Nissan Steers Away From Incentives to Boost Profit

Thinking about taking a new Nissan (7201:JP) out for a test drive? Don’t expect to negotiate a great bargain at the dealership.

With a slate of coveted vehicles, the Japanese carmaker is finally ratcheting down its pricing policies in a bid to catch up with more profitable rivals such as Honda (7267:JP) and Toyota (7203:JP). “Our plan for fiscal year 2014 is to continue to try to take as much price as possible,” Nissan’s chief executive, Carlos Ghosn, said on a conference call this morning.

Having cars that people want is one of the best ways to hold the line on price, and Nissan is finally looking good on this front. The Rogue has been a star in North America, with sales surging 19 percent in the first quarter of this year. The Altima still woos plenty of drivers away from Toyota’s Camry and Honda’s Accord. The company also has 10 new vehicles coming out in the next 12 months, including an update of its larger Murano SUV and a pickup that will be sold worldwide.

The product glut is helping Nissan wean itself off deal sweeteners. In April 2013, the company was granting incentives equal to almost 10 percent of the value of its vehicles in North America, according to Bloomberg Industries data. By last month, however, the automaker had ticked that rate down to a little less than 6 percent, in line with Toyota’s share of sweeteners and slightly above Honda’s 4.4 percent incentive rate.

This morning Nissan went a bit further, pledging to scrap the so-called stair-step program that gives dealerships tiered bonus payments depending on how many cars they sell each month. Such programs are both standard in the industry and hugely controversial.

Here’s rough sketch of how it works: Car company A promises dealer B a payment of $500 per vehicle for sales of 10 cars of a particular model in a month, a payment of $750 per vehicle if it sells 20 cars, etc. If only a few days are left in the month, and the dealer has sold 16 vehicles, it makes a lot of sense for the outfit to offer major sweeteners on those last four cars. If the the dealer sells 20 cars, its bonus payout jumps from $8,000 to $15,000.

These stair-step programs are helpful for manufacturers because they provide some assurance of demand and urgency to the people who actually talk to customers. But as far as incentive engines go, it’s a fairly crude apparatus. The system tends to whip-saw prices from week to week, which is a great way to put off customers already leery of sales tactics. What’s more, carmakers—and Nissan in particular—are known to change sales goals drastically from month to month. Not surprisingly, the National Automobile Dealers Association has come out against stair-step programs, even though they occasionally make for big bonus checks.

For a manufacturer such as Nissan, one can imagine what this kind of hard shifting does to profit margins. Even if prices overall stay relatively high, it’s not a smooth ride. Now Nissan will be doling out dealership bonuses on an annual basis in the U.S., so the people who actually sell its cars can take a longer view when deciding how to set prices and when to offer sweet deals.

Ultimately, Nissan’s goal is to secure a sustainable 8 percent operating profit margin worldwide as well as an 8 percent market share. At the moment, it controls 6.2 percent of the market and has a profit margin just shy of 5 percent, according to its earnings release this morning.

If Nissan wants to give dealers a little extra boost, it will greenlight the sport sedan concept it rolled out at the Detroit Auto Show in January. The angry-orange ripple of metal, which was said to be the next Maxima, seemed to sell itself just fine.

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Nissan Steers Away From Incentives to Boost Profit
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