The car business is changing rapidly and like it or not, the traditional dealership model not only has to compete with local competition, they also have to win business in an industry where geographic boundaries are slowly dissolving. Businesses like Carvana and Shift have capitalized on the car buyer’s negative perception of the traditional buying process with a complete digital experience from browsing to purchasing. They’ve removed the dealership and in turn, disrupted your business.
In this article, I’ll break down these new business models and give you tips to compete with these online businesses, rather than become a test drive lot for them..
The Digital Buying Business Model
Carvana has created quite a buzz in the digital automotive space and it’s certainly an interesting model, though since inception they have yet to turn a profit. Based in Tempe, Carvana relies on a superior technology platform of video and photography to give the shopper a full view of the car. With it’s recent $22M acquisition of Mark Cuban’s, Car360, they continue to bet on technology and will be able to offer 3D computer vision, machine learning, and AR technology for the automotive industry.
On the plus side, there are a lot of cars in inventory, around 15,000 nationwide, so the chances you’ll find one that fits your needs are good. They also offer financing, extended warranty and GAP Coverage and once you select your car of choice, you can complete the transaction in about 11 minutes. What’s more, if you’re not satisfied with the car, you can return it within 7-days for a full refund, well almost full, we’ll get into that a bit later in the article. Also, they don’t have traditional salespeople, rather they have “Customer Advocates” that are there to help the customer through the car buying process, removing the stigma of the car salesman among them.
On the flip side, the site heavily relies on technology, not people. When you’re making the second biggest buying decision (behind a home) it would be nice to have a human point of contact. The chat function is admittedly a robot, but I was able to call and speak with one of their advocates. That conversation convinced me even more that this wasn’t the right option for me.
Why? First of all, if I’m buying a car online, that process needs to be FLAWLESS. It wasn’t. I searched for a Toyota Highlander. The one I wanted had a $500 delivery fee associated with it. I clicked on the “?” near the delivery fee and there was a link to search for similar cars that don’t have a delivery fee. I assumed I’d be taken to a page with Highlanders or other similar vehicles but I wasn’t. I was taken to a page that had sedans and when I searched with the results for an SUV they came up with shipping fees. I asked my customer advocate when I called if I could search for cars with no delivery fee to which she responded, “sometimes there is an option to search for it but it doesn’t always come up.” Huh? It seemed to me that this is going to take a long time to find my car. What’s more, several times during my search I received error messages and had to start my search over.
Once a buyer picks out a car, they begin the steps to purchase, which isn’t truly finalized until they pick it up at a vending machine or have it delivered. When delivered or picked up, the shopper has 15-mins to test drive the car and if they like it they complete the process for ownership. To reduce the stress of this, Carvana offers a 7-day money back guarantee, no questions asked. However, if the shopper wants to return the car, they’ll need to pay for the shipping back to the Carvana facility. Costs for delivery range from $199 to as high as $1,000 from one coast to the next. A hefty risk of potentially $2,000 would be a deal breaker for me.
Since over 80% of shoppers switch cars from their initial inquiry once they come into the dealership, then a buyer needs to know exactly what they want going in. This is where shoppers may simply use your dealership to find and test drive the car that they want and then purchase online to save time. I mean, this really does defeat the purpose of avoiding the dealership, doesn’t it? While it may seem like you would have the option to test drive several cars at a vending machine location, this is not the case as all have already been purchased and promised to other buyers.
Competitors to Carvana are Shift and Vroom which are not quite at the scale of Carvana with only 1,000 and 3,000 vehicles respectively. Both offer a 5-day return policy. With Shift, if you live in a city where they have a distribution facility like I do, then they’ll bring the car to you for a test drive and you can take it from there with no fee. They’re not too transparent as they mention a concierge fee but never say what that is. With Vroom the only pick up location is in Houston, otherwise you’ll need to pay a $499 delivery fee. On the bright side you won’t have to pay if you return the vehicle.
Bottom line: You need to know exactly what you want before buying a car directly online unless you live near a distribution center and can easily return without a fee. This could potentially scale but a lot of kinks need to be worked out and frankly, I am the type of person that likes to have some options.
The Subscription Model
Another business model that has come into play is one whereby shoppers don’t need to commit to a purchase, ever. Two companies in this space are FlexDrive and Fair. FlexDrive, also based in Atlanta has more than 9,000 users and is growing each month. While they’re only in 17 cities now, they have their sites on being national in the coming year. They charge users a flat monthly fee that covers most expenses of ownership including insurance and maintenance. This idea can be compelling to Millennials who are getting used to these subscription based models or even business people who need a car in certain locations for an extended time. Instead of having a loan that they need to pay off in six years, they can use a car and switch it out for a newer or different model on their timeline. Getting a car through them is seemingly easy and can be attained through their online app. All people need is a clean driving record, three years driving experience and a credit card, no credit check required. They stay nimble in that they don’t own the cars that they are lending, rather they source their cars through partnerships with local dealerships. Both Flexdrive and Fair have a start up cost that is typically a multiple of the monthly rate but getting started appears fairly easy. The downside, this is like a long-term rental and at the end you don’t own anything. For more fiscally minded folks, probably not the ideal option.
How Dealerships Can Respond
The reason these models are gaining attention is because shoppers are resisting the current dealership process. According to Autotrader, 72% of shoppers would visit dealerships more often if the buying process was improved. What does this look like?
- Well for one, having a more streamlined process so that they can get through finance in less time than taking a transcontinental flight. What can you do to cut down on the time it takes to get the customer out the door?
- Buyers like the idea of transparency and no haggle pricing, they want to know that they’re getting a fair price and not being taken advantage of.
- Also, highlighting your dealership benefits like offering a 72-hour return policy on cars, warranty benefits and don’t forget how important your dealership’s contribution can be to the local market.
If you’re reading this and are interested in even more information about how to strategize a way to compete with not only online retailers, but your local competition, start a free 7-day trial with our virtual training platform. We recently launched a new series about Digital Retailing which addresses just that. Plus, once you sign up you’ll have access to scripts to help convert more shoppers to the showroom, tactics to bring shoppers to increase gross profit per retail unit and updated monthly content for managers.