How Does a Dealer Incentive Work?

Automotive sales are a very competitive business, especially in the age of price-conscious shoppers willing to drive between dealerships hunting for the best deal. To help dealerships boost their profit margins while remaining competitive, many automotive manufacturers provide dealerships with incentives and other programs that provide them with cash payments or refunds to sell certain vehicles or to manipulate invoice prices on vehicles. In some cases, dealers may pass these incentives onto consumers to become more competitive, although in some markets, dealers may retain them.

Basic Dealer Incentives

The most common form of dealer incentives are when automotive manufacturers provide dealers with a cash incentive to sell a certain type of car. Usually coupled with an effort to clear inventories of last year's model or otherwise unpopular cars, automotive manufacturers provide dealers with cash payments for each qualifying vehicle they sell. With a concrete bonus to sell more of a particular type of car, dealers theoretically work harder to earn larger amounts of dealer incentives. In some situations, dealers may pass on incentives, or portions of incentives, to consumers to help entice them into purchasing from that lot.

Financing Incentives

In some cases, dealerships receive incentives from banks and loan companies from referring customers to them for automotive loans. In the case that a dealership doesn't provide financing direct from the manufacturer, finance companies provide bonuses and incentives to dealers for providing them with potentially lucrative loans. In some cases, dealers receive higher incentives for steering buyers into loans with higher interest rates, so consumers should be knowledgeable of loan rates before discussing financing with dealers, according to Bankrate.

Holdback

To help keep invoice costs higher and provide the illusion of sales at a slim profit margin to consumers, most manufacturers provide holdback programs. In these programs, dealers are invoiced for the full price of the vehicle stated on its invoice that consumers read. Periodically, long after receiving payment on invoices, dealerships refund a portion of the price, known as holdback, to dealers. This practice allows dealers to sell vehicles at invoice price and still turn a profit.

Consumer Incentives

Vehicle manufactures also offer incentives to consumers to help entice them into purchasing their wares. Consumer incentives may vary from cash-back programs to manufacturer-subsidized financing. Because auto makers provide these incentives directly to consumers, dealerships aren't involved, and incentives can't be held back to help boost profit margins. In some cases, dealerships will provide their incentives to consumers in order to increase the allure of purchasing at that dealership rather than at a competitor's lot.