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Monday, December 12, 2011

The War with TrueCar

Open Letter to the Automotive Industry from Scott Painter, Founder & CEO of TrueCar, Inc.
Responses by Ruggles
Monday, December 12, 2011 12:01 am
Painter: Our world is changing. Unprecedented access to information and a massive shift in consumer behavior has resulted in a challenging new automotive retail landscape. It has also enabled a consumer appetite for data transparency. To hide from evolving consumer behavior is to deny change. At TrueCar, we embrace this opportunity. We also believe that transparency is the centerpiece of trusting relationships. Some in the industry disagree. We would like to make our position clear.
Ruggles:Transparency is NOT the objective of auto dealers. Survival is, followed by net profit. It takes gross profit to have some net profit left over at month end. Is there another industry where consumers feel they have the right to know a seller's actual true costs? What gives consumers the right to that information in the first place? Providing transparency is NOT your only aim – making money in the doing is! The behaviour by consumers wanting to know a car dealer's bare costs is NOT something new. In 1970 credit unions would arm their members with "dealer cost." There were books available on every news stand. The delivery of the information is what is different.
If you want total transparency, give consumers actual bare cost down to net net net. Then allow the negotiation to be based on the gross profit, say a thousand or two. Do you really think consumers understand gross profit? Do they understand the expenses that are paid out of gross profit? More importantly, do they care?
Over the course of time car dealers have had their margins trimmed dramatically by their OEMs. When I started in the business the margin on large cars was 22.5% with a 2.5% hold back. "Trunk money" was available only for special promotions, but it was nowhere near as prevalent as today. The profit a dealer makes these days has moved to "trunk money," as the dramatically narrowed margin and increased availability of information to consumers has dictated it. And you are looking to disclose this information as if consumers have some kind of inherent right to it.
The auto business is a business of negotiation. AND consumers can shop. Consumers aren't bound by the same rules that auto dealers are. You seem to be saying that you would like to remove the negotiation aspect of the business while making money for your own company in the doing. It's not like you are performing some needed public service. You think an "efficient" market for new vehicles is good for everyone? How does that jive with the dealer, who has made substantial investment, making a reasonable return? If they don't, who will be around to provide other essential services to the consumer? The factory?
You're a business man and have closed some deals where negotiation has been required to reach agreement. You also know that in negotiation if neither party gets their feathers ruffled at some point, money has been left on the table. I suspect that in your very best negotiations, you negotiated without appearing to negotiate at all. I suspect that is how you have gotten so many dealers to sign on initially. That might even be how you gathered in $200 million in venture capital. I take my cap off to you for being such an artful negotiator. But don't in the same breath talk about transparency. Your objective is to make your deal while adopting the APPEARANCE of transparency as a negotiating tactic. How do you expect to make money in a negotiating business like the auto business with true transparency? You call it transparency to share transaction data, where ever you happen to get it and however the consumer interprets it. Real transparency is when only the margin is negotiated because the consumer knows our costs as well as we do, but of course they lack the knowledge of what has to be paid out of that margin. To repeat - you are selling the illusion and perception of transparency, but in the doing you are feathering your own nest by portraying yourself as the "good guy" to the consumer who readily accepts the dealer as the "bad guy." The amazing thing is that any dealer has cooperated with you.
And what of the sales people you intend to replace? Or do you deny that that is one of your aims? It seems you are on record about that.
Painter: Our goal at TrueCar is to foster healthier relationships between manufacturers, dealers and consumers through data transparency.
Ruggles: Forget about healthier relationships. Profitable business relationships that are also "healthy" are the kinds of relationships to have. The euphemism "data transparency" means disseminating propriety information to consumers, information that is none of their business. They can shop at the touch and click of a mouse. What more are they entitled to?
Painter: To deliver on this promise, we require a high standard from our 5,800 dealer partners – an upfront competitive price and a commitment to a great customer experience.
Ruggles: Where does the great customer experience come from in a race to the bottom on price? Where does the money come from to accomplish that?
Painter: A discoverable upfront price is the cost of getting noticed. Contrary to popular concerns this does not create a “race to the bottom.” The lowest price only secures the sale 19.2% of the time within the TrueCar network. The sale is still won by location, selection and good old-fashioned customer service.
