Defensive Strategy

The Cash for Clunkers Hangover

2 Sep 2010  

This week automakers released sales numbers for August.  The results were dismal.  According to The Wall Street Journal, sales in the U.S. fell 21% versus 2009.  Sales at Nissan, GM, Toyota and Honda all fell more than 25%.

These results aren’t a surprise, since U.S. government’s Cash for Clunkers program boosted sales last year.  The Cash for Clunkers program gave some auto buyers a credit of up to $4,500 on the purchase of a new car.  Essentially, this was a huge short-term discount, funded by the taxpayers.

Big discounts like Cash for Clunkers have a huge impact on sales.  When the discount is in place, sale will almost always jump.  When the discount ends, sales fall.  And if the discount isn’t offered the following year, the year to year comparisons will be grim.

Discounting is a bit like partying.  Everything is wonderful and fun while the party rolls on.  But inevitably the party ends and when the sun comes up the hangover remains.  And in general, the bigger the party, the bigger the hangover.

Companies need to be very careful when it comes to discounting; the short-term jump is pleasant but fleeting. 

Heinz this week announced that sales were up in the latest quarter, in part because the company cut the price of ketchup at Wal-Mart to $1 for a 40-ounce bottle.  This offer drove a lot of volume, as one would expect.  But it was just a short-term gain.  Ketchup doesn’t usually cause hangovers, but this offer surely will.

1 Response

  1. […] dangers of relying on sales to drive your business and what it can do to your brand.  In his last post is he used the cash for clunkers program as an example.   Prof. Calking warns, Discounting is a […]

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