Discounting rears its ugly head more than you think
Hal Ethington, Columnist
April 17, 2013
Filed under Columns
A Gold Wing rider, a HOG club member and your brother-in-law walk up to the parts counter. And the parts manager says…
No. This is not just an old, bad joke with a corny punch line. There’s more.
Here comes a fireman, a policeman, the fleet manager for the city and the family that bought a UTV yesterday. And what’s that? Oh, your banker’s teenage kids and your friendly UPS guy who rides.
Those guys over there are from the office supply store. And behind them is the owner of the gas station on the corner where you gas up the shop truck. And it’s not over yet. A bunch of enlisted men from the base south of town that just came in, and right behind them is the lady who runs your driver’s ed program at the school.
They’re all here at my parts counter, and what do they all have in common?
THEY ARE ALL RETAIL CUSTOMERS, AND EACH OF THEM GETS A DISCOUNT ON PARTS!
What have we done to ourselves? Would you imagine going into Lowes, or Home Depot, or Best Buy and expecting a discount because of who you are? For shop-worn stuff, for damaged goods, yeah, maybe. But just because you are a friend of a friend of a friend?
But we have done it. And all these people buy at a discount because we give it to them.
So, where did this come from? How did it start? Why do we keep doing it? And, most important of all, is it worth it? Does it come back to us in some way? Or, is it just the cost of doing business?
All good questions, and I may not have the best of answers. But I do know this: I can tell you exactly how much it is costing us. To the penny. And it’s not pretty.
Take a look at the Charts A and C.
I’ve taken out the internals and the oddball stuff, and in Chart A we see that for V-twin dealers in the six regions of the country, roughly half of all parts are sold at MSRP. OK. Half. But wait! What about the other half? What’s going on over there?
Well, in the other half, about 10 percent are sold at greater than MSRP. Yay!
And now the other shoe drops. About 17 percent are sold at 10 percent off. Another 15 percent are sold at 20 percent off. And a whopping 15 percent are sold at greater than 20 percent off. That means that 40 percent of all parts sold are sold at discounted prices. It may vary a little from region to region — the Northeast is worst, the South best — but that’s the bottom line: $28 million in discounts on $259 million in sales.
You thought that was bad? Take a look at the metric side.
Chart C (again, no internals and presented by U.S. regions): Right at MSRP? How about 28 percent. (Remember, the V-twin people landed about half in this category). Above MSRP? Roughly 10 percent, or about the same as V-twin. But the news gets a lot worse.
For metric dealers, about 20 percent of parts are sold at 10 percent off. Another 20 percent are sold at 20 percent off. And the killer is, 22-35 percent are sold at more than 20 percent off. That makes almost 70 percent of metric parts that are routinely sold at less than MSRP. Worst is the Midwest with 68 percent discounted, and best is the West where only 60 percent (ONLY?! Did I say ONLY?! Have we lost our senses?) were discounted.
Charts B and D show the margin rate by region for each discount group. A total of $207 million discounted on $788 million in sales. That’s 28 percent off.
How can anybody make it at this rate?
Well, you say, perhaps we make it up on the volume — somehow. Isn’t that the business model for the Costcos and Home Depots of the world? They mark it down, sell a whole bunch more, and make more money overall. Right? Right.
I did the math, and here’s how it shakes out.
In both markets people are getting 40 percent margin when they sell at MSRP. It looks like they average about 25 percent margin when they start dropping the price. So, if they generate $400,000 in margin when they sell $1 million at MSRP, they would have to sell $1.6 million at the 25 percent rate to return the same margin dollars.
Think you could sell an additional 60 percent in your market? Think you could handle all the additional employees, floor space, noise and confusion? And, after you do all that, you still have the same margin dollars you generated when you held the price and sold at MSRP.
Discounts. I know. You have to do it, and it is justified. Sometimes. But when it becomes your way of thinking, when that is the manner and way you do business — it will cost you. Perhaps more than you know.
So I’m thinking about this, and wondering, just like you, what we can possibly do to get away from discounting. And I find there may just be an answer.
Why do you pay your parts bill with your American Express card? Why do I fly Delta? Why do I stay at Marriott, rent cars from National and eat at Subway? Why does my wife drive out of her way to buy gas and stuff from Costco?
Points, man. Points. And admit it. You do it too. We are all influenced today by loyalty points. Ever since frequent flyer miles first appeared, it has been the new currency.
And it works. I never ask for a discount at a Marriott. I get points. I don’t bargain with the Subway cashier for a better price. I get points. And I don’t ask the grocery store checkout clerk “What’s my price?” for the milk and bread. I get points.
Points. And I go back, and I get free stuff. And I go back, again, and again, and again. And I even walk back out to the truck to get my card when I forget to take it in. Sick, huh?
Loyalty programs work. And there may be a great truth here that our industry has never quite gotten. Until now.
Loyalty is starting to appear in motorcycle. There are points programs that now integrate with the DMS. Poke your head up, look around, and you may just find a solution for this discount thing. Give them points. And they will be back, spend more dollars and get their free stuff. Loyalty programs I see look like they would cost the dealer about 5 percent at full redemption. So the true cost is going to be somewhere south of that. That sure beats 50 percent of all customers getting 10 percent, 20 percent and more off as we are doing now.
I was in the office, door shut and telling the owner that one of his countermen was giving stuff away all day long. He looked at my report, picked up the phone and called the man in.
Did I say man? He was probably 18, and scared to death. He didn’t know why he was called to the office, but he knew it couldn’t be good.
The owner, seeing how terrified this kid was, took the coach approach: “Tim” — not his real name, obviously — “Tim, could you tell me why you discounted this pair of motocross boots for this guy named Johnson?” Tim was gasping for air now, and looking at the closed door with despair. “Well,” he finally gulped out —“Well, he is a friend from high school, and he said it was a lot of money, and could I do something for him, and… and…” and here his voice trailed off into the wasteland of no excuse. He was had. And he knew it.
The interview didn’t last long. The owner was very kind, but solemn and firm. Tim returned to the counter, and his whispered report to the others there was quickly understood by all. The discount report next morning was substantially shorter.
There are ways. First, understand where you are. Next, understand the cost of where you are. All those folks standing at your parts counter are good customers, and you don’t want to lose them. And truth is, they don’t want to lose you. They like your place, and they like what you do. It’s up to you to figure out how to give them the value they want, earn their loyalty and do it without giving away the store.
Hal Ethington has been associated with the powersports industry for more than 40 years. Ethington is a senior analyst at ADP Lightspeed. Contact him at Hal.email@example.com.