Research Report 05/12
D EALER INCENTIVES
RE INF O RC IN G O R UN DER M INI NG P O LICY ?
by
Ben Waller
August 2012
DEALER INCENTIVES: REINFORCING OR UNDERMINING POLICY?
INTRODUCTION
Sales incentives for new car franchise holders, which for most manufacturers amount to at least a
billion euros for the four main markets, are often not used as well as they could be to direct and
support policy and market strategy. Most margin and bonus schemes have evolved over time,
and reflect a series of past decisions and attempts to mitigate network and supply issues and
counter incentives offered by competitors; the result is schemes shaped by market specific issues,
the reasons for which are often forgotten. They are often not as flexible, agile or targeted as they
should be to allow for more responsiveness to market demand and conditions.
The growth risks and opportunities for a brand
are reflected in dealer incentives
Qualitative customer process bonuses minus campaigns
Brand
Laissezfaire
Customer
value
focus
Network
defence
focus
Network
Margins
Integrator
Supply chain integration
Volume and mix bonuses
1
At the macro level, whilst most schemes aim to improve network performance, by rewarding
better performing franchise holders, not all schemes are aligned to brand strengths, or actual
network and supply capability. For example, a new entrant to a market looking to attract
franchise holders, a simple trading margin can be enhanced with a simple volume bonus. Adding
qualitative rewards is an attractive tool for brand managers to raise network standards, but doing
so means measuring inputs, such as investments or effective use of systems, or outputs, such as
customer satisfaction. In addition to the cost of auditing and appraisal, is the risk of adding too
much complexity. Many dealers simply ignore complex incentives that reward less than half a
percentage point. However, as a brand moves away from wholesale push to customer pull supply
systems, evident in high rates of build to customer order, the more margin is available to improve
customer service levels; at the same time, brands with more responsive supply systems tend to
offer lower volume bonuses, as these can disrupt efficient and effective use of a flexible supply
system.
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© ICDP, 2012
DEALER INCENTIVES: REINFORCING OR UNDERMINING POLICY?
Brands enter markets with a limited product offering, which is demonstrated in a low number of
possible combinations per model. Many premium brands offer a very high variety of possible
configurations per model, important to retained marginal profitability when in line with supply
system capability and performance. An entry brand will tend to offer high base margins on simple
product, but this margin is often cut when and if stock efficiency measures such as the use of
distribution centres are put in place. The base margin tends to increase again as the business
model focuses on increasing rates of build to order sales.
Despite the almost universal ambition to move from new entrant to established premium brand,
most manufacturers must manage a difficult balance between simplicity and intervention. Moving
away from a simple low cost network, with wholesale push and a price orientated customer offer,
creates an opportunity to offer low variety products efficiently with a focus on customer service
levels. Keeping offers simple whilst integrating the supply system whilst focusing on customer
handling whilst minimising outlet cost and complexity avoids the cost and risk associated with
trying to emulate the established premium brands. Such an approach also avoids the risks of
network over-investment without simultaneous improvements in supply chain management and
customer handling. The objective of this approach is to slowly improve customer perception of
the brand, thus slowly increase demand pull, pricing position and dealer investment.
The call for simplicity aside, there are few best practice approaches that can be universally
applied, since incentives can support different market strategies. The model described in this
briefing explains the implications for the dealer incentive programme of different market scenarios
and manufacturer strategies. By doing so the model helps to highlight gaps and misalignment
both between the ambition and reality of a brand in a market, and the suitability or otherwise of
the dealer sales incentive programme to support that market position. Changes to the dealer
incentives programme are notoriously difficult to achieve in some markets, but in the current
economic climate combining marketing support with the formal margin and bonus scheme
provides a good opportunity to reduce the cost of both. One volume manufacturer in the UK
managed to reduce marketing campaign payments by including them as a flexible element within
the variable component of their formal margin and bonus scheme. By doing so they have cut
both the campaigns budget and the formal margin scheme, whilst improving retained margins for
the dealer, since incorporating campaigns within the formal margin and bonus scheme, and
realignment of targets, has resulted in more focussed and lower overall discounting.
Retained margins are thin, markets are uncertain and demand is both weak and volatile. The
margins and campaigns budget is so large and the impacts so significant, that it must be agile and
adaptable to support strategy. Incentives alone cannot fix underlying problems, but can support
wider actions to make change happen. The alignment of manufacturer activity in a market to a
coherent strategy is an essential prerequisite to designing and implementing a successful and
targeted dealer incentives scheme.
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DEALER INCENTIVES: REINFORCING OR UNDERMINING POLICY?
CONTENTS
Introduction .......................................................................................................................... 1
Contents ................................................................................................................................ 3
Why look at dealer incentives for new vehicle sales? .......................................................... 4
What are the typical components of dealer sales incentives for new car sales?............... 4
Base margins ................................................................................................................ 4
Volume bonuses ........................................................................................................... 5
Qualitative bonuses ...................................................................................................... 5
Campaign payments are usually managed outside the formal scheme ........................ 5
Why do manufacturers offer different dealer incentives? .................................................... 6
Volume bonus and supply objectives ............................................................................... 6
Campaigns payments, customer related qualitative bonuses and brand value ............. 9
Base margin and model variety .................................................................................. 10
Qualitative corporate standards and network costs .................................................... 11
Prospector ................................................................................................................... 14
Value focus ................................................................................................................. 16
Integrator .................................................................................................................... 18
Defender ..................................................................................................................... 20
Local difference is inevitable, but an aligned strategy remains important ................. 22
Making changes .......................................................................................................... 24
Conclusions: addressing underlying market problems can be supported by changes to the
incentives programme ........................................................................................................ 28
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© ICDP, 2012