Entrepreneurship Class- Case Analysis
StudentDasdu
E527-PDF-ENG.PDF
CASE: E-527
DATE: 09/22/14
Yin Li (MBA ‘13) and Lecturer Robert Siegel prepared this case as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
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TRUECAR:
TRANSFORMING THE CAR BUYING EXPERIENCE
It was January 2012. Scott Painter, CEO and founder of TrueCar (www.truecar.com), was
struggling to comprehend how the company, which had been on a seven-year growth trajectory,
was suddenly in free fall. In the last quarter, 2,500 of the 5,700 auto dealers in the TrueCar
network had left en masse. TrueCar was an online platform where consumers received an
upfront price for a car that would be honored at a nearby dealership. Given that TrueCar referred
prospective buyers to dealers at no upfront cost, charging dealers only for successful sales, the
large-scale desertion of the network meant something was seriously wrong. Painter was starting
to understand that he was a big part of the problem:
Much of my career has been a very emotional crusade to improve the car buying
experience. People love cars, but we all have a bad car-buying story. Modern
culture portrays car salesmen as the lowest of the low. It’s a cultural thing at this
point and as a fundraiser, as a storyteller, I weaved together a story that made the
dealer the easy target, the bad guy. They dealers felt like they had the power to
resist it and they did, so rules be damned a little bit, they were going to get rid of
the agitation and we were it. 1
Dealers were vocally protesting TrueCar’s product and advertisements, which emphasized the
lack of transparency in the car buying experience. Many launched negative publicity campaigns
against TrueCar. In YouTube videos and on blogs, dealers portrayed Painter and TrueCar as
destroyers of American businesses and jobs. At first, Painter had met the dealers’ protests with
his typically defiant attitude (see Exhibit 1), but now he was realizing that a different strategy
would be necessary.
1 Interview with Scott Painter, July 17, 2014. Subsequent quotations are from the author’s interviews unless
otherwise noted.
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TrueCar: Transforming the Car Buying Experience E-527
p. 2
Months before, the situation had been completely different. The company had booked $38.1
million in revenue in 2010 and $76.3 million in 2011. It had approximately $40 million of cash
on hand, and the mood of the management team and employees was euphoric. They believed
they were scaling. They believed they were getting ready to go public. The company had just
moved into a new office with glass walls that showed off views of the beach and ocean in Santa
Monica, California. Painter reflected:
All our metrics—revenue, sales, and profit—were looking great at the end of
2011. We believed we were actually affecting things. It was that magic moment
where we were coming up on $100 million in revenue, and we could feel it and
we could really see the business surging. When you’re a venture-backed
company and you’re profitable, there tends to be eagerness to grow the business
and test it. We were in that zone. In the fourth quarter of 2011, we were plowing
money into media, we were on television, we were literally euphoric and I think
probably for me that was in retrospect the most arrogant time. I felt like I had
been at war, I’d been fighting a crusade, and it was almost the moment where I
could begin to gloat that I had won.
Meanwhile, also in January 2012, Michael Guthrie (MBA ‘94) had just come onboard as
TrueCar’s Chief Financial Officer. Guthrie, whose background was in private equity, had
previously served as an advisor to Painter. Painter recruited Guthrie to TrueCar in order to
prepare the company for an Initial Public Offering (IPO). Ironically, Guthrie was immediately
tasked with diving into the company’s finances in order to get a grasp on how long the company
could survive.
Guthrie picked up the phone to call his wife on Friday afternoon. He was commuting to Santa
Monica from San Francisco and had planned to spend the weekend with his family back in the
SF Bay Area. Now he realized he would need to stay to sort through TrueCar’s financial
situation. His wife would not be happy.
As Guthrie walked over to meet with Painter, he reflected on the unfortunate turn of events.
With his mind on the numbers, Guthrie walked full speed into one of the glass walls, cutting his
face. As blood flowed from the wound, Guthrie couldn’t help but compare his predicament to
the one the company was in.
