Monday, January 09, 2012

Will TrueCar.com Change the Way You Buy a Car in the 21st Century?


There’s a new company, TrueCar.com, that was started a little over a year ago by a bright, young entrepreneur named Scott Painter. Scott reminds me a little of Steve Jobs and Bill Gates because he’s extremely bright, ambitious and successful and he’s a “college dropout”. He studied political science and systems engineering at West Point for three years where he was elected class president. Then he won a scholarship to the University of California, Berkeley, where he studied economics for two years. Before he entered West Point, he joined the army and served as a “Spanish Interrogator” for the 82nd Airborne. TrueCar.com is the last of 35 companies that Steve Painter has started. He started his first business when he was just 14 years old, “Scott’s Auto Detailing Service”.

I signed up with TrueCar.com less than a year ago. Their concept is unique and frankly kind of frightening. I had to think about it for a while before I agreed to become a TrueCar dealer. For starters, TrueCar charges the dealers $299 for every new car and $399 for every used car they sell under their program. All other lead generators for dealerships like AutoByTel, Cars.com, and AutoTrader charge a much smaller amount for each lead they give you and/or charge a monthly fee. TrueCar also requires access to your dealership’s computer accounting system because they must verify if you sold a car under their program and the price for which you sold it. This way, they know they will get paid by the dealer and that the dealer charged the TrueCar customer the agreed upon price. Finally, TrueCar pits dealers in all of their marketplaces against each other by posting their agreed upon prices on TrueCar’s website and allowing customers to choose the lowest price. This has the effect of forcing any dealer who wishes to participate to post a price that is lower than their competitors’ or the lowest price they can post.

TrueCar’s sales are soaring. Last year their dealers sold about a quarter million cars. Last month they sold about 30,000 compared to 18,096 in June. With car dealers the relationship with TrueCar is a “love-hate”. They love TrueCar because, if they post a price lower than the other dealers in their market, they sell a lot of cars. They hate TrueCar because, if you don’t post the lowest price, your competitor sells all the cars. Many dealers simply drop their TrueCar affiliation because they don’t want to or cannot sell their cars for such a small profit.

TrueCar not only has a very smart CEO in Scott Painter, but private investors who put up $35.5 million in 2010. You won’t find too many people who will invest that kind of money in a company that doesn’t have a good chance of succeeding. In fact, Scott Painter has raised almost $1.25 Billion dollars including all 35 startups. The investors in TrueCar must have liked his track record of success in the previous 34. As a car dealer, I’m afraid of TrueCar but as an investor, I love them. In fact, I tried to invest in TrueCar but was unable to find an avenue. I contacted Merrill Lynch and was told that there were no investment options available to the public.

Another reason that I’m reasonably certain that TrueCar will succeed is the hysterically negative reactions from car dealers, car manufacturers, state legislatures, state attorney generals, and TrueCar competitors. If you don’t already know it, car dealers have a lot of money and invest heavily in PAC’s and their dealer associations to get politicians elected. The National Auto Dealers Association, NADA, is very powerful, well financed and has great influence in Washington D.C. State dealer associations are also very powerful. Colorado has already banned TrueCar from doing business and Washington is considering it. Car manufacturers are concerned because they fear for the profitability of their dealers. On the one hand, they like dealers to sell cars at low prices because they sell more cars that way. On the other hand, they worry if they sell cars too cheaply because it might cause dealers to go out of business. Honda has instructed dealers that posting prices on TrueCar is a violation of their contractual agreement with Honda. Honda has a provision that prohibits a Honda dealer from advertising a new car below dealer invoice. The states and the attorney generals are attacking TrueCar on flimsy technicalities. One technicality is that they are violating state dealer license laws. This is patently absurd since many companies are providing car dealers with leads and charging for it but they just don’t do it as well as TrueCar. Another technicality is that some states ban third parties from getting commission for referring a buyer to a car dealer. Very few states have this law and this is simply a bad law and could be easily overturned as being unconstitutional. Competitors to TrueCar are also bad-mouthing TrueCar to their dealers. I won’t name any names, but one very large lead provider has been very vocal in providing its dealers with all of the negative hoopla surrounding TrueCar. I don’t blame them because TrueCar is threat to them just like it is to us dealers. Isn’t it amazing that the one entity that not considered by the dealers, manufacturers, state legislatures or an attorney general is the car buyer? No one is has asked what is best for the consumer. I guess that’s because consumers don’t have powerful paid lobbyists.

The only group that is truly thrilled about TrueCar is the consumer, the car buyer. If you haven’t heard of them before now, just click on their website, www.TrueCar.com and pretend to be buying a car. In just a few minutes, you’ll fully understand why car buying will never be the same again. The last huge impact on buying of cars was the advent of the Internet. Dealers and manufacturers reacted the same way they’re reacting to TrueCar. In fact, even today some dealers will refuse to quote you a price over the Internet. Most dealers now understand that the Internet is the wave of the future. About one-third of all cars sold are sold over the Internet today and this percentage will approach 100 within the next 10 years, especially with the advent of TrueCar.

TrueCar has essentially “perfected” the Internet purchase for the car buyer. Before TrueCar, dealers could still “play games” with the Internet buyer by adding dealer and doc fees, switching the buyer to another car at a higher profit, and various other tricks of the trade. TrueCar knows the exact car their customers buy and the exact profit the dealer makes. Why? This is because they have access to the dealer’s financial records through his data management system (DMS). This access is a condition of being a certified TrueCar dealer. If a car dealer charges the customer a higher profit than he agreed to, TrueCar knows it. If the dealer sells the customer a different car, TrueCar know it. TrueCar will drop the dealer from their certified dealer list in their market if they don’t play by the rules. There are two reasons for dropping the dealer. First they are cheating TrueCar’s customer and secondly they are cheating TrueCar who doesn’t get paid their $299 on a new car or $399 on a used.

Some car dealers will simply not be a part of TrueCar, but you can be sure that if another dealer of the same make is a certified member, his prices are lower. I strongly suspect that some dealers will actually collude with their competitors and “fix prices” artificially high. Of course this is a serious violation of a Federal law, the Sherman Anti Trust Act.

Now, I’m not saying that TrueCar is the only way you should ever buy a car. I even have an “ax to grind” with TrueCar. I don’t like the way they allow their dealers to not include dealer fees and doc fees in their quoted prices. They do require the dealer to disclose them separately, but you have to look in the fine print at the bottom of the quotation to find this. I don’t charge a dealer fee but a competing Toyota dealer can show a TrueCar price that is lower than mine which is actually higher than mine when you add back his dealer fee. If the car shopper doesn’t notice the fine print, he could end up going to the dealership with the higher price. In fact, TrueCar ranks the prices on their website without including the dealer fee. This is very wrong of TrueCar and I intend to call them on this. I also think that you should always get at least two other bids besides the TrueCar bid and give the other dealers a chance to beat the TrueCar price. Finally, you should always get three bids on your trade-in and financing. TrueCar can only guarantee that you get the lowest price on your new or used car. It can’t help you if you allow the dealer to undervalue your trade-in or overcharge you for financing. 

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