Time for net pricing?


I once asked a successful businessman what he thought his secret to success was. The answer was not what I had expected. Most of us would attribute business success to careful management of costs, correct pricing, customer service or marketing to name a few. While these are no doubt important factors his answer hit the nail on the head: get rid of as many uncontrollables as possible and concentrate on the controllables.

He illustrated this by comparing his business to that of a farmer. Being a farmer he contended, was a great example of his worst case scenario uncontrollable – weather. No matter how diligent a farmer is in his business, if it does not rain his business is at severe risk.

If we analyse our business as dealers, what are our controllables and uncontrollables? The list is too long to include in this article but I would suggest you take a moment to think about them and start planning a new strategy to deal with them.

One of the uncontrollables that we face as dealers is when OEM’s launch a rebate and another is the impact that variable margins have on price erosion. The former is a very frustrating exercise for me because it inevitably ends up costing more money than the rebate is worth! If you have a showroom full of used vehicles and the OEM announces a rebate, the models on your floor implicated lose value traditionally more than the value of the rebate. They then owe you incorrectly and you as the dealer have to write back the models in order to retail them. Never mind the fact that there is an expected discount off the new model and this is exaggerated when the OEM takes away the rebate once they have off-loaded their excess stock onto the dealers!

Variable margins have resulted in most dealers selling new cars at very little, if any profit. I know Mercedes-Benz dealers who retain as little as 1% gross profit on an S-Class. This from a supposed premium brand. Yes, there are kick-backs on offer if certain targets are achieved, but not everyone gets there.

Customers are fully aware of the pressures the automotive industry is under and they certainly take full advantage of it by horse trading one dealer against the other to get the maximum discount. I for one cannot stomach the concept of a multi-million Euro franchise trading like a flea market.

The net result of the above scenarios is volatility in the new and used vehicle market which can cause dealers to run into the red very quickly. So how do we change it?

The first thing to do is to put the correct price positioning of models fairly and squarely back on the manufacturer’s shoulders. After all if they price too high, it is the dealer that takes the first punches when the market does not accept it and stocks pile up. In order to ensure that better price positioning occurs, I propose a net pricing scenario. There are logically many concerns regarding what the various competition tribunals would have to say about this, but there are some ideas to overcome these. In any case, if McDonalds can have a set pricing menu, why not franchised dealerships?

One idea to implement net pricing is for the OEM to invoice the customer directly and pay the dealership a fixed commission. And this will sort out a whole lot of issues. It will take away a serious uncontrollable from the dealer and offer much better financial stability for them.

There are many issues to consider and think about regarding net pricing. There are many advantages and disadvantages to the proposal which I’m sure will result in much debate. However, with the additional uncontrollables such as online sales creeping into our external environments, we need to start getting better protection from our franchisors. After all, that is why we are part of a franchise…

Peter Viljoen

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