SCOTT PAINTER
Scott Painter was already a serial entrepreneur and a lover of cars when he founded TrueCar in
2004. Over his career, Painter had started 37 companies and raised over $1 billion of capital in
support of them. Painter’s first company, founded at the age of 14, was Scott’s Auto Detailing:
I was 14. It was kind of a Tom Sawyer operation. I hired all the kids in my
neighborhood and would drive them from their homes in rural Sacramento to my
house. It was a great opportunity to get behind the wheel of a car… [My parents]
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TrueCar: Transforming the Car Buying Experience E-527
p. 3
thought it was absolutely great. I was making money and I was great at backing
cars up our driveway. 2
After high school, Painter joined the U.S. Army and worked as a Spanish-language interrogator,
later enrolling in the United States Military Academy at West Point. However, Painter switched
to the University of California, Berkeley, after two years, where he studied economics. Painter
left before graduation to sell his first auto-related start-up, AUTOAccess, an electronic database
of used cars for sale. Painter described his personality:
Almost all really great entrepreneurs I know have a chip on their shoulder for
some reason. Most of them have a bad relationship with their dad, and I’m no
exception. I ended up going to West Point because I wanted to prove to my dad
that I could, and then I realized I didn’t want to be in the army. So that’s been a
life-long struggle. I’m intellectually curious. I’m a perfect entrepreneur: I’m
willing to risk it all. There’s all that psychological stuff that goes into what makes
entrepreneurs tick in the first place. I do believe that great companies solve real
problems. I happen to have a passion for this one. I’m a car guy, I’ve always
loved cars, but I’m definitely the guy who goes into a restaurant and if I see that
the napkins aren’t folded right, I pull the owner aside if I can find them and tell
them how I think they should fold the napkins. I’m always trying to solve, solve,
solve. To me there’s no bigger problem than cars, and I know on the other side
there’s no bigger reward for solving it than in cars.
In 1998, Painter founded CarsDirect, a lead generation business that took advantage of car
buyers coming onto the Internet to research cars. Up to that point, Americans had learned about
cars from their local dealers or from print publications such as Edmunds, a publisher of booklets
consolidating information on automotive specifications. 3 CarsDirect published content online to
draw traffic, which became leads that the company could sell to automotive dealerships.
Because the Internet-using population was still relatively small at the time, visitors to CarsDirect
typically had high intent to purchase, making them valuable leads. Painter commented:
From the time of CarsDirect, I had publicly made the dealer industry and car
salesmen the bad guys. If you think about CarsDirect, the name of the company
implies purchasing cars “not through the dealer”. So if you're a dealer, CarsDirect
is a full frontal attack.
CarsDirect was poised to go public when the tech bubble burst in 2000. The company survived,
as a result of the private financing Painter had raised, and went public about five years later.
However, Painter had moved on to new ventures by that time.
2 David Hochman, “TrueCar CEO Scott Painter Talks Cars, Life And Saving His Company,” Forbes, February 26,
2014, http://www.forbes.com/sites/davidhochman/2014/02/26/truecar-ceo-scott-painter-talks-cars-life-and-saving-
his-company/ (August 3, 2014). 3 “Edmunds.com,” Wikipedia, http://en.wikipedia.org/wiki/Edmunds.com (July 31, 2014).
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TrueCar: Transforming the Car Buying Experience E-527
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THE DEALERSHIP INDUSTRY
Seventeen million new cars were projected to be sold annually in the U.S. 4 in 2014 (see Exhibit
2), at an average price of approximately $30,000, 5 totaling to a $0.5 trillion retail market.
Virtually all new car sales took place at one of 31,500 franchised dealerships. These were
independently owned brick and mortar businesses operating under agreements with car
manufacturers to be the exclusive retailer of an automotive brand in a geographic area. The
American franchise dealership model evolved in the early 1900s to meet the challenge of selling
cars, which at the time was a new product that consumers were unfamiliar with:
In the early twentieth century, independently owned automobile dealerships were
a rarity. Automakers sold vehicles through department stores, by mail order and
through the efforts of traveling sales representatives. The prevailing delivery
system was direct-to-consumer sales. 6
Regulation
Franchised dealerships gave manufacturers physical presences close to consumers, with
salespeople to assist and educate prospective buyers, and service departments to provide
maintenance. To protect dealers’ investments in the brick and mortar dealerships, nearly all U.S.
states enacted franchise laws prohibiting manufacturers from selling cars direct to consumer, and
requiring new cars to be sold only by licensed, independently owned dealerships.
Additionally, many states heavily regulated or prohibited third parties from serving as brokers
between consumers and dealers. Bird-dogging 7 laws prevented anyone from getting paid to find
customers for dealers. John Stephenson, TrueCar chief risk officer, commented:
The dealers do not want to be dis-intermediated from their customers. These laws
were made to ensure that consumers are dealing directly with dealers because that
benefits the dealers and it ostensibly protects the consumers because they’re not
going to get hoodwinked by some middleman who is just extracting money for no
value in the middle of a transaction.
Finally, the auto industry was governed by myriad advertising laws, which could also be traced
back to the ink-and-paper era. Modern day Internet-based businesses and mobile application
businesses in the auto space were required to abide by these arcane laws as well. Stephenson
summarized the regulatory environment of the dealer industry:
4 “Total U.S., Light Vehicle Retail Sales,” MotorIntelligence, http://www.motorintelligence.com/ (July 31, 2014).
5 TrueCar estimate.
6 “Has the Traditional Automobile Franchise System Run Out of Gas?,” The Franchise Lawyer, Summer 2013,
http://www.americanbar.org/publications/franchise_lawyer/2013/summer_2013/has_traditional_automobile_franchi
se_system_run_out_gas.html (July 31, 2014). 7 The term refers to bird dogs, which are dogs trained to retrieve birds, and which are compared to brokers that seek
out potential customers.
