TrueCar, a true friend to both consumers and dealerships
TrueCar manages to use data to disrupt and delight a 60 yr old business model
TrueCar is a car buying platform that aggregates car sales information to provide transparency into dealership pricing. With a promise to customers that they will “Never Overpay”, TrueCar has become a formidable middle-man in an industry once dominated by automotive manufacturers and dealerships.
Do you remember buying a car before TrueCar existed? If so, then it may conjure up negative emotions. You may remember having to visit multiple dealerships to get quotes. Negotiating with each sales person to get the best deal. Having to listen carefully to the terms to make sure you aren’t getting ripped off, only to finally find out a friend managed to negotiate under the invoice price. Needless to say, the entire car buying experience was difficult, stressful and draining.
Enter TrueCar, in 2005, who brought data to consumers in the automotive space. By aggregating vehicle sales data and also vehicle configurations, customer and dealer incentives, registration, and insurance data, TrueCar has been able to provide to consumers something that never existed in one place, transparency into dealership pricing. After selecting your car and location on the platform, TrueCar shows a graph representing what others in your area have paid for the vehicle you want, ranging from the lowest to highest. It also gives you a special price (usually on the low side), that you could take to a dealership and be honored fully, therefore eliminating all the negotiation and hassle of car buying. Also for the consumer, everything is free. For someone who values convenience, the service is a no brainer.
Now if there was so much transparency and value creation for the consumer, wouldn’t the dealerships stand to lose with TrueCar? Actually, it’s the opposite. Despite a rough start in the first few years, TrueCar has become an ideal partner for dealerships. To see how this works, it helps to understand a dealership’s business model. For car dealership, sales margins are razor thin, often leading to only a few hundreds in profit per sale. Therefore, dealerships make a significant portion of their revenue from other sources like repeated visits for service, extended warranties, and financing. They may even sell cars below the invoice price if the manufacturer offers incentives for the dealerships to sell. In this type of model, TrueCar thrives. They create a better buying experience for consumers, who then are more inclined to purchase cars, and ultimately generate more sales volume for the dealership. Dealerships also find it easier to upsell value added services because the smooth transactions allows consumers to build trusting relationships dealerships again, something that hasn’t been the case for decades.
The model has proven to be so helpful for dealerships, that they are willing to pay TrueCar for each successful sale. TrueCar makes $300-$400 off each transaction, capturing a fixed portion of the value that is created. What’s unique about this business is that there are still no direct competitors. TrueCar moved first in the market and used their relationships and data advantage to dominate, but it wasn’t exactly a smooth journey. In the beginning, TrueCar actually tried to offer even more value to the consumer by allowing dealerships to enter into bidding wars on its site to compete for the lowest price. This race to the bottom system was great for consumers, but caused severe backlash and several automotive manufactures opted out of the platform completely. TrueCar recognized the severity of the situation, and ended up giving more power to the dealerships at the expense of the customer. Today, consumers don’t see all the possible offers, but a selected group of “good” offers from dealerships. As a result, almost every major auto manufacturer can be found today on TrueCar.
As TrueCar continues to provide value, there are a couple challenges that could arise. The first is the arrival of a true competitor. Since consumer sales data can be accessed from databases, any competitor could offer the same service to both consumers and dealerships with better pricing. For example, they could charge $100 for each transaction or even offer the matching for free, opting for an advertising supported business model. TrueCar sits comfortably now but with pricing pressures, they might have to cut price or find additional ways to add value to consumers and dealerships.
Another relevant but more long term threat comes from the shifting nature of the industry. From new transport alternatives, to decoupling the purchase and usage of a vehicle (think Uber, BlaBlaCar, and Turo), to the end of the dealership model (Tesla sales model), TrueCar will have to understand what role it will play. In each of those scenarios, TrueCar will have think of a new value creation strategy because the problems of the past for the consumer and dealers, may not be the same concern in the future.
Student comments on TrueCar, a true friend to both consumers and dealerships
Interesting blog post, with great practical implications – I will definitely use TrueCar when I buy a car in fall ; )
I wonder WHY there is no competitor in the market yet? I understand that TrueCar has build a platform, but I don’t see large entry barriers, because multi-homing seems easy. Do I ignore anything important?