Deficit Marketing is the result of marketing efforts that have a negative impact on the desired results. An example of this is the doctor who makes cold-calls and says, “Hi, I’m a doctor, how would you like an operation?” While short term gains may be realized, the practice of over emphasizing immediacy, i.e., discounting, inevitably hurts more than it helps.
Case in point, the 2003 Cayenne was very popular and very short lived. Customers gladly paid full list for this vehicle. However, soon after its introduction, Porsche introduced the 2004 model year Cayenne. Rightfully so, some of the early buyers, most of which were repeat Porsche buyers, raised the voice of righteous indignation. Adding insult to injury, some of the dealers found themselves stuck with 2003 MY Cayenne’s in stock.
This created multiple problems. Some clients were upset, and dealers had potential inventory problems. How do you sell now year-old merchandise without significant discounts? By this time, the internet had turned regional markets into a national market. Discounts in one part of the country now immediately effected the whole country.
A dealer in a major midwestern city ran an ad for 2003 Cayenne’s at invoice. The poop hit the fan. Those who recently purchased at full list just suffered a second hit in depreciation. If a new 2003 was now retailing for invoice, what was a used version worth?
Dealers smart enough to maintain great customer relations could have traded their ’03 clients into ’04 models, allowing original MSRP in trade value. They could then book the trade-in for whatever figure the dealership could justify. This would constitute a discount, but unknown to anyone outside the dealership.
With demand outstretching supply and no used market, the dealerships could create a premium used market. Any full-list new car has a very positive effect on its used market. By taking the high road, smart Porsche dealers could have controlled the market with minimal losses and protected their valued 2003 purchasers. A lifetime purchaser is worth so much more than a one-time full list buyer. Any money invested in the right client will bring huge returns.
Instead, one dealership panicked and destroyed the value of the ‘03’s and customer relations. They turned what could have been a win-win situation into a lose-lose fiasco.
Another deficit marketing ploy is having any of the volume stores stealing deals from the smaller market stores. The incentive being an increase in market share, the larger store can afford to let a few cars go for less profit but a quicker turn. The problem is the smaller market stores gain a reputation for over charging. The volume stores can conceal the dumping by showing a relatively respectable gross profit average on each model. In some cases, the small market dealer will keep their client, but at a loss of profit. That’s life in the fast lane, but clients in smaller markets are being conditioned to by-pass their hometown store. On the other hand, through no one’s fault, the volume store will typically have a larger selection.
Without doubt, the worst example came in one of those supply exceeding demand markets. A Florida dealer ran an ad entitled, “It’s the price, stupid.” What an innovative way to maintain gross profit. Doesn’t it make more sense to make some money during bad times rather than give everything away? It also says nothing for the dealer’s opinion of their clients. They are stupid? This is the classic definition of lose, lose.
20/20 hindsight will never prevent deficit marketing, but awareness of its effects may encourage looking for the high road and maintaining control of the market rather than being a victim of it.
What are the chances of creating a game plan to creatively navigate through a challenge rather than give in to tactics that assure mutual self-destruction?
See “A Discount without a Discount”. To be continued.