August 6, 2020 by Dhiraj Gurung

The complexity surrounding incentives: the Indian case

The automotive industry has long had a reputation for serious cost management. From planning supply chains to engineering and development, each rupee spent is under the microscope. Despite this intense scrutiny, the industry at present appears to have a blind spot when it comes to the growing appetite for incentives and discounts.

The use of incentives have grown substantially over the past few years, with manufacturers  now tending to lose 8-12% of their revenue to incentives. In fact, between 2017 and 2020, the industry increased incentives expenditure by 49%, demonstrating a huge focus on this aspect of the market.

But what is causing this reliance on incentives?

With OEMs continuing to face an increasingly difficult economic backdrop, declines in sales combined with huge costs of production are presenting significant challenges for business leaders and so a propensity to lean on an incentives as a way to shift stock is likely to continue.

And this is far from the only driver. In the past, when new cars were being produced, manufacturing and sales were far less complicated for OEMs. Each vehicle had a lifetime value, and as competition was not as strong and features were more mechanical, changes to these vehicles were not made as frequently.

Now, with vehicle features becoming electric and software driven, the intensity of changes to these products is increasing, and due to increased competition, an array of new products are coming to the market each year. To keep up with their competitors and avoid high inventory costs, OEMs are heavily relying on incentives to shift these products, demonstrating the decline of the old product lifecycle.

Currently, profits for OEMs are low (between 6-10%), meaning the shift toward incentives risks squeezing margins even further. And, incentives are not yet working effectively for a number of reasons.

There are four main types of incentives, ‘cash incentives’, ‘ownership value’, product value and ‘finance value’. Although there are only four core areas for incentives, due to a lack of reliable information regarding take rates and customers preferences, the complexity surrounding incentives has been growing, as incentive teams present new ideas for incentive combinations without adequate research or data.

At the last count, we observed hundreds of new incentive combinations released by manufacturers each month. This presents a huge challenge for both OEMs and dealerships who have to be aware and stay abreast of competitor incentives at all times.

High incentives and discounts also hurt the brand and resale value in the long-term. This is because incentives managers need to trade off the market share and sales pressure. If a vehicle is heavily discounted to begin with, it’s future resale value will be determined by its original purchase price and will be far less than originally anticipated.

It is clear that the responsibilities of incentives managers are becoming increasingly complex, not only do they have to deliver higher sales volumes to satisfy manufacturers, they are also facing slashed budgets, and a range of competitor benefits which they must be ready to counter.

Every rupee saved flows directly to a company’s bottom line and improves profitability. These savings can be reinvested to strengthen the brand, so, if incentives managers do not have access to a reliable data tool, helping them to stay ahead of incentives and new offers, it is likely their policies will be unnecessarily generous – wasting money and damaging overall profitability.

But how can automotive players optimise incentives spending?

Transparency and data sharing plays an important role here. Increased transparency and access to competitor information, would allow players to compare and contrast incentives policy. With access to this vital information, OEMs will find it far easier to demonstrate to dealers exactly why their deals are competitive and likely to result in positive sales outcomes.

Greater transparency will also promote fact-based planning with data dispersion across all segments and models, helping to tailor incentives effectively by product type and brand.

Most importantly, the industry needs to move towards elevating incentives planning and instead build alliances among sales teams in order to solve the inherent conflict between incentives spending and volumes.

Until the latter is achieved, JATO Dynamics are able to help tackle these problems. We have developed an incentives taxonomy which allows us to research and track incentives types across the top 20 markets.

JATO Dynamics’ optimiser tracks historical events in the market, to help businesses best track and compare incentives and volumes in the marketplace. Not only does this technology allow companies to understand which incentives are gaining the most traction but it also delivers alerts for incentives news and allows incentive teams to track the correlation between their investments and the corresponding results. We can help incentive teams remain on top of the competitive landscape and spending behaviour, all through the use of one sophisticated optimiser tool.

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