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TrueCar: Transforming the Car Buying Experience E-527
p. 5
The dealer industry is one of the most highly regulated environments that you can
operate. Each of the 50 states has its own regulatory scheme. The franchise laws
that govern who can sell a car and how are as old as the Model T almost. They are
franchise laws that were designed to protect—and rightly so—the capital
investment that is made by dealers who take millions of dollars and pour them
into brick and mortar dealerships with inventory, et cetera.
The regulatory frameworks under which dealers operated were closely guarded by state dealer
associations, which actively lobbied to protect dealers’ interests. For example, in 2012 the
Massachusetts State Automobile Dealers Association brought a lawsuit against Tesla Motors, the
maker of electric cars. Though Tesla had never had franchised dealerships, the dealer industry
nevertheless protested Tesla’s factory-owned showrooms where consumers could place orders
for Tesla cars directly. 8
Dealer Business Model
Franchised dealerships typically had several streams of revenue, one of which was selling new
cars. Dealers’ gross margins on new cars were approximately five percent, or approximately
$1,500 on an average new car with a retail value of $30,000. The price that dealers paid
manufacturers for inventory was called the invoice price. However, the invoice price did not
necessarily represent dealers’ cost of goods as manufacturers typically offered dealers additional
incentives based on hitting monthly volume goals. As a result, a car that was sold at the
beginning of the month at an unprofitably low price could turn into a profitable transaction by
the end of the month as a result of the dealer unlocking certain incentives. Dealers adjusted
pricing throughout the month depending on where they were relative to volume targets, leading
to pricing uncertainty for consumers, as well as inefficiencies at the dealerships.
There were four major cost centers in the operations of a franchise dealership. First, dealers paid
approximately $600 in customer acquisition costs for each vehicle sold, an amount that totaled to
over $10 billion annually across the industry. Second, dealers paid sales people a commission,
with commission structures varying from dealer to dealer. Third, dealers also paid for the
carrying cost of inventory. Finally, dealers also incurred real estate, and other administrative and
operating expenses.
In addition to selling new cars, however, dealers also earned margin from financing,
maintenance, and trade-ins. Selling a loan for a new car to buyers earned dealers a few hundred
dollars per loan with extremely high gross margins as they simply marked up loans offered by
various lenders. The maintenance revenue stream expected from servicing the car was estimated
to be approximately 50 percent gross margin. Finally, dealers could also earn margin from
reselling used cars traded in by buyers.
Consumer Experience
Prior to the Internet, prospective buyers had little visibility into what the fair price of a car should
be. Salespeople also tended to maximize the profit from each individual customer, rather than
8 Ibid.
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TrueCar: Transforming the Car Buying Experience E-527
p. 6
across all customers the dealership might serve. This mentality sometimes led salespeople to
treat customers aggressively. As a result, car salespeople had an unsavory reputation with
consumers. In a Gallup survey, consumers ranked car salespeople below most other major
professions in terms of honesty and ethical standards (only members of the U.S. Congress had a
worse reputation). 9 Stephenson commented:
One of the most daunting things that anybody does in their life is go and buy a
car. I mean you can take the most educated people in the world and before they
had access to all that information, you went in and you felt like you were at the
mercy of the dealer.
Although a base model price might be available, the many different features, trims, and packages
that could be added onto a car made it difficult for consumers to know what was a good price,
and how much margin the dealer was earning. TrueCar’s data showed that on a typical mid-
range new car sold in the U.S., there was spread of up to 28 percent between the prices paid by
different buyers for the same model of car (see Exhibit 3). Guthrie commented:
There is large distribution of the different prices paid by buyers for the same
model of a new car, within the same month, at the same dealer. With most other
appliances, just because you come into the store on a Thursday or right at the end
of the quarter or whatever, it doesn’t mean you’re going to pay a different price
for that appliance. But you do it for a car and the difference could be thousands
and thousands of dollars, and hours of your time and this creates an awful, awful
retail experience.
TRUECAR 1.0 10
After leaving CarsDirect, Painter still believed there was a long way to go in improving the car
buying experience, and he considered it his “unfinished business.” Painter was particularly
interested in the idea of upfront pricing, where consumers could walk into a dealership already
guaranteed the price for a car they were interested in and complete the purchase quickly without
haggling.
In the meantime, prices for Internet leads in the automotive industry had been driven down as the
industry became commoditized. As the population of Internet users increased, visitors to sites
such as CarsDirect.com became less valuable as they were less likely to convert. Painter saw the
opportunity for a more accountable marketing service where dealers only paid for leads that
resulted in transactions.
