In a world where many alleged car buying services are little more than bounty hunters that feed willing buyers to the sharks, TrueCar stood out for truly identifying dealers with the lowest price. This is about to change. Earlier in the year, one of the dearest wishes of some car dealers and OEMs nearly came true: TrueCar, the Santa Monica company that empowered customers by giving them heretofore top-secret pricing information, was under fire from OEMs, dealers, and state regulators. Losing thousands of dealers in a matter of weeks, the company nearly went out of business.
“It was a near death experience, absolutely. The company almost died,” says Scott Painter, TrueCar’s CEO in an interview with Thetruthaboutcars. “We went to the whiteboard and began rebuilding the business is if we were a well-funded startup.”
“We had a choice. The choice was are we going to partner with the industry with the belief that transparency is good and can be profitable, or are we going to pick up the consumer’s momentum and be their hero at the expense of the dealer. We chose to partner with the industry.”
For no one was this change harder than for Painter himself. As co-founder of 1-800-CARSEARCH, a predecessor of Autobytel, and long-time veteran of the “cars at the lowest price” business, Painter was known for his rhetoric that played on customer fears and nurtured the image of the salesman as a predator.
People think car dealers make a lot of money, something Painter admits is not true. Discounting is rampant in the industry, and it has been so long before the Internet. Dealers make very little money on the sale of a new car. In 2011, the average profit per vehicle was $23, says NADA. Now, it is up to a few hundred dollars, with 20 percent of the dealers losing money on the sale of a new car. The main reason behind this lies in how the industry operates. Dealers receive a retroactive bonus on every car if the reach certain milestones. If you have sold 900 cars near the end of the year, selling 100 at a loss to “make your number” becomes enticing. For decades, OEMs blamed dealers for discounting, and dealers blamed OEMs. Now, everybody blamed TrueCar.
By the end of last year, TrueCar found itself under attack from all sides. Honda got the ball rolling in December of 2011 by warning its dealers away from TrueCar. State regulators knocked on TrueCar’s doors. Fearful of fines, dealers abandoned TrueCar. Sales originated through TrueCar dropped from 13,000 per month in December to 2,000 in June.
Looking back, Painter thinks TrueCar came under attack simply because it became relevant. Dealers and OEMs had an ambivalent relationship with the on-line services since they started in the late 90s as part of the dotcom boom. Blamed as the antichrist, they were nonetheless welcome to make incremental sales with little fuss, and to help dealers and OEM to “make their numbers.” But for many years, says Painter, “we did not really matter, and nobody cared.”
Suddenly, OEMs, dealers, trade associations, the industry press, and state regulators did care. Saddled with a cost structure that anticipated hyper growth, the company hemorrhaged cash. In September 2011, TrueCar had closed its last private equity round, next stop: IPO. Instead, existing investors had to ante-up a bridge loan.
Rebuilding the company, TrueCar first “changed anything that was potentially illegal,” Painter says. Then, TrueCar softened its tone. Out went the anti-salesman rhetoric, in went the line that dealers in the TrueCar system are “holding margin and making money.” Customers no longer learn dealer cost and lowest price paid. Without registration, and giving up anonymity, customers today don’t learn much more than that most customers pay somewhere between dealer invoice and MSRP. TrueCar’s value proposition shifted from getting the lowest price to not paying more than necessary. An advertising campaign, anointed by TrueCar’s dealer council, now stresses “fair” prices.
The new system already is successful – for the dealer. Dealers on the TrueCar system are making more money than before. TrueCar has replaced over 1,000 dealers it has lost. By the end of the year, Scott Painter hopes to be cash flow positive again. TrueCar survived the near death experience. The idea of giving the customer true, transaction-based pricing information however became a victim of OEMs and dealers, who simply don’t want you to know.