Tag: eCommerce

Caching the Rate Response

Every so often, I am asked to write on a specialist topic for F&I technology, like surcharge processing, term bumps, or credit life math.  Today’s topic is well known in dealer system software, but bears repeating for the new generation of digital retailers.  This is the problem of how long it takes to receive rates for protection products from the provider’s web service, also known as “latency.”

The good news is that all providers today expose their rates via web service, so they’re always up to date and tailored to the current deal.  It wasn’t always thus.  We once had to scan reams of paper rate guides, and walk ten miles in the snow.  The bad news is that the web rating call can take several seconds to run.

A savvy rate response already has Squish VIN in it, so you just smack the whole thing into Mongo and you’re good to go. 

In the typical scenario, a menu system calls the provider’s web service directly, passing the VIN and the dealer number.  The dealer number is required because product pricing and selection may vary with the dealer.  This may not be the case for digital retail.  You may have a standardized slate of products (or just one product) with a mandatory fixed retail price, and not care about dealer-specific costs and packs.

You still have to pass the VIN, in any case, because most products are risk-rated by model.  Then you wait.  At MenuVantage, we set the timeout for twenty seconds.  If a provider couldn’t respond within twenty seconds, they couldn’t be on the menu.  Digital retail, of course, requires a much faster response.

The rate response for an old-school SOAP call, returning all products for a single model, is about 500 KB, or 10,000 lines of XML.  I have seen them exceed one megabyte (you know who you are).  A well-done web service can transmit the rate response in about one second, and then another second or so for the integration hub.

Most menu systems do not interface directly with the provider.  They go through a central hub like PEN or F&I Express.  These are the main ones (full disclosure: both are clients) but there are others, and a slow rate hub can add seconds of latency.  Digital retail is more likely to be using REST and requesting a specific product.  The biggest product is a service contract, weighing in around 2,000 lines of JSON or 100 KB.

Ideally, all networks and services would be fast, and you would always send the request.  “The network is the computer.”  On the other hand, maybe you ought to cache the rate response.  To do this, simply save each response in a database, keyed by dealer number and Squish VIN.

If you’re in the “don’t care about dealer” scenario described above, then omit the dealer number.  If you expect to rate specific products, as opposed to the menu scenario, then take apart the response according to its (provider-specific) product segmentation.  A savvy rate response already has Squish VIN in it, so you just smack the whole thing into Mongo and you’re good to go.

The point to Squish VIN is that, of the 17 characters, only ten really matter.  The first eight identify the model and trim, and the tenth position encodes the model year.  This is what the provider uses to risk-rate by VIN.

Common practice for digital retail is to pull an inventory list and rate every vehicle on the lot.  That’s some redundant rate requests.  A dealer might have 500 cars on the lot, but only seventy unique VIN patterns.  Even if you’re compulsive about stale cache, and you want to rate every night, this is still a sevenfold improvement.

So, the procedure is: every time you want to rate, either in batch or on demand, go first to the cache.  If there is no matching Squish VIN in the cache, only then must you take the hit for a live rate request.

Menu systems generally do not do the lot-scan thing.  This seems to be new with digital retail.  Generally, we would just expire the cache at midnight and start rebuilding with the next day’s deals.  The first Cherokee takes a hit, and then the first Wrangler, and after that you’re rating Cherokees and Wranglers all day long from cache.

Also new with digital retail are various use cases that don’t require a dealer number.  This vastly improves the efficiency of the cache.  Instead of seventy VIN patterns per dealer, you might have seventy for the whole country.

Digital Transformation Playbook

I read a good book over Christmas break, The Digital Transformation Playbook, by David Rogers.  This is a good book because it has both theory and practice, plenty of research and real-life examples, and practical “how to” guides.

Just when you’re thinking, “oh yeah, when has that ever happened?” Rogers comes up with an example.  Many of the these include commentary from the people who worked on them.  It’s clear that the professor gets out of his classroom for a fair amount of consulting.

Digital transformation is not about technology – it is about strategy and new ways of thinking.

Most books like this focus on digital native startups.  That’s the sexy stuff and, in fact, where I have most of my experience.  I chose this book for its focus on digital transformation, in existing companies and hidebound industries (like auto retail).

The book is organized around five strategic themes: customer networks, platform marketing, upgrading your value proposition, data as an asset, and innovation through experimentation.

