Taxonomy of Online Car Shopping Sites

I have been writing an ad hoc series about online car shopping. It started with a technical point about how software vendors should migrate into this space, and then along the way I started characterizing the sites themselves. In this article, I present a classification scheme which may be of interest to technology strategists.

One way to look at car shopping sites is in terms of functionality. In my last article, I presented six key functions:

  • Specify vehicle and trim
  • Price vehicle
  • Price protection products
  • Value trade
  • Structure deal
  • Obtain financing

For each function, there are grades of support. Does the site sell protection products, for example, and are they customized for the chosen vehicle? This would be a way to rank the sites, like Consumer Reports. I have strong opinions here, but they’ll have to wait for a later article. For strategy purposes, the sites are better characterized by three business decisions:

Control of inventory – Traditional car shopping sites are platforms for common inventory search across multiple dealerships. Because they do not control the inventory, there are limits on the functions these sites can provide. Looking at inventory (and delivery) is a way to characterize the site’s relationship with the dealer.

Disclosing the price – Most of the downstream functions are blocked until the price is settled. This is what separates shopping sites from buying sites. Unfortunately, price transparency is a problem for many dealers. In addition to no haggle pricing, we now have innovative solutions from TrueCar and Make My Deal.

Different makes – A site that specializes in a single make can also specialize in financing and protection products. In addition, some information systems may be standardized. On the other hand, most car buyers begin by comparing similar models of different makes, like the Touareg versus the 4Runner.

My approach groups the sites into eight categories, and gives us a way to describe the differences. For example, when the customer moves from a platform site to an individual dealer, the make (and the lot) is specified. Now the dealer can offer customized financing and products.

The difference between a platform site and, say, Carvana, is that Carvana owns the inventory and can quote a price. In fairness to new car dealers, price transparency is less of a problem with used cars. Carvana, Vroom, and CarMax have the inside track. Otherwise, AutoNation Express would be in this category.

You could slice it thinner, but I think eight categories is enough. I leave it to the reader to evaluate all twelve single-feature comparisons.

 

Taxonomy2

One thing I learned studying syntax as an undergrad, is that you construct a paradigm to fit the data you have, and then you prove the paradigm by using it to find new data. Here, I drew a blank for case #2, and then I realized it would be the web site for an OEM company store, as in Europe. Sure enough, Tesla fills this slot.

There is one more feature I would have liked to include, but I felt it was too much, and that is systems integration. AutoNation Express has the distinct advantage that whatever payment calculator, menu presentation, or other gadget they may add to the site, it is guaranteed to work seamlessly with an AutoNation dealer.

Another way to prove out my taxonomy is to explain and predict trends in the industry. Speaking of AutoNation, one of these trends is toward increasing consolidation by the big, public dealer groups. They are represented online by cases #1 and 3.

To defend themselves online, private dealers will migrate into the most capable of the platform sites, and there will be a shakeout. The winning platforms will not be mere lead providers. They will have to offer advanced shopping features, as I have described previously, and they will have to solve the problem of systems integration with a diverse dealer base.

Eventually, as both camps wrestle with the pricing issue, there will be a breakthrough. Like the first prehistoric fish to draw breath on shore, the platform sites will struggle into case #5.

The one strategic curveball would be if a consolidator decided to open up their site to outside dealers, blurring the line between cases #1 and 5, or a platform site started acquiring new car franchises. We’ll leave this chimera for another story.

How to Save TrueCar

My title is somewhat facetious, but “how to position TrueCar so that it makes dealers less hostile and invites fewer lawsuits” was too long. The Auto News forum is not exactly laden with objectivity. People see the headlines and the share price, and then they crow about TrueCar going out of business.

Complaints or negative publicity about our business practices, our compliance with applicable laws and regulations … could diminish users’ and dealers’ confidence in our products and adversely affect our brand

Investors are more objective, as in Why I’m Buying TrueCar despite the Sell-Off. You can look at the Morningstar rating (undervalued) and the quarterly report. TrueCar is making twice the revenue of Autobytel, and growing faster. Still, there is the hostility. Here are my thoughts:

  • Enhance the site to support online buying, as I have described previously.
  • Add features like the ability to sell protection products. This feature alone would compensate for foregone gross on the front end.
  • The platform should help individual dealers to compete with consolidators. Make it a “community” that includes dealers, affinity groups, and finance sources.
  • Prepare for a world of one-price dealers. Look at Scion, for example. The histogram for a Pure Price dealer has only one bar.
  • Use out-of-market data, consumer data, and statistical inference to provide a more detailed pricing picture. This feels less like “ratting out” the dealers.
  • Make the database a research tool, as Zillow is for homes. TrueCar owns ALG, so they already have the machinery.
  • Update the revenue model, to avoid legal classification as a broker. The current model, ironically, becomes less effective as more dealers adopt it.
  • Think about pay per lead, or monthly. I can’t share the details, but I understand the AutoNation deal could have been saved.

These measures should allay the hostility that some dealers have toward price transparency, and the TrueCar business model. If all else fails, and litigation persists, there is the “nuclear option.”

I can think of a few ways to end price obfuscation, for good. The practice is obsolete anyway (not to mention unfair and deceptive) and would not survive six months of concerted attack. Of course, that would also damage the TrueCar model, as presently constituted. I recommend doing the strategy alignment first.

TRUE