Everyone likes having a new car; buying one is a different matter. A range of businesses try to sell price transparency as a way to level the playing field between the average car shopper who goes through the process about once every 10 years and the teams of professionals who do it about 10 times a day. Now we’ll get a closer look at one of them: TrueCar, a Santa Monica (Calif.)-based company that filed initial public offering paperwork last week.
Formerly known as Zag.com, TrueCar is interesting, because it isn’t just a platform for listings or a portal for pricing data. It essentially acts as a broker that allows car buyers to reach an agreement with a local dealer without an afternoon of excruciating negotiations and “what-can-I-do-you-for” chitchat. TrueCar says it’s hoping to trade under the ticker “TRUE.”
If a shopper decides on a make, model, and offer, TrueCar routes him a “price certificate” guaranteeing a certain level of savings. If the person uses that certificate and actually buys the car, the dealer pays TrueCar a fixed $300 fee.
So far the company has almost 7,000 dealers playing along, about one in five U.S. car lots. And last year TrueCar booked about $119 million in referral revenue. At $300 a pop, that suggests the company brokered about 397,000 deals last year, close to 3 percent of all vehicle purchased in the U.S. TrueCar has also sold its model to USAA. The military-focused bank owns 22 percent of TrueCar shares and routes its car-buying clients to the platform.
For dealerships, TrueCar offers a good way to reach potential customers and manage inventory. If a lot is trying to clear out a glut, it can selectively sell some cars for peanuts without blasting big incentives to everyone in the market. For buyers, it offers some transparency and an end run around negotiating, even if the final prices aren’t always as low as absolutely possible.
But TrueCar is walking a fine line. If dealerships don’t make some money off of TrueCar browsers, they won’t keep pushing vehicles onto the platform. Indeed, at the end of 2011, roughly one-third of TrueCar dealers split because they thought the service was too much of a threat to their business model.
The company has shored up its relations with car sellers, but if TrueCar doesn’t help buyers get prices as good or better than they can find elsewhere or hammer out on their own, consumers will go elsewhere. And its model stops short of actually closing a transaction or letting a customer lock in everything from floor mats to financing.
Perhaps the biggest challenge TrueCar faces is how to constantly win an entirely new group of consumers; most people simply don’t buy a new ride very often.
Not surprisingly, the cost of getting the word out has been steep. TrueCar spent almost $8 million on a national advertising campaign in late 2011. And sales and marketing burned up roughly one out of every two revenue dollars last year.
Profit, meanwhile, is a milestone TrueCar has yet to pass.