When does ‘discounting’ occur?
Major discounting in the market usually occurs towards the end of the calendar year (Oct-Dec), and also towards the end of the financial year(Apr-Jun). The reality for carmakers is stark: production must equal sales. This equation is held critically to account at those times annually, and all markets globally are expected to pull their weight, which is why there is an emphasis on making sales at these times – often by conceding some profit.
To a lesser, but still significant, degree there is somewhat more localised pressure to produce sales at the end of every month. Car retailers (dealers) have quotas they are expected to maintain, and there are financial incentives in place to encourage them to meet or exceed them. The books are balanced on sales at the end of every month. Dealers who are just a little shy of their quotas towards the end of the month are typically highly motivated to proceed with a sale even if there is little profit in the deal directly. For consumers this can mean a bargain if you pitch a low price towards the end of the month, on a car the dealer has in stock now.
Be wary of supply and demand…
Like most economic transactions, the fundamentals of supply and demand pertain. Popular cars, which are either in short supply or for which there is a high demand, will generally not be discounted – regardless of the time of year. Cars that have fallen from favour – where supply exceeds demand – have the most potential for discounting at any time. However, in this latter case, one must consider if the poor popularity will continue into the used market after a few years. If it does, this could mean excessive depreciation and poor resale value at trade-in time, which erodes any discount on the showroom floor.
Upcoming new models are often hotly anticipated by consumers as a whole. This causes a number of reactions in the market. Sales of the soon-to-be superseded model typically decline or stall because buyers prefer to wait for the new model. Demand drops, and manufacturers have no choice but to drop the price to ensure the old stock sells in advance of the launch of the new model. This can occur informally, or it might be more formalised in an official ‘run-out sale’ marketing campaign.
‘Run-out’ sales may not be what they seem
Although the discount in a run-out sale campaign can seem attractive up front, it’s important to weigh this against the effect of being superseded upon resale value. A good example of this is the current model Mazda3 – which was released in November 2013. If you were a consumer at that time with a mid-$30k budget, the soon-to-be-runout Mazda3 SP25 auto sedan had a recommended retail price of $33,670. The new model Mazda3 offered an SP25 GT auto sedan for $32,590. Fast-forward to today: the new model sells privately for an average of $26,550, with the funds lost to depreciation totalling $6040. The superseded model sells privately for an average $25,450, losing $8,220.
An obvious conclusion, at this popular price-point is that the discount on the run-out model would need to be significantly more than $2000, especially when you weigh up the fact that the new model is an objectively better vehicle, which also cost $1000 less, up front.
My recommendation to people looking for a run-out sale bargain is to walk away immediately if the saving up front is less than 10%. If it’s less than that, the proposition hardly represents good value in the medium term.
The flipside of the launch of popular new models such as the latest Mazda3 referenced above is that because many consumers hold off from purchasing for several months in the lead-up to the launch, demand for the new model is very high in the months following its launch. Often in these cases it can take as much as three months to achieve a kind of reasonable equilibrium between supply and demand. What this means for intending early adopters of a new model, is that the potential for discounting is often very limited initially. When demand outstrips supply, there is no pressure upon sellers to drop the price.
Car financing plays a significant role too
David Green from CarLease.com.au says people are often blinded by the price of the car they intend to buy, when what really counts is the complete ownership cost for the proposed term of ownership.
“The key to driving down the cost of owning a car is to consider the monthly finance payments and the likely revenue from the sale at the end of the term,” he says.
“Most new cars are financed, and this means getting the finance right is just as critical as acquiring the car at the right price. Tax implications, which depend on individual circumstances, are vital to consider too.”
The time of year you purchase a new car might make a significant difference to your financial situation, and this is something best discussed with your accountant or trusted financial adviser early on in the process. Timing can make a significant difference to the claims for depreciation in particular financial years, and some car finance structures, such as novated leases, can take time to set up – especially if negotiation with your employer is required in order for these arrangements to be made. Obviously it’s better in these situations to find out where you stand with sufficient lead time to avoid being under immense pressure to acquire any new car quickly.
About the Author:
John Cadogan is an Australian automotive journalist currently employed as editor in chief by Carloans.com.au. He frequently presents news for some of Australia’s top companies such as Channel 7’s Today Tonight and 2UE radio. John can be contacted via twitter or via the contact page here.