if not fatal
There are good reasons to discount, but Chris Rebacz, product development analyst of RPM Group, says dealers must consider several questions before implementing a plan to discount and see it the whole way through. Even if a discount seems like the only option, there are alternate opportunities.
Reasons to discount
Although all discounts affect a dealership’s gross profits, Rebacz says discounts can be an effective tool for dealers when they are used to improve business in the long term.
“You can give a little now only if it will lead to more later on,” he said. “You should give discounts only if you can identify how it will ultimately generate value for the dealership.”
Some of the right reasons behind offering discounts, Rebacz says, are to stimulate the sales of slow-moving units or obsolescent inventory, to dispose of damaged goods or discontinued product lines, to create inventory room so new merchandise can be purchased, to meet competitors’ prices on the same or similar merchandise, or also to increase customer traffic.
“If a dealership fails to discount when it’s warranted,” Rebacz said, “it will result in inventory that does not sell and an inability to buy more merchandise. If a dealership has too much of their cash tied up in inventory and that inventory isn’t moving, then it becomes a greater challenge to pay their operating expenses and to buy new inventory that customers will want to buy. It’s important to note that the primary reason dealerships fail is they run out of money.”
While discounts can prevent a dealer from running out of money by generating more sales, they can cause inventory to be sold without getting its proper return.
“A good method for identifying whether discounts are an appropriate strategy for improving business is to think about them in terms of the actual dollars that a dealership will net in profit from the sales,” Rebacz said. “Will implementing a discount actually improve the dealership’s bottom line? Will the increased volume in sales make up for the profits sacrificed due to the discount? A discount is a prudent approach if the profits generated for the dealership are greater than they would be if the dealer had decided simply to hold margin.”
After establishing the long-term value a discount session might bring to the dealership, Rebacz says the dealer can only expect a positive outcome if he or she first understands the dealership’s customers.
“If sales have slowed to the point where you are considering discounting, are you witnessing less traffic coming in? Is it really a question of price? Is it possible that salespeople are not properly executing the sales process, and therefore, have not done a good job building value in the units or merchandise you offer?” Rebacz asked and added that these questions can be addressed quickly by using an electronic traffic log. By answering these questions, dealers might discover a discount is not even necessary.
“The reality is that if dealerships focus on customers,” he said, “then many of the reasons why discounts would ever be implemented disappear.”
If dealers focus on customer demand when ordering, this will enable them to offer sought-after inventory. Then the inventory will turn three-four times a year and the dealer most likely won’t have to offer discounts.
A dealership must also have a strong sales process that makes it easy for customers to buy, says Rebacz. That process must help the customer see the value in the dealership’s product. Discounts often do just the opposite.
“You always want customers who buy to feel they are getting a good deal, but you don’t want them to feel they got something cheap,” Rebacz said. “Whenever you sell anything, you are selling the dealership as well. What will be the potential impact on the dealership as a whole if you are seen as a discounter? Are you really building customer loyalty if you focus your attention solely upon price?”
These are the types of questions dealers should ask before the discount is applied. If discounting seems like the best option, regardless of an implemented plan, Rebacz says it will only work if the dealership’s salespeople are not discounting items for individual customers.
“If you do, the only thing you can plan for is a loss in profit,” he said. “At best, you’ll be leaving money on the table; at worst, you’ll have to take a loss on the sale.”
One way to prevent this is to ensure managers are the only ones authorized to offer discounts. Nevertheless, Rebacz notes there will always be people who want a discount. Sales staff can handle them if they’re thoroughly coached on the sales process and thus able to build value in each item.
Some people argue discounts can help improve customer retention because the customer feels they can get a deal and will come back. But Rebacz says those customers aren’t necessarily the type a dealership wants. “There is a way to build customer loyalty without offering discretionary discounts,” Rebacz noted.
A healthier substitute to discounting with many of the same goals is a rebate or rewards program. Rebacz says these programs have a better chance of achieving customer retention and generating more in total sales and gross profit margins. Why?
• With discounts there’s no motivation for a customer to return to the dealership.
• If a customer receives a rebate but opts not to return to the store, then the dealership still retains full gross profit margin on the initial item sold.
• If the customer does return to the dealership to claim the rebate, the dealership still maintains a higher gross profit margin on the combined sales, as well as increased total dollar sales and more items moved out of inventory.
• Rebate or rewards programs have more options than just marking down prices. “(A rebate or reward program) can have many different looks,” Rebacz said. “You can simply offer a certain dollar amount or a percentage off their next retail purchase that’s written down on their receipt. You can also offer a rewards card on which they accumulate points that can be used for future purchases.”
• Once the program is in place, salespeople can deflect customers looking for discounts by offering them information on the rebate or rewards program.