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 Dealer Incentive

Dealer incentives are widely used in car sales so the practices of dealers and manufacturers provide the best examples. In general, though, 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. They allow manufacturers to cut the costs of making sales, enable the capture market share, and help with the launch 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. Generally, they 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.

Dealer Incentive: How It Works

The most common use of dealer incentives is by car manufacturers, which 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 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 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 well-publicized.