TrueCar – solving the “lemons” issue through data??
TrueCar is aiming to solve the “lemon” issue in the car dealer market, by providing customers with a huge amount of pricing data for all types of cars, thus helping them to not overpay for their car. The question is: Is the pricing data itself from “lemons” or not?
The car dealer market has quite a bad reputation. The 1970 nobel prize winning paper from George Akerlof on the “Market for Lemons” shows how “messed up” this market is and how customers get frustrated even when they think about buying a car. The paper showed how information asymmetry can in the end lead to a lower quality of goods in the market overall.
TrueCar is a company that tries to solve this market friction, by helping customer to get more transparency on the car pricing. TrueCar is basically and automotive pricing and information website that collects data on automotive sales on a daily basis and presents this data to customers in a transparent way. So, if you are at a car dealer and see the price tag for a car you would like to buy, you can quickly enter the car details in your smartphone and check the distribution of what other customers paid for the same car (in addition you get some more statistics, such as average, etc.). TrueCar is cooperating with car dealers to collect their data and supports them in the selling process as a sort of independent agent, validating their price. Currently, TrueCar is cooperating with approximately 10,000 certified dealers across the country. More the 2 million cars have been sould via the TrueCar process with the certified car dealers. Since its founding in 2005, TrueCar has raised of over $200 million in financing.
TrueCar is offering the service for free to its customers. Value is captured instead by charging the car dealers a transaction fee for each car sold through the process. Currently the fee is approximately $300 per transaction. The other revenue source is data and consulting services. Here, TrueCar directly monetizes the vast amount of data and the insights in the car market. In 2013, TrueCar made total revenue of $118.7 million ouf which approximately 90% came from transaction fee and 10% from data and consulting services.
Overall, data and the use of data is the core and foundation of TrueCar´s business model. From my perspective, the competitive advantage they have is not really the data analytics piece (TrueCar is using the software Hadoop for that), but much rather the actual access to the data. The data analytics is not really complicated, since all they do is putting the data in a database, where they have some car features (brand, Horsepower, other specifications), the price paid and the ZIP code (since there are some regional differences). Then, they take the data and make it accessible in a nice format on their webpage and an app. This could be copied probably in less than a week by a competitor. The access to this data however is the source of the competitive advantage and actually quite sustainable, since the car dealers seem to benefit from the system by getting much more trust from the customer by being “vetted” through TrueCar.
Going forward, my concern is whether customers over the long-term really view the data as getting them a fair car value. In my opinion, the company is doing a great job in telling customers that they solve the friction in the car dealer market, but I actually do not really buy into that. The mere data, what others paid for a similar car does not really proof, whether the price is actually fair. Going back to the lemon theory, this would actually on the contrary reinforce the lemon issue. Since at some point, only lemons are offered in the market, the data shows the prices for “lemon” cars. In comparing the car I want to buy with the “lemon” car prices, TrueCar just reinforces the prices for “lemons” in the market. For me, the only way to really identify “lemons” in the market is to have a certified car experts actually estimating the value of a car and thereby getting the real “True Value” of a car. If a competitor or car dealers would offer this service (having every car analyzed by an independent expert), this would disrupt TrueCar´s business completely.
I agree that TrueCar’s service alone doesn’t address the lemons issue but it goes a long way in providing a baseline price for a negotiation between a buyer and a seller which alone is a valuable service.
A lot of people (myself included) would have no idea about a reasonable price for a second hand car with a certain set of attributes which brings a lot of potential for getting taken advantage of by a seller or a dealer. While I may still end up overpaying for a lemon after research a car on TrueCar I would have more confidence people won’t laugh at what I paid for a car.
Certainly an interesting issue to debate – is a “fair” price for a particular car a price that’s equal to/lower than what everyone else is paying, or does underlying, unobservable condition of the car figure into the equation. I agree that TrueCar’s business probably stands on the principle that the former is the “fair price”. Especially in light of the fact that almost any dealer nowadays sells “Certified Used” cars, with better condition guarantees and warranties – for a higher price than a “non-certified” used car would be of course, I wonder how TrueCar competes with or factors in different types of warranties into their valuations, if at all. Additionally, online listing services like AutoTrader have pushed listing prices for dealers downward in recent years and serve as another way to potentially collect data on what cars are going for, in addition to Kelley Blue Book & others. I wonder how close these competitors can get to the TrueCar valuation without the benefit of actual transaction data as well.