I did grow a little impatient with Rogers’ incessant enumerating: five core behaviors, four value templates, three variables, two trajectories (and a partridge in a pear tree) but I appreciated the effort to boil everything down to a foolproof recipe.  There are a number of these:

  • Customer Network Strategy Generator
  • Platform Business Model Map
  • Value Train Analysis
  • Data Value Generator
  • Experimental Design Templates
  • Value Proposition Roadmap
  • Disruptive Business Model Map
  • Disruptive Response Planner
  • Digital Transformation Self-Assessment

I was even inspired to start making value train diagrams of our business, and platform model maps:

On the theory side, Rogers reexamines familiar models from people like Drucker and Levitt.  He shows, for instance, that Christensen’s theory of “digital disruption” is a special case, and broadens it.

By the way, this discussion of digital disruption is one of the most lucid (hype-free) that I have read.  As usual, there is a checklist: analyze three features and choose one of six strategies.  If that doesn’t work then, yes, you’re disrupted.  Time to update your resume.

I read all the time, though I don’t often write book reviews (here is the last one) so Rogers’ fifteen-page bibliography was an extra treat.  That should keep my Kindle stoked for a while.

Wanted: eCommerce Product Manager

Things are going well here at Safe-Guard, and I am looking to hire another eCommerce Product Manager.  Posting is here.  We need someone who can not only manage a shopping site but, as we are in the midst of a digital transformation, also establish the required support and fulfillment processes.

The eCommerce department manages the development and support of these properties, whether they are standalone web sites, dealer-site storefronts, or web services … 

The successful candidate will have solid product management experience, and maybe some digital marketing.  Agile development experience a plus.  Self-starter.  Relocation.   Salary commensurate with experience.

Toward a Digital Auto Marketplace

Will the big public groups dominate online retail, as I predicted last week, and drive private dealers from the field?

This trend seems to have recovered, after some false starts, with the availability of fresh talent like Shift, Drive, and Roadster.  Shift has $253 million in funding, notably including Lithia.  AutoNation has recently invested $50 million in Vroom, valuing the online startup above $700 million.

How can smaller groups compete in this high-stakes contest?  One way, as I wrote here, would be to consolidate themselves online.

To defend themselves online, private dealers will migrate into the most capable of the platform sites. The winning platforms will not be mere lead providers.

I know something about platform marketing, having organized the Provider Exchange Network around cross-side network effects.  The more menu systems we added on the dealer side, the more success we had with F&I providers on the other side.

The difference between a selling platform and a mere lead provider lies in the site’s ability to deliver a completed deal.  That is:

  1. Show the true price online.
  2. Sell protection products.
  3. Provide a firm offer for the trade-in.
  4. Offer hard-pull credit approval and deal structuring.
  5. Allow the customer to save multiple deals and self-close.
  6. Sign the contracts online.
  7. Provide for home delivery.

Home delivery is not just a nice touch.  It demonstrates the capability to truly complete the deal online, with no tasks left over.  It is the acid test for online retail, even though most customers will opt to finish the deal in person.  The tasks are described here, and the workflow is here.

This capability is not so far-fetched as it was when I started writing about it, some years ago.  Delivering it on a multi-dealer site, however, poses special challenges.  The only eCommerce capable sites I can think of are run by monolithic used-car dealers Shift, Vroom, Carvana, and CarMax, or single points using digital storefronts from Roadster, Drive, and TagRail.

So, I am back to writing about the future.  In the fullness of time, someone will figure out how to do eCommerce for:

  • New cars
  • Multiple new-car stores in a group
  • Multiple unrelated new-car stores

When I started writing about the platform concept, I naturally assumed that Autotrader, et al., would be there.  Now that I have spent some time exploring Autotrader, Cars.com, Car Gurus, Edmunds, GoGo, Carfax, TrueCar, Autobytel, Kelley, and Deliver My Ride, I can tell you this is still uncharted territory.

Everybody promises eCommerce, of course, but most stumble at the first gate.  This challenge, price transparency, was supposed to be TrueCar’s edge.  In fairness, the platform model poses some special challenges:

Price Transparency – This one needs no explanation.  Despite glimmers of hope from the Rikess Group, online pricing is mostly confined to used cars.  A new car marketplace would have to disclose, on the search results page, prices from competing dealers.

Protection Products – Same story here, as regards pricing.  Also, if you want to do it right, you need to copy the dealer’s menu system setup, and ping those providers for pricing.  In fact, each step of the online process needs an interface with its “system buddy” in the dealership.

Trade Valuation – There are plenty of tools, but participating dealers must agree to honor the platform’s valuation.  This is easier if the platform happens to be Kelley.

Credit Approval – Each dealer will have their own stable of finance sources.  It’s best simply to bounce the application off the dealer’s Route One or Dealertrack credit system, and then return the results to the platform.  This data needs to be in synch with the dealership anyway.