Additionally, many dealers were seeking to establish their own brands online. However, Painter
believed that it would be difficult for them to do so because of their poor reputations. Painter
9 Frank Newport, “Congress Retains Low Honesty Rating”, GALLUP Politics, December 3, 2012,
http://www.gallup.com/poll/159035/congress-retains-low-honesty-rating.aspx (September 5, 2014). 10
Initially, the concept for TrueCar was divided between two companies, both started by Painter. Zag.com pursued
affinity partnerships and the dealer network, while TrueCar was a pricing data and analytics company. The two
companies were later combined and rebranded under TrueCar.
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TrueCar: Transforming the Car Buying Experience E-527
p. 7
believed that it was more feasible for a third party to build a brand around pricing data and
giving consumers confidence that they would not be overpaying at the dealership.
In 2004, Painter began to work on a concept that would refer buyers with high intent to purchase
to dealerships under a pay-per-action model. TrueCar provided prospective buyers with a price
report detailing what others had paid for a car model and a “Guaranteed Savings Certificate,”
which gave an upfront price that would be honored at TrueCar network dealer. Dealers paid
TrueCar a fee of $300 if a purchase was completed.
Although Painter was interested in offering TrueCar’s services directly to consumers, he needed
to establish a base of demand with which to attract dealers into the network. Painter targeted
affinity organizations such as USAA 11
and AAA, 12
pitching TrueCar as a white label 13
car-
buying program for their members. By partnering with these organizations, TrueCar could gain
access to large amounts of consumer traffic. In exchange, TrueCar shared part of its fee with
affinity partners, approximately 25 percent or $75 per car sold.
The Data
TrueCar used multiple sources of data to produce its price reports, which provided detailed
information to consumers on prices for new cars by model, date of purchase, and zip code. The
information was granular to the model, year, and trim, whether the buyer had traded in an old
car, and other details. To generate this data, TrueCar extracted information from the long paper
trail generated by each new car purchase, including records from purchasing, financing, leasing,
registering, and paying tax on new vehicles. TrueCar acquired aggregated data from different
sources, including DMS (Dealer Management Software) providers. Painter stated in an
interview, “In the same way that you can go to Zillow and find what other people paid for a
home, you can find what other people paid for a car.” 14
Additionally, TrueCar was not reliant on
any single source of data, but rather used multiple snapshots of the same transaction to generate
statistically significant pricing information. Guthrie commented:
You can break any car down to the base model and build it back up by its pieces.
For example, if you have the visibility to every Toyota Corolla transaction, you
can strip every Corolla down to the base and price that. It used to be a pitfall for
consumers when they moved from car to car or from trim to trim, because the
dealer could hide things and make it look more or less transparent. TrueCar
breaks everything down so no matter what you’re searching for and how you fit it
out, we can calculate the price because we start with massive amounts of data on
base-level pricing and then we know what the increments are.
11
The United Services Automobile Association offers offering banking, investing, and insurance to people and
families that serve, or served, in the United States military. 12
The American Automobile Association is a federation of motor clubs throughout North America. 13
A white-label product or service is produced by one company (the producer) and sold to another company (the
marketer). The marketer rebrands the product to make it appear as if they made it. 14
“A Discussion about data with Scott Painter, Founder & CEO of TrueCar, Inc.,” TrueCar blog, December 2011,
http://blog.truecar.com/2011/12/12/an-open-letter-to-the-automotive-industry-from-scott-painter-founder-ceo-of-
truecar-inc/ (August 3, 2014).
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TrueCar: Transforming the Car Buying Experience E-527
p. 8
Although it was not reliant on access to dealers’ DMS for pricing information, TrueCar required
it from dealers who joined the network. With access to the DMS, TrueCar could track which
prospective buyers using TrueCar completed a purchase, allowing the company to bill the dealer
for its $300 fee.
Coverage
Because buyers could take the TrueCar Guaranteed Savings Certificate to a non-network dealer
and likely have that price honored, it was important to TrueCar’s model that its network covered
a sufficient number of dealers in each geographic area.
Value Proposition to Dealers
TrueCar believed that participation in its network could increase dealers’ revenues, and bring
greater efficiency to its major cost centers. TrueCar believed that the promise of an upfront price
coupled with good customer service would help its network dealers take market share from non-
network dealers. Additionally, TrueCar’s research showed that when consumers had a good
experience purchasing their vehicle, there was a higher attachment rate of value-added services,
which created more revenue opportunities for dealers.
TrueCar also increased dealers’ efficiency. First, TrueCar charged dealers a fee of $300 per
transaction completed, approximately half of the dealer customer acquisition cost using
traditional advertising channels (see Exhibit 4). Second, approximately one of four TrueCar
users that contacted a dealer through the site purchased a car, a much higher conversion rate than
the status quo, helping make salespeople more efficient. Third, if dealers sold cars at a higher
pace as part of TrueCar’s network, they experienced higher inventory turns, lowering their
inventory carrying costs. Finally, by selling at higher volumes, dealers were rewarded by
manufacturers with increases in allocation of cars and incentives.
