TrueCar Versus Honda: Online Car Buying Challenges Hit Home

The rise of the internet has had myriad effects on everyday life, not the least of which has been its profound impact on consumer behavior. With ever more data being made available online, and with the rise of independent alternative media outlets like TTAC, car buyers in particular are fundamentally changing their relationship to the car buying process. Dealers have been noting for some time that the internet has created better-informed buyers who, armed with more information, are demanding the car they want at the best possible price, wreaking havoc on traditional car dealer tactics like upselling and opaque pricing policies.

But as the eternal dance between supply and demand shifts in favor of consumers, some dealers and OEMs are having a tough time adjusting to the new reality. At the same time, the need to make money off of online consumer education has created some tension for the new breed of consumer-oriented websites. This conflict has now broken out into the open, as the auto transaction data firm TrueCar has found itself locked in a battle with American Honda over the downward pricing pressure created by more widely accessible transaction data. And the outcome of this conflict could have profound impacts on the ever-changing face of the new car market.

Early last week, TrueCar CEO Scott Painter took to the TrueCar blog with an “Open Letter To The Automotive Industry,” in which he argued

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.

And indeed, from personal experience I feel comfortable saying that TrueCar does provide consumers with some highly valuable information by tracking vehicle transactions from several data sources and publishing the range of transaction prices on a local level. This clearly helps consumers navigate the often opaque and confusing world of dealer-level pricing, and facilitates a more efficient interaction between supply and demand. And if that’s all TrueCar did, it would be impossible to argue with the valuable service it provides.

But in order to fund its business model, TrueCar cannot simply give away data and hope everything pans out for the best. In order to generate profits, TrueCar works with “dealer partners,” allowing them to present a lower “haggle-free” price for the model being researched at no upfront cost. If the consumer buys that car, TrueCar gets a $299 commission from the dealer; if not, the dealer pays nothing. Dealers can tailor these “guaranteed lowest prices” based on TrueCar’s data, and they seem to generally beat non-“guaranteed” prices in the TrueCar “price curve” display by only a few hundred dollars. But by offering this service to its dealer partners, TrueCar has opened itself to conflict with OEMs, as this fiscally-necessary service muddies TrueCar’s role as a pure consumer service. Which is where the conflict with Honda comes in.

In his “Open Letter,” Painter mentions no OEM by name, and TrueCar’s EVP for Dealer Development Stewart Easterby tells TTAC

We’re not trying to pick a fight… we very much value Honda/Acura. We have strong OEM relationships through our recent acquisition of Automotive Lease Guide, and we have lots of people on staff who have work for OEMs, so we generally have strong relationships with the industry.

But in an Automotive News [sub] piece published on the same day as Painter’s “Open Letter,” the TrueCar CEO claimed that American Honda was warning dealers away from advertising below-invoice “guaranteed lowest” prices. After talking to American Honda, AN updated its piece, noting that it had

incorrectly reported that Honda singled out TrueCar.com when the automaker warned dealers that they would put their local marketing payments from Honda at risk if they offered prices below invoice on Internet shopping sites

In fact, what had happened was that American Honda had simply warned its dealers that any advertisement of below-invoice prices could jeopardize the marketing assistance money Honda sends dealerships. American Honda’s Chris Martin clarified the automaker’s position in an emailed statement to TTAC, noting

Dealers who wish to receive marketing funds are expected to adhere to certain guidelines that govern dealer participation in its Honda Dealer Marketing Allowance (DMA) Program and its Acura Carline Marketing Allowance (CMA) Program. Among the many advertising guidelines to which dealers must adhere to in order to receive DMA/CMA Funds, Honda dealers are restricted from advertising new Honda vehicles at a price below dealer invoice plus destination and handling charges and Acura dealers are restricted from advertising new Acura vehicles at a price below MSRP plus destination and handling charges. Such guidelines do not limit a dealer’s discretion to advertise a new vehicle at any price if the dealer is not seeking DMA/CMA Funds. Furthermore, the dealer is free to charge customers any price it chooses, in its absolute discretion, for a vehicle.

Martin goes on to identify the central bone of contention:

The development of third party websites used for advertising is not any different than advertising pricing in a traditional newspaper or on TV.