Deal Structuring – I complain all the time about weak payment calculators on consumer sites.  The special challenge here is that data must be shared with each dealer’s desking system, and the calculations must match.

The rest of the process is pretty much unchanged from single-dealer: saving and transmitting the deal, signing (standardized) forms with DocuSign, and scheduling the delivery.

I recognize this is but the broadest broad-brush outline.  My purpose here is not to explicate the design, but to illustrate how progress toward the digital marketplace is impeded by these special challenges.

We may need to cooperate with a direct rival due to interdependent business models or mutual challenges from outside our industry.

How will these challenges be resolved?  Will competing dealers learn to cooperate, for the sake of their online survival, or will the palm go to a single online victor – like AutoNation, or Amazon?  The quote above is from Professor Rogers’ definition of “coopetition.”

Smaller groups cannot afford to invest $50 or $100 million, as AutoNation and Lithia have done.  Look a little farther down the league table, though, and it’s not hard to find four or five dealer groups which, combined, match the scale and revenue of a public group.

Joint ventures are not unheard of in our industry, especially when it comes to eCommerce.  My own brainchild (and eCommerce platform) PEN, like CVR before it, is a joint venture between archrivals CDK and Reynolds.  Route One is a creation of the Detroit three captives, plus Toyota.  Honda and GM are working together on electric cars, while BMW and Daimler collaborate on mobility services.

Combining four or five dealer groups simplifies the problem, relative to a fully open marketplace.  It reduces the number of systems, lenders, and product providers that need to be integrated.  The ideal venture partners would already have a high degree of standardization within each group, and similar choices of software among them.

Such a project might proceed “depth first” by developing core functionality in one partner, and then folding in the others, or laterally by function, or by merging the existing eCommerce capabilities of the partners.  What to aim for as “minimum viable,” and how best to expand it, depends on a number of factors.

Meanwhile, the commodity lead business is under pressure.  Damage reports and reviews do not offer adequate differentiation, whereas investments in eCommerce could yield significant new opportunity.  The Cars.com situation marks the beginning of the shakeout, consolidation, and – just maybe – the digital marketplace.

Asbury Drive in the House

Photo Credit: Nyisha MorrisKelly and I were sipping coffee at Digital Dealer, greeting participants, and speculating on how the ultimate online buying experience would come to pass.  Presenters had talked about Amazon, obviously, and the recent opening of a Hyundai digital showroom on Amazon Autos.

A while back, I organized the various offerings into categories like: online platforms where multiple dealers may list their inventory (basically lead providers) versus eCommerce plug-ins to be placed on individual dealer web sites.

One key variable was whether the site actually holds inventory, i.e., is a dealer, not just a technology play.  Carvana, for example, or Shift.  Increasingly, what I notice is that the good technology either evolved from a dealership, or – I found this intriguing – they will buy a dealership to serve as a test bed.

Your rapper name is a top twenty dealer group plus a digital retail system.

Roadster came from a concierge buying service which, as far as I know, they still operate.  A2Z Sync came out of Denver-based Schomp group.  The Gogocar people operate a Kia dealership.  This brings me to the next level of dealer technology tie-ups, those where big dealer groups choose an online retail solution and commit to it.

Roadster is working with AutoNation, Lithia just bought a big stake in Shift, and Drive is in all Asbury stores.  The Lithia deal is pure genius, because it allows Shift to handle more inventory and slashes their floorplan costs.  The many links in this post show support for my prediction using publicly available information.

We philosophically do not believe that software development is our expertise. Instead, we’d prefer to partner with third parties – Craig Monaghan

That prediction is … continuing the consolidation megatrend, we will see dominant groups taking the lead in online retail, but unable to master the technology on their own.  This is what I call the “Kodak syndrome.”  Incumbent leaders are not agile enough to ride a paradigm shift.  This means not only the dealer groups, but the traditional software vendors.

I expect to see the Sonics and Asburys of the world buying up the digital retail people, absorbing their talent, and denying access to their competitors.  I characterized this as a “land rush” in the earlier piece.  Direct to consumer is the final frontier.

Deconstructing the Dealership

Remember when dealerships had body shops?  Two out of five still do, but they comprise less than 20% of this $35 billion market.  Somewhere along the line, it became clear that collision repair was better done by specialist facilities, unconnected to the dealer.  Scale, capital investment, brand diversification, and (lack of) synergy were factors.

We may now wonder if parts and service belong in the dealership, thanks in some measure to the rise of automotive eCommerce.  Jim Ziegler warns that Valvoline Express is beating dealers in the shop and online.  Ward’s makes the same point, with emphasis on Google search optimization.  In the same vein, Amazon has come up with a way to sell tires online.

