In their simplest sense, incentives are a form of temporary price reduction, basically a means to balance demand with supply.
Simple economics would suggest that as demand rises - such as when the economy grows - the need for incentives should lessen.
It sounds good, but there are two problems.
1. The above argument assumes that the supply remains fixed. In this hypercompetitive market, plagued with overcapacity, supply is anything but fixed.
2. Interestingly, incentives have become embedded into the marketing fabric. This is true on many levels. It would be easy to make the case that many vehicles have an assumed incentive "baked" into the sticker. A case can be made that we have trained many consumers not to purchase a vehicle without an incentive. Incentives are not simple price reductions. They have become flexible tools that help dealers close sales that otherwise might not have been made.
That is clearly the case with factory-to-dealer incentives, which many consumers don't even know about. They are counted as incentives, but dealers use those dollars in a variety of ways: as spiffs to salespeople, support for extra marketing investment and ad hoc price reductions.
Some dealers even let them drop straight to their bottom line. Interestingly, the way they use the factory-to-dealer incentives varies depending on the vehicle.
For example, in December, an average of only 69 percent of the dealer incentive on the Buick Rainier was used to reduce its selling price. For an Acura RL, the figure was closer to 81 percent.
Factory-to-dealer incentives are popular in some circles because they are believed to be less damaging to a marque's brand image than the highly publicized factory-to consumer incentives.
That benefit must be offset by the fact that factory-to-dealer incentives are hidden, and dollar-conscious consumers are not likely to consider a vehicle when they are unaware of available savings on it.