by David Ruggles
How do the third party vendors like TrueCar, and the others, actually work? It’s really quite simple. The auto buying Consumer belongs to retail Auto Dealers. They have the money invested in inventory. They have substantial investment in facilities. The third party vendors spend large amounts of money to “hijack” those auto buying Consumers and take them “hostage.” They then “ransom” them back to the Dealers for a sizable chunk of change. In the case of TrueCar the “ransom” is about $400. on a new vehicle and $300. on pre-owned. That money is reinvested by the vendor and used to “hijack” and “ransom” even more car buying Consumers. They are able to “hijack” these Consumers by pretending to protect them from the Auto Dealers, as if the Consumers are helpless sheep. These vendors don’t lead their message to Consumers with the fact that they raise the cost of the Dealer’s sale, and the Consumer’s purchase price, by the “ransom” amount. How many consumers would knowingly pay an upfront fee to these vendors?
The ultimate customers of these third party vendors are the Dealers. That’s where their revenue is derived. Most Dealers understand what’s going on and aren’t happy about it. A large number of them, however, have capitulated. Others use the third party vendor strategy in their favor without paying for it. For example, a TrueCar customer can come to a Dealership that isn’t a TC Dealer. That Dealer can go to the TC site and use the information provided there as a closing tool to negotiate the deal with the Consumer. Because the non-TC Dealer’s cost doesn’t include the “ransom fee,” the Consumer potentially gets an even better price while the dealer makes additional profit if they split the unpaid “ransom fee.” The Consumer becomes a higher value owner to that Dealer.
All Dealers have advertising and marketing budgets. These third party vendors would like everyone to believe that their fee would be spent in other areas of advertising rather than adding to the cost of individual the vehicles sold to Consumers the vendor took “hostage.” The vendors insist that their services allow dealers to target their marketing efforts better, thereby providing savings. The fact of the matter is that Dealer advertising budgets have done nothing but rise since the proliferation of third party vendors came into being. The Internet has spawned so many “leads” that Dealers are now struggling to figure out how to “weight” them, to distinguish leads in terms of “likelihood to purchase.” Despite the fact that TrueCar has yet to make a profit, despite reaching a Dealer saturation point that they used to claim would make them money, many third party vendors DO make money. They make enough money that there is about to be a flood of new major players enter the field.
In particular, enter Amazon Vehicles, with pockets deeper than any of the existing players. They will potentially have the budget to do almost anything they want. Indeed, they can afford to fritter away a lot of money figuring things out. Relative to stand-alone players they can lose money for an extended period of time, in a market where profits are already diluted, all the while using their competitors as “pricing cover.” Dealers could call a halt to all of this by just saying no, but while a few may hold back, enough will participate because they just don't get it, and their rivals down the street will join to make sure they don't gain an advantage. So collectively they won’t say no. There will be further consolidation in this business as players with really deep pockets enter the fray. In the meantime, neither Consumers nor Dealers will be well served.