Stair-Step Incentives Affect How Much You’ll Pay for New Cars

SANTA MONICA, California — If you’re shopping for a new car, here’s one more thing to have in the back of your mind: stair-step incentive programs.

What’s a stair-step incentive? In simple terms, it’s a manufacturer-to-dealer incentive that’s tied to sales volume. For instance, an automaker might pay a dealership $500 if they sell 10 vehicles while a stair-step program is in effect. However, if that dealership sells 20 units, it might earn $1,000 per unit. More aggressive programs will even compensate dealers retroactively, such that the aforementioned $500 could be paid out even for the first 10 vehicles sold, not just those sold after the quota is reached.

Although it sounds like a complicated interaction between dealers and manufacturers, it can affect how much you’ll pay for a new vehicle, at least indirectly. Large-volume dealerships will often discount their pricing at the retail level to make sure they hit the desired quotas.

But, writes Edmunds.com Vice Chairman Jeremy Anwyl in his latest column, this presents a dilemma for smaller dealers. “Do they match the lower prices being offered by the larger dealers and risk losing money if the sales quotas are not achieved? Or do they continue with previous pricing and risk being seen as not competitive?”

Automakers, Anwyl notes, like these programs, because they usually increase sales volumes while resulting in transaction prices that are more attractive to consumers, with dealers absorbing some of the cost — particularly dealers that don’t hit their quotas.

“Manufacturers typically refer to their dealers as partners,” says Anwyl. “This is generally true, but it’s a partnership with points of tension. A big one is that dealers want to optimize their businesses around profitability. The manufacturers would prefer that dealers optimize for volume.

“The enduring appeal of stair-steps is that during the program, the interests of dealers are aligned with the manufacturers. Both are reaching for volume.”

Inside Line says: Stair-step incentive programs will continue for the near term, and this could give you more bargaining power if the dealer you’re negotiating with is trying to hit a quota.