Understanding Factory-to-Dealer Incentives

Customer incentives are easy to comprehend: They involve cash-back rebates, low-interest financing offers or other perks that are offered directly to buyers. Dealer incentives don't work in the same way, but they can still lower a car's negotiated purchase price and benefit the customer.

What Are Dealer Incentives?

Dealer incentives are factory-to-dealer incentives that reduce the dealer's true cost to buy the vehicle from the factory. Manufacturers offer these incentives on a regional basis to generate sales on specific models. These incentives are sometimes referred to as "spiffs," and they can lead to competition among dealers to move that slower-selling stock. For instance, a dealer incentive may kick in when a certain sales target is reached, with each subsequent sale resulting in a higher factory-to-dealer rebate.

How Dealer Incentives Can Help You

To be clear, dealers are under no obligation to pass these rebates along to customers; you'll need to negotiate in order to benefit from dealer incentives. The good news is that incentives motivate dealers to sell. If a dealer is nearing a sales target, he may be more inclined to give you a good price in order to reach his goal. And if you're aware of the dealer incentive that's being offered, you may be able to use that knowledge to negotiate an even lower purchase price.

Remember, dealers pay to keep vehicle inventory in stock. So even if an incentive isn't attached to a particular model, dealers are more likely to be flexible on pricing for a vehicle that's been on their lot for two months or more. The longer a car collects dust, the more affordable it becomes to a savvy negotiator.

What Else You Should Know About Dealer Incentives

Dealer incentives are subject to local and regional variables. The national incentives listed on Cars.com represent a range of these offers. But it's difficult for car shoppers to know the exact incentives being offered to local dealers.

Additionally, dealer incentives aren't relegated merely to slow-selling models. Manufacturers may provide new dealerships with rebate offers in order to establish customers, or they may offer incentives to established dealerships in exchange for taking on added inventory. Hopefully, these and similar scenarios will benefit customers.

Finally, dealer incentives should not be confused with dealer holdback. Holdback is a portion of a car's sales price (typically 2 percent to 3 percent of either the invoice price or MSRP) that an automaker returns to a dealer, usually on a quarterly basis. It's a way of boosting the dealer's cash flow and helps the dealer keep his lights on. Most dealers see holdback as something that they're entitled to.