There can be much synergy between the two ends of the business, which can be leveraged to manage and sustain customer relationships – Vincent Romans

My approach is to “follow the money” and, sure enough, here is Carl Icahn buying up repair facilities.  Icahn Automotive Group is a classic consolidation play, with 2,000 locations including Precision Auto Care, Pep Boys, Just Brakes, AutoPlus, AAMCO, Cottman, and CAP.  Icahn is vertically integrated through Federal-Mogul Motorparts, which includes ANCO wipers and Champion spark plugs.

So, will eCommerce pick off the dealer’s profit centers one by one?  In this example, we see the convergence of powerful megatrends.  The traditional dealer model is challenged by two new ones, which I like to call the Best Buy model and Amazon model.

History tells us that the Amazon model will prevail in the end, but it doesn’t tell us what the transformation will look like, or how dealers should prepare.  To learn that, we employ an old tool from Business Process Reengineering, and we discover a surprising result.  Here is a breakdown of the traditional dealer operations:

  • New Sales
  • Used Sales
  • Finance
  • Insurance
  • Parts
  • Service
  • Collision Repair

We can consider each operation in terms of how it will respond to the new challenges – and whether it belongs with the others.  We have to start somewhere, so let us define new vehicle sales as the nucleus of the dealership.  The test drive is the process most resistant to eCommerce although, as I wrote last week, there are ways around it.

Used vehicle sales will certainly not stay in the dealership.  It is vulnerable to both consolidators and eCommerce.  This is a shame because taking vehicles in trade used to be a great synergy.  The new specialists are true “auto traders,” using high-volume analytics to trade both ways with the public and the auction.

Coming back to fixed operations, there is a clear synergy.  According to Cox research, customers who are properly introduced to the service department are two and a half times more likely to come back for service.  But there are other ways to exploit this synergy, like the “zero deductible at our dealership” service contract – and the Amazon tire store shows that parts can be separated from service.

Lithia Motors has 186 locations including, by my count, fourteen collision centers.  There is not much synergy between body shops and vehicle sales, or even service, but they run fine as standalone operations connected to the brand.  Likewise, given a branded service contract, I can see Lithia’s mass market franchises supporting shared service facilities.

F&I is the subject of fierce debate, too much to cover here.  Can it be merged into the sales function? Can protection products be sold successfully online?  What is the future of indirect finance?  Do “F” and “I” even belong together anymore?  For our purpose today, we need only observe that while F&I has a workflow linkage to sales, it does not need a physical one.  F&I could just as easily skype in from a call center.

As Carl Icahn would tell you, these are distinct businesses without much synergy, if synergy is defined as “positive return from shared personnel and facilities.”  Dealers organized along these lines will, indeed, be picked apart by eCommerce and consolidation.

On the other hand, if synergy means “positive return from shared customer contact and branding,” then these businesses will hang together.  Dealers organized along this principle will have diverse and independent operations, making them resilient to disruption.  They will have “optionality,” to use Nassim Taleb’s term.

You may be taken aback by this assault on the venerable “rooftop,” and I admitted earlier to being surprised.  However, decoupling and diversification (and divestiture) are textbook responses to an industry in flux.  Just look at how many departments are no longer in department stores.

The Automotive eCommerce Ecosystem

Around the turn of the century, I was helping RouteOne to build their now-ubiquitous credit system.  Then, I moved on to aggregation models for the “I” side of F&I.  It was a lot of work.

We had to develop scores of unique interfaces for lenders and product providers.  We had to develop deal calculation engines, and then reverse engineer each DMS so our payments would match.  There were no automated sources for finance or product rates.  We had to walk ten miles in the snow …

Today’s eCommerce startups have it easy.  All of the key tasks are supported by readily available services, leaving the entrepreneur to focus on user experience and dealer support.

When I started writing about this space, the key challenges were price negotiation and trade valuation (and the test drive, but I’ll cover that in a later piece).  Today, you have reliable online trade valuation from Kelley, Trade Pending, and others.  Price negotiation can be handled through chat or one-price, generally on used vehicles.

You can have payment calculations, including incentives, from MarketScan, provider networks from PEN or F&I Express, and finance networks from RouteOne or Dealertrack.  Everything in this paragraph is an API, not to mention passing data from your eCommerce platform into the corresponding dealer system. Finally, even the old faithful DMS now exposes a variety of databases, like inventory.

A few months ago, I described the role of venture capital in driving process change.  I think this eCommerce ecosystem is equally important.  Entrepreneurs can enter the space at a very low cost, relative to ten years ago, and meet most of their requirements through interfaces.