And here, American Honda has something of a point. Whereas TrueCar’s price curve is a pure reporting tool, simply reflecting otherwise available data, it’s not entirely unfair for Honda to characterize TrueCar’s service to dealer partners as an advertising service. In practice, the only real difference between this service and any other form of advertising is that TrueCar only gets paid if a car gets sold at the “guaranteed lowest” price offered by one of its dealer partners. If you accept that reality, Honda has some very valid reasons for threatening to withhold dealer marketing assistance, as Martin’s statement explains

The function of these [DMA] guidelines is three-fold. First, it encourages dealers to use the advertising money provided by American Honda for interbrand advertising. That is, rather than providing funds to dealers so that they can engage in discount advertising against other Honda and Acura dealers (which does American Honda and consumers no good), American Honda wants dealers to use the funds to promote the advantages of Honda and Acura vehicles when compared with competing brands. Second, discount advertising is detrimental to the Honda and Acura brand images. American Honda has no wish to pay for ads that portray its products as “cheap” or “low-end” vehicles. This may be appropriate for other manufacturers; it is not appropriate for the Honda and Acura brands.

So far, so reasonable. TrueCar’s service may be more palatable than the local, low-rent “Check Out Our CRAAAAZY Prices!” ads you see on TV, but in practice there’s little meaningful difference. Besides, the choice belongs to dealers: either accept Honda’s money with the inevitable strings attached, or throw in your lot with the new lower-price, but potentially higher-volume TrueCar (or CRAAAAZY Prices!) strategies. But with its third rationale for its policies, Honda strays from this reasonable territory, and betrays a distinct bias against TrueCar, arguing

Third, American Honda believes that much discount advertising is bait-and-switch advertising, which is not beneficial to the consumer and reflects badly on the manufacturer that condones it. Dealers that advertise vehicles for extremely low prices (as some do on the TrueCar site) may engage in either direct bait-and-switch tactics or using the automobile’s brand name to sell expensive accessories, service contracts and the like.

Memo to Honda: these practices are as old as the auto industry itself. Suggesting that these tactics will never be used at dealers who toe Honda’s DMA line is just as disingenuous as the implication that TrueCar’s dealer partners are more likely to use them. If anything, TrueCar’s major sin is that it makes below-invoice advertising easier for the OEM to monitor and therefore squelch than in the pre-internet days, when consistently maintaining these DMA standards would have required a survey of every local publication and TV/radio broadcaster (not to mention direct-mail marketing), a task that no automaker was or is equipped to do.

But Honda’s apparent antipathy towards TrueCar is just the tip of a growing resentment towards the site. In a speech cited in the AN piece published last Monday, AutoNation CEO Mike Jackson expressed the angst that appears to be spreading across the auto retailing industry, especially in light of its recent deal with Yahoo [sub].

The good deal that they’re pitching to the consumer is lower than average. So to the extent that everyone goes with the TrueCar price, it moves the average down. It’s a death spiral, and the question is whether they are powerful enough to unleash that dynamic in the U.S. marketplace.

But Jackson’s implication, that TrueCar can essentially manipulate the market in favor of consumers, simply doesn’t hold up to scrutiny. On an abstract level, you can’t repeal the law the law of supply and demand. As Painter puts it

They’re trying to say Hondas are worth more than invoice, but if everybody’s paying less than invoice, that’s not true

More practically, however, TrueCar’s own data seems to refute the industry’s fears. Specifically, Easterby tells TTAC

TrueCar represents two to three percent of new car sales… we’re flattered that people think we’re influencing the market, but at that share, we clearly aren’t. The 21st C consumer demands transparency in all products and services, that’s what the web has done. TrueCar reflects the market, just as Zillow reflects the market for real estate, rather than determines it.

Even more importantly, Painter insists

Our goal at TrueCar is to foster healthier relationships between manufacturers, dealers and consumers through data transparency. 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. 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. [Emphasis added]

So where does this all leave us? Clearly Honda has the right to withhold DMA money from dealers violating its reasonable conditions on that money. By the same token, dealers have the choice of pursuing higher volumes with less traditional advertising by choosing the TrueCar strategy, or continuing to follow the time-honored tradition of collaborating with the manufacturer. And here, TrueCar’s price curve, which it says is not populated by dealer partner data but from independent, anonymized sources, becomes the killer app: it’s so good (reflecting a claimed 90% of all new car transactions), it can’t help but draw ever more buyers, who will then be exposed to its dealer partner “advertisements.”

Ultimately, it’s difficult not to conclude that TrueCar (and sites like it) won’t continue to draw ever more dealers away from the old DMA agreements, especially as online research becomes more important to the car-buying process and as traditional advertising dollars flow from TV, radio and print towards the internet. And if dealers and brands are sufficiently hurt by downward pressure on pricing, the alternative is always there. This is how competition works, and because TrueCar has more fundamentally aligned itself with consumers and the power of the market, it’s tough seeing them not coming out ahead in this struggle. And if they do, car buying could be changed forever. Again.