It’s not what it looks like.

Insight to auto car dealers, why few offer discounts? How they afford to offer discounts? Why do they do so? What happens to the ones who don’t?

India has seen the automotive sector booming at a very promising pace with most of the global big names preparing their foothold in the country. Firstly, India has a very high captive market for the passenger cars and secondly, India offers cheap labors hence the automotive companies have made India there production hub. Few companies cater to the global market by through production in India.

In this article the author will make a mention as to why the dealers for passenger cars offer discounts and give a perspective to the other side of offering discounts.

In the B, B+ & C segment cars in India, there happens to be a strong correlation between the discounts these dealers extend to the profit they make.

These dealers have their prime focus to sell the car and that too by offering heavy discounts what so ever possible. They increase their market presence by selling the cars in the local market, but do they really make any profit by just selling these cars? The answer will be shocking to many; they just make mere marginal profit by selling cars. Now, if they make so less profit by selling cars, why do they still offer discounts and sell these cars across, they can always reduce the discount and make higher profit out of it. Perhaps a deeper look into the profit model of these dealers revel that they make profits by not just selling but by servicing them.

How it operates? The dealers bring down the price point of the car to a lower level from P1 to P2 by offering discounts (i.e. P1-P2); the consequent effect to the same is seen in the car sales which go up from Q1 to Q2. Hence with the mentioned discount the sales volume go high. (Refer the under mentioned exhibit)

The dealer makes profit when these cars come back for servicing. Also they try is to attract more cars from the market which they haven’t sold for servicing. As long as the business of servicing of cars is working, the profits keep flowing in.

When this operational model is seen from evolutionary perspective the intention of the dealers are very clear. In the finite world with fewer customers and more offering, the traditional model of making profits by selling can no longer earn them that extra north bound revenue at the end of the year. The customers are drawn by lucrative discounts and once the sale is made the peculiarity of a particular car sold can be handled by the company run service station itself, moreover these days the customer have become more sensitive to servicing and they return back to the same dealer for their servicing needs.

This intention of going back to the same dealer for servicing is by the virtue of latent pull which the dealer creates with the positive vibe while selling the car to the customer and the customer has a mental picture that the particular dealer gave him the best offer in terms of discount and hence an intrinsic loyalty pull comes towards the dealer.

What is the darker side of this model? As Charles Darwin’s theory of “origin of species” made Herbert Spencer make a mention of “Survival of Fittest” and used it in his economic theories on the similar lines I want to draw a similarity in this article as well.

When a particular dealer does not do well in services and his profits tendency to decline, he usually thinks of micro correction by offering lesser discounts and recovers his profits by selling the cars only. It tends to miss the bigger picture, by reducing the discounts; the volume of cars sold drops and even his sales goes down as well.

This is a vicious circle of never ending damage to this dealer. Firstly he reduces offering discounts to increase profits, which actually draw customers away. Secondly, other dealers in the same city keep offering a discount which adds on to the problem of this dealer. Thirdly, even after knowing the fact if tries to offer discounts equal or more than others he will be hitting under the belt and further worsen his own condition. This dealer knows that “people respond to incentives” (4^th Principle of Economics) still there is no way to come out of this condition, unless fresh cash is flown in.

The article can also be viewed from the 1^st Principle of Economics: “People face trade-offs”, here the dealer had to trade-off to either make profits by offering lesser discounts or to make profits by servicing them, but by now it must be clear that in this trade-off the dealer has to let go discounts for the higher profits through services.

Looking the article from the 2^nd Principle of Economics: “Cost of something is what you give up to get it”, it is clear that the dealer gives up the discounts to get the profits through services. Hence it costs the dealer in terms of discounts offered.