Volume Discounts – Good or Bad?

I had an interesting phone call recently from a Texas dealer regarding volume discounts. He had read one of my recent columns where I mentioned that new car dealers, large or small, paid the same price for new cars and trucks. The main reason for his call he said was to get my thoughts on why volume discounts are not a good thing. When I asked him what prompted this question he said, “One of my primary boat lines has recently decided to offer volume discounts. I told them I didn’t think it was a very good idea, and they challenged me to give them some good reasons why they shouldn’t offer volume discounts.”

I happen to know the founder and owner of the boat company the dealer was referring to and was surprised to learn that they had started offering volume discounts. If any company does not need to offer such discounts, it is this one. They sell one of the highest quality boats in the industry and have a tremendous reputation with boaters and dealers alike.

After his phone call and our lengthy discussion, I thought about this issue for several days. As a result, here are my thoughts on why volume discounts on boats are not good for the industry or dealers:

• Volume discounts put smaller dealers at a disadvantage. When large dealers can buy and sell boats at prices significantly lower than other dealers who handle the same brands, customers can easily conclude they are getting “ripped off” when they are quoted prices with reasonable markups by smaller dealers. This can send a negative message to consumers about the industry being a bunch of thieves. Credibility suffers.

• It can cheapen the image of the boats. There is the risk that people will think a boat company needs volume discounts to sell its products.

• I know from experience that large customers (that get larger with volume discounts) can get very demanding and consume great amounts of customer service time.

• Over time, volume discounts will tend to concentrate a company’s business with a few large customers who potentially can “hold them hostage” with demands.

• Then, as a result of the above, boat builders’ profits can be eroded as more and more of their production is sold at volume discounts.

To conclude why volume discounts on boats are not good for dealers or the industry, let’s take a look at the automobile industry. The new car companies don’t do it. As mentioned before, as a Chevrolet dealer, I paid the same price for new cars and trucks as a mega-Chevy dealer who was only 15 miles away. Most customers shopped us both for the best deal before they bought a Chevy. As a medium-sized dealer I was able to compete against this retail giant. He worked on a slimmer gross margin because of his tremendous volume, but I was able to hang in there on deals and sell cars and trucks because we both paid the same price.

Now, let’s look at the reasons why volume discounts are good.

• Actually I can’t think of any good reasons that really benefit the industry or dealers.
• Volume discounts do help a few dealers grow larger at the expense of other dealers. So it benefits some dealers, but hurts many more in my opinion.

• Volume discounts can help a boat company get more volume and production, but at the risks outlined above.

A Midwestern dealer e-mailed me this message about volume discounts: “My pontoon manufacturer, one of the oldest in the country, supplies boats to all sizes of dealers. During a recent visit to the boat builder’s office, the executive I was meeting with had to step out of his office for a few minutes. I noticed an invoice for a metro dealer lying on his desk. I was able to see that the dealer was getting an extra 10 percent discount with a delayed payment on the same model boat that I came to pick up that day.

“After returning home I read and reread my dealer price manual, and nowhere in it did it say there was an extra 10 percent volume discount available. So I called the sales manager and was told that they did not have any volume discounts. When I told him I had seen the invoice with the 10 percent extra discount, he said it was just a billing error. I believe that manufacturer lied to me and as a result I changed boat brands.”

I guess when there is more supply than demand, many manufacturers respond with incentives like volume discounts to try to get a larger piece of a shrinking pie. But such shortsighted actions hurt the industry, in my opinion, and help shrink that pie further.

Editor’s Note – Ben Sherwood, a marine industry veteran, was head of sales and marketing for Johnson and Evinrude outboards before retirement. After retirement he owned and operated a Chevrolet dealership, which he later sold. He now operates Sherwood Marine Marketing, a marine industry consulting firm in Pleasant Prairie, Wis.; 262-694-6636. E-mail address is ben@bensherwood.net and Web site is bensherwood.net.

Leave a Reply

Your email address will not be published. Required fields are marked *