Some participating dealers initially pushed back on paying TrueCar its fee because they felt that
sales to customers bearing Guaranteed Savings Certificates could not necessarily be attributed to
TrueCar’s platform. They argued that buyers brought in by TrueCar were not incremental to the
audience reached by their existing traditional media campaigns. Guthrie explained:
For every single car, dealers are spending $600 to $1,000 to market that car for
sale. If you compare that to $299 charged by TrueCar in a completely accountable
manner—you pay only when you sell a car, we are by an incredible margin the
most efficient, effective marketing channel. But when a dealer comes on our
network on day one, we’re an increment to what they’re already spending.
Because they’re not going to take down the billboards, go off the radio, go off
local television. For a moment in time, we’re an incremental expense. But over
time, as more of any given dealer’s volume are accounted for through TrueCar,
they should decrease their marketing expense on the other less accountable
channels.
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TrueCar: Transforming the Car Buying Experience E-527
p. 9
Early Success
Painter found early success with TrueCar’s model. In 2006, TrueCar became the white label car-
buying service for credit card issuer Capital One. In 2007, USAA, which had greater than 5
million members, also became a partner. By the end of 2010, the company had more than 40
partnerships under its belt and the rate of new partner additions was accelerating
The number of dealerships within the TrueCar network also steadily increased, reaching 4,344
by the end of 2010. Access to dealer data steadily improved TrueCar’s ability to provide
consumers not only with a guaranteed upfront price but also with the distribution of prices in
their geography to prove that the upfront price was a good one.
In 2010, TrueCar booked $38.1 million of revenue (nearly double the prior year’s sales), which
was comprised almost entirely of fees earned from its white-label programs. The company’s
non-GAAP 15
EBITDA 16
was $1.7 million.
In 2010, Painter began to run small tests of the TrueCar brand, advertising it to consumers. Now
that the company had a sizable dealer network, Painter believed he was ready to scale the model.
In 2011, Painter raised approximately $50 million of additional equity financing, with the
intention of advertising TrueCar nationally. Through the first three quarters of 2011, the
company performed as expected, with revenue doubling over the same period in 2010.
In August 2011, TrueCar acquired ALG, a subsidiary of DMS provider DealerTrack. ALG was
a 45-employee company focused on the science of calculating residual values of cars. Residual
values were important in the use of estimating lease rates and trade-in values. TrueCar
purchased ALG in order to enhance its data capabilities in the used car space.
THE SWIRL
As TrueCar began to advertise, the marketing message to consumers was “get the lowest price.”
Dealers bid prices down in an effort to capture consumers, driving prices below sustainable
levels. Dealers’ perceived TrueCar as a strong threat to their profits. As a result, they sought
protection from regulators, and one-third of dealers left the TrueCar network over a 75-day
period. The dealers’ en masse desertion of the network led to a downward spiral of the business
that the management team referred to as “the swirl.”
In particular, the company’s product allowed dealers to view what prices their peers in the same
market were offering to consumers. TrueCar had believed that such transparency would create
an incentive for dealers to offer competitive prices. However, dealers’ response to this feature
took an unexpected turn after TrueCar initiated national advertising. Previously, when TrueCar
only reached a small number of consumers through its affinity programs, dealers adjusted their
prices on TrueCar periodically (about once a month). However, with more consumers on the
TrueCar platform, dealers began to adjust their prices frequently in response to other dealers’
15
Generally accepted accounting principles. 16
Earnings before interest, tax, depreciation, and amortization.
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TrueCar: Transforming the Car Buying Experience E-527
p. 10
prices. They were competing much more aggressively than before, to the point of bidding
unprofitably low prices. Stephenson explained:
Part of the TrueCar product was to show every TrueCar certified dealer everyone
else’s pricing. What we didn’t know was that this would lead to a race to the
bottom. At some point, you’re not talking about a market-clearing price, you’re
just talking about going straight to the bottom and one of the things that the
company didn’t appreciate because it’s counterintuitive is that car dealers are like
lemmings. They will follow each other right off the cliff because they will always
try to beat each other’s prices. So by giving the dealers transparency, they were
killing each other. But we gave them the button.
