Toyota’s Aggressive Sales Incentives – Risk and Reward

Toyota kicked of March with a series of aggressive incentives across the board – zero percent financing, incredibly cheap leases, and free maintenance for many new car buyers. As a result, Toyota enjoyed a 41% year-over-year sales increase in March. In order to keep up that momentum, Toyota has continued many of the incentives they launched in March.

Last week, we talked about how Toyota’s aggressive incentives in March were likely ‘pulling sales forward’, but it’s anyone’s guess as to how many sales were pulled forward and how much was simply pent-up demand. Either way, the fact that Toyota has decided to continue their incentives signals that they feel it’s time to be aggressive and ‘buy’ some business. Here are the risks and rewards that come with this strategy:

Risks

1. Incentives are like drugs. Taken once or twice a year, it’s hard to get hooked. However, take some every time there’s a holiday, every time you need a little ‘boost’ in sales, or every time you’re trying to make a ‘push,’ and before you know it your company is hooked on incentives. Here’s why that’s bad:

• If you give a mouse a cookie… When an automaker constantly offers incentives, consumers come to expect them.
• You always need a bigger hit. Growth is critical to success, and when a company gets hooked on incentives the tendency is to make them bigger every year so you can sell a few more cars.

Of course, just like a drug addiction, quitting incentives is incredibly difficult.

2. Incentives cause cancer. The minute that a manufacturer throws $5,000 in incentives on the hood of a new car, used cars on dealership lots all across the country depreciate about $3,500. This is known as ‘killing resale value,’ and Ford, GM, and Chrysler did this to their cars for years. As time goes by, resale values erode until the point that leasing becomes cost prohibitive. Without getting bogged down in specifics, manufacturers need leasing to sustain their long-term business. Incentives kill leasing, and that eventually kills the company (see GM and Chrysler, circa 2008).

3. Incentives hurt your business partners. Profitable dealers help your brand’s image. Yet when big incentives become the norm, dealers struggle to make a profit on new cars, and that means they cut costs. Customer service and advertising suffer, and the brand loses value.

Rewards

1. Leveraging Toyota’s biggest assets. Despite all the recent bad publicity, in many ways Toyota is in a position of strength: they’ve got billions of dollars in cash, a very loyal owner base, and a 30 year reputation for quality. Incentives are a great way to capitalize on these strengths in the short term.

2. Taking advantage of goodwill. Remember how we said GM’s $1,000 Toyota recall rebate could backfire? Here’s a quote from a Cars.com news report that says Toyota was still drawing new customers last month:

“People are upset with GM, Chrysler and Ford coming out with that $1,000 rebate to trade in your Toyota,” said Jim Tessmer, vice president and co-owner of Jack Safro Toyota in Milwaukee. “They were insulted by it. Customers told us they’d never buy a car from them because of that reason. They said, ‘You guys didn’t do anything like that when they went through bankruptcy and their sales were down. You’ve been very classy. It’s like kicking somebody when they’re down.’ I heard that from a number of people, and it surprised me.”

For all the bad publicity, there are a lot of people who still love Toyota and want to show their support. GM’s Toyota recall rebate helped to crystalize this sentiment, and Toyota’s discounts make it easier for people to participate.

3. Toyota’s competitors might blink first. GM and Chrysler are still losing money and still cash poor. Matching Toyota’s aggressive incentives for the rest of the year won’t hurt Honda, Hyundai/Kia, Nissan, VW, or Ford, but it will hurt GM and Chrysler. If GM and Chrysler stop matching incentives – or cut back substantially – there’s a good chance Toyota can grab some market share. This will make it easier for them to quit incentivizing and return to profitability.

Finally, the big winner here is the consumer. Toyota’s incentives have led to lower prices across the board – just what we need to get the economy going.