Mendoza School of Business

Too much of a good thing?

Published: August 10, 2005 / Author: Andrew Writer

Analysts wonder about the long-term impact of employee discounts.

As Beth Rodick browsed the parking lot at Gurley Leep’s Ford dealership on the south side of South Bend, she paused when asked if she would be normally out car shopping.

“Honestly,” she said, “I would not usually buy a Ford.”

But thanks to a wave of employee discounts offered by domestic automakers, customers like Rodick are flying into car dealerships.

General Motors Corp. began the incentive craze last month by announcing it would extend its employee discount and existing rebates on most new cars to all shoppers.

The move paid off so handsomely that Ford Motor Co. and DaimlerChrysler AG’s Chrysler Group announced similar incentive plans last week.

But with the Big Three automakers each rolling out competing employee discount programs this month, analysts are speculating whether the short-term spike in sales will be worth the long-term problems the discount programs could cause for automakers.

“There’s gonna be a lot of good deals for the consumers,” said Jesse Toprak, a senior analyst with, an automobile research Web site.

“What’s happening here is we’re further conditioning consumers to expect good discounts when they get to dealerships, which will have an effect on domestic automakers.”

The short term

There’s no denying that GM’s promotion was a major sales success. The automaker said June sales jumped a whopping 41 percent compared to the same month in 2004 to reach their highest level in nearly 19 years.

What made the move even more worthwhile to GM is that the automaker might have actually saved money by offering the discounts.

While GM rolled out commercial after commercial featuring GM employees saying their discount applied to everyone, the automaker quietly reduced rebates and zero-percent financing incentives, Toprak said.

“From a promotion perspective, it was brilliantly planned and run,” Toprak said.

So when GM recently announced it planned to extend its employee discount program through the end of July, Ford and Chrysler — which had initially resisted following suit — were all but forced to offer similar programs of their own.

“They didn’t have a choice,” Toprak said.

Consumer response has been impressive.

At Don Medow’s Jeep dealership in South Bend, Joe Rogers, the dealership’s used car manager, said the company sold four cars on Wednesday, the first day of the promotion — double its usual rate.

“It’s such a deep discount that, on the customer end, you have to act quickly or else everything will get snatched up,” Rogers said.

While Ford and Chrysler dealerships in the area are expecting sales to increase in July, experts don’t believe they will jump as high as GM’s did in June. “There’s a point of diminishing returns,” Toprak said.

And, in the future, some wonder if consumers will now avoid buying cars unless a steep discount exists.

“From a tactical point of view, it’s had an effect,” said Mike Etzel, a University of Notre Dame marketing professor.

“From a pragmatic point of view, I don’t think we’ll ever find out if GM benefits from this.”

The long term

This isn’t the first time automakers have launched car promotions that captured the attention of the public.

About a decade ago, dealerships unveiled cash-back incentives and other rebates to draw consumer attention.

When customers became acclimated to those deals, car companies rolled out zero-percent financing for certain periods.

Soon, customers got used to that, as well.

And it’s only a matter of time until customers become accustomed to the employee discount promotion, as well.

Cutting prices to attract customers isn’t the best business strategy, Etzel said.

“You can’t just cut costs the same way you can cut your price. It eats into the profit margin,” he said. “You prefer to compete on some other basis, like aesthetics, or operating economy, or some other dimension other than price.

“But it looks like (car companies) are being forced to compete on price.”

In GM’s case, that isn’t necessarily a bad thing in the short term. The automaker has been criticized for offering high numbers of incentives. But in June,’s Toprak said, the automaker actually cut the amount it spent on incentives.

Where car manufacturers go after this wave of discounts ends is another issue.

Notre Dame’s Etzel said it isn’t clear if the demand for GM cars in June was fueled by people leaving other manufacturers or by people purchasing earlier than they may have planned (thus showing that the car market isn’t growing).

He also said that dramatic discounting affects customer perceptions of vehicles.

For example, a customer who notices a $3,000 discount might wonder why such a discount was being offered. If the customer blames a sluggish economy, then sales might not be affected, Etzel said.

On the other hand, if the customer associates the discount with some negative attribute of the vehicle, automakers will have a tough time reversing that perception.

“Competing on price ought to be a last resort because it has so many detrimental effects, both on revenue and on perception,” Etzel said.

Some car manufacturers are taking steps to combat the recent trend of deep discounting, Toprak said.

For example, Chrysler has started adopting a value-pricing strategy, where the sticker price is lower than competitors’ cars in the same class, but fewer incentives are offered.

And foreign automakers, most notably Honda and Toyota, shy away from offering incentives to lure buyers.

For example, last month, General Motors spent $3,875 in incentives per vehicle sold, said. By contrast, Toyota only spent $1,100.

Local Ford and Chrysler dealers who saw customers pass their lots in favor of GM-brand lots in June are glad their manufacturers introduced the employee discount.

“We really expect it to spike the market,” said Mike Griffin, the general manager at Gurley Leep’s Ford dealership.

But what happens when customers get used to the employee discount?

“You’re teaching people to become discount buyers, and teaching them what the discount has to be to attract their attention,” Etzel said. “The customer will develop a threshold of what a reasonable discount is, and if it isn’t at that amount, it doesn’t get their attention.

“So the discounts have to be getting larger and larger to get people’s attention. When does this ever end?”

* * *

Out of control

One of the consumer benefits of General Motors’ employee discount last month was relatively little haggling over prices.

Dealerships displayed stickers in the windows that clearly explained the employee discount and any additional rebates.

But Jesse Toprak, an senior analyst, said that customers really didn’t save much money at the end of the day.

He noted that the average sale price of GM vehicles in June actually hit a record high. That was because customers, thinking they were already save thousands of dollars, added on many additional features that they wouldn’t otherwise consider.

“A lot of people think this is a great deal, but they end up spending more money than they plan,” Toprak said. “Because they think they are saving money, they take the money and upgrade their vehicle instead.

“It’s best to go in with a budget and stick to it.”


Topics: Mendoza