How TrueCar won auto dealers over

January 21, 2014: 9:32 AM ET

The digital auto buying platform initially alienated dealers with its transparent pricing model. Now it's reengineering and making amends.

By Doron Levin

140121092436-truecar-620xaFORTUNE -- A quiet revolution bubbles beneath the surface of U.S. automobile retailing, one of the few shopping categories so far relatively undisrupted by the Internet.

One sign of change is the rise of TrueCar, which bills itself an automotive "buying" website, now used by 7,000 U.S. dealers (roughly a quarter of the total) and a party in nearly 3% of all new-vehicle transactions. Two years ago, TrueCar alienated some dealers by pitting them against one another in so-called reverse auctions to sell vehicles at the lowest possible price, which squeezed profit margins.

The outcry from dealers, along with scrutiny from state regulators, convinced Scott Painter, TrueCar's founder, to revamp the company's business model. Today, TrueCar dealers no longer can see one another's offering price. The number of dealers using the service is growing. TrueCar makes money by charging a dealer $299 for each successful new-car transaction and $399 for each used car sold through the service.

MORE: Auto giants rediscover their swagger

"We believe that consumers don't expect to pay the absolute lowest price possible for a car," said Larry Dominique, a TrueCar executive. "They do want to get a fair price and make sure that they don't overpay."

TrueCar and other third-party websites, like Edmunds.com and Kbb.com, provide automotive information and sell resulting sales leads to dealers, and they are able to buy transaction data. With this data, they can watch and analyze the transaction prices of specific models, creating an accurate and up-to-the-moment report on the market. Hence, someone shopping for a Chevrolet Cruze in Houston can decide whether to pay an asking price based on what hundreds of shoppers recently paid for a Cruze in that area, including prices for optional features.

The Internet, besides providing useful shopping data, creates a convenient pipeline between automakers and consumers. Automakers would love to sell vehicles to consumers directly online; currently it's impossible because franchise law makes dealers the exclusive sales agents in every state. (Tesla (TSLA), a niche manufacturer of electric vehicles, has sidestepped the franchise system and has been selling its cars online and through company-owned stores, though it has faced regulatory opposition in some states.)

TrueCar claims that the average car buyer saves 63 minutes of time and $3,000 of cost by using the service.

MORE: The $20 book that companies are betting could save them $100,000 or more

Dominique says TrueCar is offering new digital tools for dealers, based on sales transaction data for their area, model by model, to ensure they don't make a mistake and sell too cheaply.

Since TrueCar's founding in 2008, nearly $190 million has been invested in the venture, which was merged with ALG, a service that monitors the used cars and the residual value of leased cars that are returned after the leasing period is over. The latest was $30 million from Microsoft co-founder Paul Allen's Vulcan Capital.

As dealers spend more on digital ventures -- and less in traditional media such as newspapers -- the automakers also are looking for ways to get closer involved. General Motors Co. (GM) has started "Shop, Click, Drive," a website that refers shoppers to participating GM dealers in their geographic area. Shoppers who wish to buy a car online from participating dealers can do so without visiting a dealer showroom.

Of GM's 4,300 dealers nationwide, about a quarter are partaking of "Shop, Click, Drive."

The older cohort likely will continue visiting dealer showrooms until it buys its last car. Fewer and fewer young, computer-savvy buyers will experience the joy of haggling with a salesperson over the price of a car.

Posted in: ,
Join the Conversation
Search This Column
View all entries from this: Week, Month
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.