Ruggles: No race to the bottom? Easy for you to say! If only 19.2% buy based on the lowest price, why would you even try to provide consumers with the lowest price? The cynic in me tells me that your motive is not public service, but your own profit. Let's tell it like it is. That being the case, how on earth would you expect dealers to be your allies in the endeavor? Well, that's easy. A host of dealers with their heads up their asses have already signed on providing initial validity to your premise. In case you haven't noticed, there is a burgeoning group looking to enlighten our fellow dealers.
Painter: At TrueCar, we believe that upfront price is at the core of a good buying experience for dealer and consumer. Informed consumers buy more confidently and are more satisfied. At TrueCar, we publish the most accurate reflection of the retail market that has ever been available. The goal is to establish an objective, credible and transparent baseline for fairness – both for the customer and the dealer. That being said, TrueCar does not set this market. Our dealer partners set their own prices 100% of the time.
Ruggles: Its great that you believe that "upfront price" is at the core of a good buying experience. In our mind, a good buying experience is where the dealer makes a substantial but reasonable profit, the consumer is happy, and a long term profitable relationship is formed. The price is negotiated. Trades are taken. Consumers can shop if they feel they aren't getting what they want.
Whose definition of fairness are we using? Yours? The consumers? As previously mentioned, ask a consumer what they think a fair margin is on a new car and the answers will be all over the map. Most aren't business people. It doesn't even occur to most of them that there are substantial costs that have to be paid from gross profit.
Bottom Line: You are trying to create a system based on wildly variable consumer perceptions, while destroying the system that has worked for years, and to make a few million in the doing.
AND after you have taken down sales people and the dealer network, do you then turn you program on manufacturers? Where does it end? Dealers don't need any more downward pressure on gross profit. And those who help you provide additional pressure on their own gross profits just haven't woke up to that fact yet.
Painter: Dealers earn their business every day and we believe that their marketing programs should too. TrueCar is the only fully accountable source of new business where our dealer partners only pay when they sell a car. Gone are the days when dealers have to assume all of the marketing risk and pay for advertising and for leads as a primary way to secure new customers.
Ruggles: I suspect that more and more dealers will be opting to take their "risk" back in return for not being complicit in their own demise.
Painter: TrueCar requires DMS integration for tracking of this accountable model, the core of what makes us unique. We use DMS feeds from our dealer partners for tracking and optimization of introductions made to the dealership. We don’t use our dealer partners’ information to populate the TrueCar pricing curve. That information comes from entirely separate sources of anonymized data that represent nearly 90% of all vehicle transactions in the U.S.
At TrueCar, data integrity, security and privacy are job #1. Our policies, systems and technology have passed the scrutiny of partners like USAA, Consumer Reports, American Express, AAA and many others. TrueCar has never, and will never, sell or repurpose DMS data for any reason.
Ruggles: IF security and privacy are job #1, you have failed miserably. The credibility gap between TrueCar and dealers is growing. Even if it is true that your access to a dealer's DMS doesn't provide actual transaction data, the fact remains that your company is making money by putting additional pricing pressure on dealers under the guise of providing a "public service."
Painter: In spite of all this, we recognize that change is threatening for some. Ours will always be a high-touch industry. The service of our dealer partners and highly-trained sales professionals becomes increasingly important the more consumers know. At TrueCar, our commitment is to relieve those professionals from needing to resort to high-pressure sales tactics or misdirection. These tactics have been an albatross for our industry and they are at the heart of why consumers have become generally mistrustful of the car shopping experience in the first place.
Ruggles: Change? This isn't change. TrueCar simply puts the dissemination of proprietary dealer information on steroids. Do us a favor and let dealers return to their high-pressure and misdirection tactics of days gone by when we delivered 17,000,000 new vehicles a year. The only way most consumers will be satisfied is to be guaranteed to win the negotiation. And they can't even define what it would mean for them to win. You say consumers have become "generally distrustful of the car shopping experience?" Please tell me, is this some kind of new phenomenon that recently arose so TrueCar could come to the rescue?
Painter: Is TrueCar good for all dealers? There will always be those that resist change. To our dealer partners, we applaud your understanding that truth, transparency, and customer service is at the center of success in our changing market. And, to those that still have questions, we invite an open dialogue. One of the great virtues of transparency is that we have nothing to hide.
Ruggles: The change dealers want to resist is further downward pressure on their gross profits, at a time when their manufacturers are pushing them to spend more and more money on their facilities, thereby further increasing their costs. As a 40 year industry veteran retired from the day-to-day of retail, I can speak my mind. I hope others will do the same.
David Ruggles