Business model and value creation
CarGurus is an online automotive marketplace that connects buyers and sellers of new and used cars . The company provides the largest car listing marketplace in the United States and also operates in Canada, UK, Germany, Italy and Spain.
CarGurus creates value for both the buyers and sellers of cars. For the former, CarGurus offers a sophisticated search engine that shows how competitive car’s price is in comparison to similar vehicles. The platform calculates an Instant Market Value (IVM), which reflects the market value of a vehicle. The IVM is calculated through a data-driven approach that considers multiple dimensions such as make, model, mileage, and customers reviews . This marketplace helps solve the lemon problem: the fact that owners of used vehicles have an information advantage over potential buyers in relation to the quality of the cars, making it difficult for buyers to select and buy great cars .
For dealers, the platform provides an efficient channel to sell their vehicles through the Basic Listing, Enhanced Listing, and Featured Listing products. The Basic Listing product allows dealers to publish and market their cars in the website without cost. The Enhanced Listing product provides dealers with a higher volume and quality of connections as well as the contact information of potential buyers. In addition to the benefits of the Enhanced Listing, the Featured Listing product ensures the dealer’s cars are promoted at the top of the search engine . CarGurus captures value through the dealer’s subscription (89% of total revenues) and through car companies’ advertising on their website (11% of total revenues) .
Assessment of CarGurus’ scalability and sustainability, and next steps
Since the company does not charge a fee for car-buying customers and offers a free entry-level product for dealers, it has been easy to scale the company. Its main challenge it to sustain that growth over time in a profitable way.
In its annual report, CarGurus highlights the cross-side network effects driven by scale. The more customers who use the platform, the more dealers subscribe to the marketplace and pay for premium products . At the same time, having a large number of dealers attracts more customers who are interested in buying cars. Figure 1. shows that the company significantly scaled the platform between 2016 and 2018. To illustrate, in 2016-2018 the number of paying dealers increased by 22%, while the average annual revenue per subscribed dealer increased by 16% .
In relation to the sustainability of its business model, CarGurus participates in a very competitive market including other vehicle marketplaces (e.g Cars.com) and other automotive websites (e.g. Carfax.com) . Although the company has no risk of disintermediation, since CarGurus only charge revenues for the subscription and no a percentage of the transaction, the company is at risk of dealers migrating from a paid service to the freemium version. To face this problem, CarGurus should strengthen the value proposition of Enhanced and Featured Listing products. The company should enhance its current tools (such as the Dealer Dashboard, which includes tools to price inventory by real-time market conditions) and create new tools to increase average revenue per dealer.
In addition, since car buyers search for cars in their areas, there is network clustering, which makes easy for other competitors to reach a critical mass in a local market and take off through a differentiated offer . In a competitive market, both the car buyers and sellers can do multi-homing.
In the case of buyers, since in general automotive platforms does not have a cost for them, the cost of adopting an additional platform is low. For that reason, it is critical to strengthen the value proposition by improving its search tools and the customer experience. In relation to the sellers, the freemium users also do multihoming, while the premium users have a higher barrier to do multihoming. Currently, the subscription agreement of the dealers can be terminated with 30 days of notice. Deepening medium and long-term relationship with established dealers can increase the marketplace’s stickiness and improve the sustainability of the platform.
As explained above, going forward the company should focus on strengthening the value proposition for both dealers and buyers . In the year 2020, the company has implemented new initiatives to improve customer experience. For example, CarGurus decided to improve the customer experience by reducing the advertising load . Continue implementing initiatives that improve customer experience and establish long-term relationships with dealers is the only way to thrive in this competitive market.
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