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August 2006
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Fuel economy is the best incentive
Consumer Reports survey finds that product attributes are more influential than advertised incentives

The summer sales push is well under way, with auto manufacturers promoting new-car sales incentives like multimedia midway barkers in an attempt to clear dealer lots before the 2007 models arrive. However, a study by the Consumer Reports National Research Center found that the most effective incentives are a vehicle's fuel economy and reliability--not a flashy financing gimmick. Further, most in-market consumers do not fully understand how incentives work.

Last summer, automakers' employee pricing campaigns created a gold rush that drove significant sales volume, but the market is much different this year. Rising fuel costs have led to bloated inventories of large pickup trucks and SUVs, while small, thrifty vehicles have been in high demand.

To understand the role incentives play today, the Consumer Reports National Research Center conducted a random nationwide telephone survey from Aug. 3 to Aug. 7 of adults 18 and older who are considering a new vehicle purchase during the next 24 months.


THE POWER OF PRODUCT

Incentives have long been a persuasive tool used to jump-start sales on slow-selling product lines, invigorate slow markets, and clear out end-of-the-year inventory. In recent years, frequent promotions have trained auto buyers to expect discounts. Even Uncle Sam is in the incentive game with federal tax credits on hybrid models promoting sales.

When asked to identify the most important considerations, survey respondents were less influenced by incentives than product features, perhaps reflecting a blasé attitude shaped by perpetual promotions. Fuel economy (27 percent) led the list of considerations, followed by reliability (25 percent), purchase price (14 percent), and safety features (12 percent). Only five percent of car shoppers said that manufacturer or dealer incentives were the most important factor in their purchase decision.

But incentives do play a role, with 69 percent of shoppers reporting that they may time their purchase to coincide with incentives. In addition, 18 percent of shoppers claimed in stronger terms that they definitely will plan their purchase around incentives. This behavior is more prevalent in older, higher-income consumers, according to the survey.

As the adage goes, everyone has a price. Consumers said that an incentive must be quite large in order to affect the choice of their next new vehicle. Almost 25 percent of respondents claimed it would take $5,000 or more to turn their head, with $3,000 being the median value. These amounts are greater than most offerings in Best New Car Deals highlighted by Consumer Reports for August, which reveal Recommended models with substantial discounts. In Best New Car Deals, four models carry $2,000 or more in rebates, including the Lincoln Town Car Signature Limited with a $7,000 rebate.

Consumer Reports Auto Price Service has identified several full-sized, domestic SUVs with rebates in the $4,000 to $6,500 range on non-Recommended vehicles. In most cases, the greatest customer cash can be found on large, gas-guzzling SUVs that are being replaced by redesigned models, such as the Cadillac Escalade, Chevrolet Tahoe, Ford Expedition, GMC Yukon, and Lincoln Navigator.


THE POWER OF PERSUASION

To understand what could motivate shoppers, we asked which incentive would most influence a purchase decision. In addition to traditional incentives, survey respondents were also offered less-common options to gauge whether there may be another draw that could be effective, such as trade-in guaranties or aftermarket upgrades.

The most compelling incentive proved to be 0 percent, or discount, financing (32 percent of shoppers). Free extended warranty (23 percent), free gas for a year (20 percent), and cash rebates (14 percent) were the other, significant influencers. The reduced-rate financing appealed most to men and high-income consumers.

However, a majority of shoppers have misperceptions about incentives. The marketing messages are compelling, yet the true deal may be different from what the customer expects. Split evenly between men and women, 63 percent believe that every customer is eligible for the same new vehicle incentives, despite the common "for qualified buyers" in small print.

A larger 80 percent believe that incentives can be combined, such as zero-percent financing and cash-back rebates. This is quite rarely the case, leaving consumers to calculate at point of purchase if it would be advantageous to reduce the purchase price, and therefore the amount needed to finance, or to take advantage of a low interest rate. Buyers should have their finance plan in mind before entering the showroom, where it will be difficult to make such decisions because of emotions and distractions.