One dealer wrote on his website:
I know that a lot of dealers are using Zag.com [TrueCar] because they are sold on
the fact that they never pay for a lead and only pay $300 for when the car gets
sold…Let's face it, Scott Painter (CEO of TrueCar) has never worked in a
dealership or experienced the pain that we all had selling cars and dealing with
struggles. He actually has been quoted saying that he envisions this industry
eliminating sales people with this process. Here is a man that is out to give
consumers transparency while hurting out business. I believe in being fair,
honest, and showing transparency. I do not believe in auto dealers getting hurt to
do it… As the saying goes, "there is no such thing as a free lunch". If you are
using Zag because you like that the leads are free and you only pay for the lead
when the car gets sold you need to consider the damage that you are doing by
losing money on these deals and letting Zag use your data to make you look bad
in front of your customers as well as create more tension between competing
dealers. Let's put an end to this madness. I propose that whoever is using
Zag/TrueCar stop using them and pass that on to everyone including your
competitors. 17
Dealers left TrueCar’s network in protest of its practices. Several large dealer groups, including
Penske Automotive (150 dealers) 18
and Group 1 Automotive (108 dealers) ordered their
dealerships to stop doing business with TrueCar and to stop providing TrueCar with access to its
DMS data. 19
State dealer associations complained to regulators that TrueCar was violating laws
that govern the advertising and brokering of new auto sales, triggering regulators from several
states, including Colorado, Virginia, Louisiana, and California to launch investigations into the
company. Some TrueCar users also complained that dealers were engaging in bait and switch
17
Stan Sher, “The Reality of TrueCar/Zag.com,” DealerElite, December 1, 2011,
http://www.dealerelite.net/profiles/blogs/the-reality-of-zag-com-truecar (August 1, 2014). 18
Doron Levin, “TrueCar is running into roadblocks,” January 18, 2012, http://fortune.com/2012/01/18/truecar-is-
running-into-roadblocks/ (August 2, 2014). 19
Lindsey Auguste and Dennis Galbraith, “BREAKING NEWS: Group 1 Automotive Drops TrueCar,”
DrivingSales, December 14, 2011, http://www.drivingsales.com/blogs/InvestigativeReporting/2011/12/14/breaking-
news-group-1-automotive-drops-truecar (August 1, 2014).
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TrueCar: Transforming the Car Buying Experience E-527
p. 11
practices, and did not actually have in stock vehicles for which they had provided consumers
with upfront prices.
Manufacturers also became nervous that as transaction prices declined through dealer
competition, Manufacturer Suggested Retail Prices (MSRP) would also need to decline. Honda
Motor Company stated it would withdraw support from dealers that advertised below invoice
prices of its cars.
In some states, TrueCar stopped advertising its services in response to the investigations. In
other states, as dealers left the network, TrueCar was left with coverage gaps in many areas,
threatening its monetization strategy. Stephenson explained:
At that point, even if consumers wanted to use TrueCar, we didn’t have the
footprint to cover their transactions. For example, if a user found a Guaranteed
Savings Certificate from a TrueCar dealer that’s 50 miles from his or her location,
and there are 10 non-network dealers within those 50 miles, he or she could stop
at every one of them and say “here is my guaranteed savings certificate, I’m going
to keep driving until somebody honors this.” And one of those non-network
dealers will honor it in all likelihood and we wouldn’t get paid. Our business
model depends on sufficient coverage.
TrueCar’s revenue plummeted from $26.4 million in Q4 2011 to $20.5 million in Q1 2012 and
$17.6 million in Q2 2012, tracking the decline in dealerships (see Exhibit 5).
Investors, who had gotten wind of the downturn, were calling on Guthrie to provide revised
projections of 2012 revenue growth. One investor stated to Guthrie that “he could live with 50
percent growth” for 2012, to which Guthrie replied, “Respectfully, don’t ask me for a revenue
number again until I tell you we’re ready because all I’m focused on is the cost structure…we
need to look at our payroll, the rent, just everything that keeps the lights on.” Not only would the
company likely not grow given the state of the dealer network, Guthrie was certain that his focus
now needed to be aggressively cutting the company’s expenses and increasing operating
efficiency. With the company’s burn rate at $15 million per month, the $40 million in the bank
would last the company no more than three months.
Meanwhile, Painter’s instinct had initially been to push back on the concerns that dealers’
brought up. He believed deeply in transparency and data and had spent his career trying to bring
them to the auto industry. Excerpts from an open letter he wrote to the automotive industry in
December 2011 read:
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. We would like to make our position
clear…
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p. 12
Is TrueCar good for all dealers? There will always be those that resist change. To
our dealer partners, we applaud your understanding that truth, transparency, and
customer service is at the center of success in our changing market. And, to those
that still have questions, we invite an open dialogue. One of the great virtues of
transparency is that we have nothing to hide. 20
Yet, his messages did not appear to be getting across to the dealers. No matter how many times
he tried to explain what TrueCar was doing or the importance of transparency, the dealers
remained angry and suspicious. It was not until one of his own management team members,
Chief Operating Officer Stewart Easterby, pulled him aside that he realized that he needed to
look within himself for the solution. Easterby said to Painter:
Look Scott, your body of work, your career over the last 20 years—that’s the
problem. It’s impossible for the people on the front lines to defend at the
moment.
WHO IS OUR CUSTOMER?
