Dealer Incentive: What it Means, How it Works

What Is a Dealer Incentive?

A dealer incentive is a financial inducement used by manufacturers to motivate dealers to sell a particular product by offering discounts on that product. Generally, this corporate sales strategy involves a reduction in the cost a dealer pays to acquire an item from a manufacturer, which increases the dealer's profit upon sale of that item.

A dealer incentive may also take the form of a cash payment to a dealer for the sale of a specific item, or a cash incentive, such as a rebate, that is awarded directly to the consumer. Dealer incentives are most often used by auto manufacturers, but may also be employed by other types of brokers or resellers.

Understanding a Dealer Incentive

A dealer incentive happens between a manufacturer and a dealer with the goal of reducing the cost for the dealer and improving their profit margins. Dealer incentives are usually applied when manufacturers want to sell old inventory or in general inventory that is not selling, which may be due to a variety of reasons.

The dealer incentive is not passed onto the customer but is rather a benefit for just the dealer. However, this does often allow room for consumers to negotiate. If the dealer is still coming out on top by reducing the price for a consumer but benefiting from the dealer incentive, this may work in the consumer's favor.

In general, dealer incentives are used by companies to motivate salespeople, such as cash incentives paid to a salesperson for the sale of a particular model of car or hitting a sales target. They also allow manufacturers to cut the costs of making sales, enabling the capture of market share, and helping with the launching and promotion of new products or models by tying pay to performance.

Dealer incentives may be applied in a certain state or region, or nationwide. If regional, it's a good idea to broaden your search from your local dealer to see if you can find a good deal in another state, for example.

Generally, dealer incentives are employed to spur sales of slower-selling models, to realign inventory, or after specific monthly sales goals are met to motivate salespeople to continue selling.

Implementation of Dealer Incentives

The most common use of dealer incentives is by car manufacturers, who will reduce the price a dealer has to pay for a particular vehicle model in the hope of increasing the sales volume of that model. If the dealer charges the end consumer the same price but pays less to acquire the model, then the dealer will earn a higher profit.

The dealer may also pass the cost savings on to the consumer, but may not be required to do so. Such an incentive is known as a factory-to-dealer incentive. The consumer may not be told of or be aware of such incentives, but savvy car buyers can quickly tell which models are seeing disappointing sales and may be subject to dealer incentives.

Dealer incentives may also involve cash payments made by a manufacturer to a dealer. Such incentives may be structured in tiers, with greater cash incentives earned as sales thresholds are met.

In such cases, a dealer and salesperson would be motivated to sell more cars to achieve better payouts from the manufacturer, which may mean better deals for buyers. This structure is valuable in auto sales environments in which salespeople may have less incentive to sell after meeting their monthly goal or quota.

A factory-to-buyer incentive may be used by manufacturers to generate sales by bypassing the dealer entirely. Such an incentive is also known as a rebate. These incentives are usually well-publicized with the goal of driving up demand for a product.