Chrysler is unusual in combining incentives within its "Employee Pricing Plus" program this summer. With this campaign, shoppers are lured to dealerships with discounted pricing, 0 percent financing, and a 30-day return program. As with most deals, the small print reveals that not all buyers qualify and there are significant caveats.

Shoppers learn about incentives primarily from dealership or manufacturer radio and television advertising, trailed by printed ads, and third-party automotive Web sites (such as ConsumerReports.org). While the ads are a primary information source, many consumers doubt the veracity of the dealers themselves. Almost 60 percent of respondents don't feel that dealers inform them about all the rebates and incentives available, suggesting the clear value in researching offers before entering a showroom. Current offers are listed on manufacturer Web sites.

On an encouraging note, 85 percent of respondents report that they negotiate the purchase price even when using an advertised incentive. The other 15 percent should note that employee pricing-type programs do not always provide a better price than could be otherwise negotiated. To understand the value of a deal, and have a price target, it is helpful to use the Consumer Reports Bottom Line Price, which factors such things as invoice price, dealer holdback, and hidden sales incentives. (The Bottom Line Price and full disclosure of available offers is included in the comprehensive Consumer Reports New Car Price Report.) When negotiating, there may be more room for price adjustment with less-popular models and those about to be replaced.


ALTERNATIVE POWER ATTRACTS

A May 2006 Consumer Reports study showed that elevated gas prices were having a significant impact on the American lifestyle, with 37 percent of the nationwide survey respondents reporting that they were considering replacing their current vehicle for one with greater fuel economy. Subsequent sales trends supported the study findings, with four-cylinder vehicle transactions on the rise while large, V8-powered vehicles are on the decline. (Compare the most fuel-efficient vehicles on the market today with the Consumer Reports New Car Buying Kit.)

The August survey finds many consumers looking beyond conventional gasoline-fueled vehicles; nearly two-thirds are considering vehicles with alternative powertrains. A simple majority (51 percent) are considering a flexible-fuel vehicle for their next purchase, split evenly between genders. The auto industry marketing and political push behind E85 (85% ethanol, 15% gasoline) has fueled flex-fuel vehicle interest. However, Consumer Reports testing has shown that E85 provides significantly less fuel economy. (A full report is in the October 2006 issue and online in September.)

Interest in hybrids is also strong at 44 percent, with men leading at 47 percent vs. women at 41 percent. Those high numbers signal a true acceptance of alternative powertrain technologies, although interest is well ahead of vehicle availability. The fuel-economy drive is so great that 87 percent of respondents would consider a hybrid vehicle even if there were no government tax incentives.

These hybrid-intenders may not be aware that Consumer Reports research last April found that, even with federal tax credits, the fuel savings from current hybrids did not offset their additional cost versus similar gasoline-fueled vehicles in most cases over the first five years and 75,000 miles of ownership. Look for an updated Consumer Reports analysis, which factors in today's higher gasoline prices and the latest sales incentives.


CONCLUSION

New-car intenders report that when priced right, reliable, fuel-efficient vehicles sell themselves without exorbitant and often-confusing incentives. In addition, there is greater interest in flex-fuel and hybrid vehicles than there is supply.

Considering public perceptions and concerns, shoppers should carefully research the myriad available offers prior to entering the showroom, further empowering their negotiations and easing their concerns. In addition, consumers should look to the real-world fuel economy for all vehicles, particularly with hybrids and flex-fuel models, to fully understand the true operating costs. With only about 800 gas stations (out of 176,000 nationwide) selling E85, interest in flex-fuel powertrains should be weighed against fuel availability, which is increasing over time.

As in summers past, there are attractive deals promoted on air, in print, and online, yet consumers recognize that the best buys are on good cars.
Get the Consumer Reports New Car Buying Kit to access one-of-a-kind information on incentives, fuel economy and reliability. Plus, the New Car Buying Kit includes the Consumer Reports Bottom Line Price - the price you bring to the dealership when you're ready to negotiate.