Easterby’s comments triggered Painter and the management team to reflect on how TrueCar had
arrived at the swirl, why dealers had reacted so negatively, and what would be the identity of the
company going forward. For Painter, the swirl was an “emotional rollercoaster” for him, during
which he lost 40 pounds. He had spent nearly his entire two-decade career in business fighting
for greater transparency in buying cars, and to be brought down when success was so close was
painful. That it was his personality and “body of work” that shaped the company’s attitude
towards dealers—a large factor in the company’s downfall—was a profound realization. Painter
reflected:
I think if companies are a reflection of leadership, then I was arrogant and the
company was arrogant and we were gloating and that added to dealers’ desire to
set us back in our place. Literally we were at the height of arrogance and Gatsby-
esque euphoria. The feeling in Q3 2011 was this is it, the American Dream, and
it’s going to happen right now. Whether the industry technically should have
been able to resist in the way that they did, they did it.
Stephenson added:
The mission statement of the company from the earliest time was about bringing
transparency to this opaque industry and empowering consumers to get better
deals more efficiently and to have a better car buying experience. The company
was born by zealots and that’s how TrueCar charged off into the market. It had
lost the fundamental grounding principle of who is our customer? Obviously our
customers are the dealers, so the dealer network and the franchise system are
20
Scott Painter, “An Open Letter to the Automotive Industry from Scott Painter, Founder & CEO of TrueCar, Inc.,”
December 12, 2011, http://blog.truecar.com/2011/12/12/an-open-letter-to-the-automotive-industry-from-scott-
painter-founder-ceo-of-truecar-inc/ (August 7, 2014).
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TrueCar: Transforming the Car Buying Experience E-527
p. 13
something that we operate in and must. You have to swallow your arrogance and
remember you're a for-profit business and if you aren’t tending to your customers,
you won’t be in that business anymore.
Although TrueCar had designed its product with a dealer value proposition in mind—be the
lowest cost customer acquisition channel and the only accountable channel, it had focused on
messaging the consumer value proposition. What the dealers saw were TrueCar advertisements
and messages that emphasized transparency (and implied the lack thereof from the dealer
industry). However the company began to recognize that truth and transparency, and
transformation must be profitable for its customers and that it could not trash the dealership
ecosystem if its business model depended on it.
The Listening Tour
Painter set out on a national tour to meet with dealers, an experience that he likened to eating
humble pie. A consummate salesmen and fundraiser accustomed to doing most of the talking in
business meetings, Painter took on the role of listener during this tour, focusing on hearing the
frustrations of dealers’ rather than on selling his vision. On a recorded interview with Autoline,
a dealer industry news source, Painter’s tone was notably more humble than a few months
before. He stated, “That TrueCar became known for the lowest price at any cost is a
mismanagement of our brand that I’m responsible for,” and also emphasized that TrueCar
intended to be a “citizen of the ecosystem.” 21
TrueCar’s product and messaging had been
focused on being the consumer’s hero and making pricing data available to the public, but
Painter pledged that transparency would henceforth be used in a balanced way to benefit both
consumers and dealers and that the company’s agenda would be more inclusive of the dealer
industry.
In addition to apologizing to dealers, forming relationships with the dealer industry, and pledging
to have a more balanced product, TrueCar also formed a National Dealer Council that would be
the voice of its customers. The dealer council helped review TrueCar advertisements to ensure
that they portrayed dealers in a positive light and also helped the company with redesigning
several aspects of its product. The messaging also focused on “never overpay” and better
experience and services provided by TrueCar dealers, rather than just data and “lowest price.”
Painter was able to preserve two key parts of the product—showing consumers what others had
paid for the same model of car, and up-front pricing. However, the company removed the ability
for dealers to see each other’s prices, the feature responsible for starting a race to the bottom.
Once dealers could no longer see who was offering the lowest price and if they were the lowest
price, they began to price rationally.
Stephenson summarized Painter and TrueCar’s learnings from the swirl:
21
“TrueCar.com CEO Scott Painter on Autoline,” November 13, 2012,
https://www.youtube.com/watch?v=3ZFxtILQsJY (August 3, 2014).
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p. 14
It wasn’t enough to just be right, it wasn’t enough to have the most transformative
idea. To win, it was not going to be enough to be the smartest guy with the best
idea in the biggest category, you also needed to have a broader understanding.
Housekeeping
In the run up to 4Q 2011, the company had proven its business model but was vulnerable from a
regulatory perspective. Stephenson commented:
All of a sudden, there’s all this publicity that wasn’t present before. We were
suddenly on the radar screen for all the dealer associations and all of the dealers
who aren’t on TrueCar. It was like the company calling mortar fire in on its own
position—we had not readied ourselves, not girded ourselves for all of this
notoriety. And so the critics came in and they had things that they could criticize
because the company had not really shored itself up from a regulatory standpoint.
A first step that TrueCar took was to invest in compliance with franchise laws and develop a
compliance strategy. With the company running out of cash, there was no time to attempt to
change the laws themselves. Instead, the company voluntarily suspended its program in four
states and ended up-front pricing in nearly all others. Stephenson worked on operationalizing
compliance and educating regulators and dealers on the company’s business model.
Although cash was a precious resource, the company spent upwards of $1 million a month on a
team to analyze the franchise laws and learn how to navigate them. In some cases, the solution
was as simple as ensuring that the company’s advertisements were printed in the font size
required by law. In other cases, changes were substantial and required re-engineering of the
company’s product site flow, and billing model. For example, in states where franchise laws
prohibited bird-dogging, TrueCar discontinued its pay-per-transaction model because of the risk
that it could be perceived as brokering. Instead, the company switched to a subscription based
model, where dealers paid a monthly subscription fee to participate in the TrueCar network.
The company also began to educate dealer associations and regulators about its business model,
especially on the point that the company was not a broker but an information and communication
platform between consumers and dealers. Stephenson explained:
One of my mantras was “thou shalt not ‘verb’.” We don’t facilitate, negotiate,
arrange. We don’t do anything. We can’t “verb.” We are, but we can’t do. So we
are a communication platform between our dealers and our users. When they
transact businesses together, we get paid. But we don’t do anything because if you
do anything, you're a broker.
By the summer of 2012, the company had developed a robust compliance strategy. It also
amassed significant intellectual property regarding state franchise law and became the only
company in the industry with this competitive advantage.
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p. 15
Meanwhile, Guthrie and his team were working to conserve the company’s cash. Some board
members had suggested the possibility of filing for bankruptcy but Guthrie believed that there
was a possible plan of cutting the company’s expenses heavily while also raising bridge
financing on the strength of the business model. TrueCar, which had been in growth mode,
fortunately had many expenses that were not essential to the core business, including certain
partnerships and consulting expenses. Guthrie’s team spent the much of early 2012 trimming
this fat from the company, turning it into a much more efficient operation.
The new subscription based models in some states added challenges to TrueCar’s financial
situation. The company had gone from earning a flat $300 per transaction to a variable amount
per transaction in the subscription states depending on how many cars the dealer actually sold.
Initially, this amount varied dramatically, ranging from $120 per transaction to $400. Having a
predictable revenue-per-transaction metric was key to both managing cash during the swirl but
also to the company’s business mode long term. To this end, TrueCar used its analytical
horsepower to design a subscription product that would monetize in a predictable way.
TrueCar’s efforts were so successful that revenue per transaction under the subscription models
sometimes matched or exceeded the transaction based model.
LOOKING FORWARD
Dealers began to rejoin the network as Painter extended his olive branch to make peace and as
the company was able to put compliance questions to bed. By the end of 2012, TrueCar’s dealer
network had recovered to 5,306, roughly the same size as before the swirl. The company had
resumed business in all states.
With better articulation of the dealer value proposition, the company was able to resume its
growth trajectory. Many dealers that had left missed the incremental revenue that TrueCar
brought them, and many rejoined the network after a few months of hiatus. The company’s
dealer network reached 7,210 by the end of Q1 2014, or approximately 23 percent of the U.S.
franchised dealers. TrueCar estimated that users of its platform accounted for approximately 15
percent of total transactions for its network dealers, and approximately 3 percent of total new car
sales nationally.
The company was also operating more efficiently as well. In addition to the franchise dealer
count, the penetration within individual dealers was increasing—the company’s transactional
revenue per dealer increased from $4,424 in Q1 2012 to $5,547 in Q1 2014. TrueCar’s own
marketing efforts had also become more robust. Transactional revenue per unique visitor, a key
operating metric for the company, increased from $2.89 to $3.39 in the same period.
In May of 2014, with the success of the last eighteen months under its belt, TrueCar raised
approximately $70 million in an initial public offering (IPO), with an implied company valuation
of $639 million. 22
The company’s stock began trading on the Nasdaq stock market under the
ticker symbol TRUE.
22
Ben Geier, “TrueCar raises $70 million in initial public offering”, Fortune, May 16, 2014,
http://fortune.com/2014/05/16/truecar-raises-70-million-in-initial-public-offering/ (September 4, 2014).
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p. 16
The company’s models projected that an optimally sized dealer network would be
approximately11,500 in size. At this size, the network would offer sufficient coverage such that
consumers would have a high probability of having a TrueCar network dealer for all major
brands near them, allowing TrueCar to effectively monetize transactions. It was also the balance
point between having too few dealers and too many dealers—not every dealer could be on the
TrueCar network in order to preserve the marketing advantages of being part of the network.
With the company adding approximately 100 dealers per month, it would only be a few years
before TrueCar reached the optimal sized network. The company was already looking ahead at
new opportunities for growth.
Used Cars
Two times as many used cars as new cars were transacted every year in the U.S., creating a large
adjacent opportunity for TrueCar. Though known for its new car experience, as of August 2014,
approximately 20 percent of TrueCar’s transactions were purchases of used cars, with the
company earning $399 per transaction.
TrueCar viewed the used car market not only as a source of growth but also as a synergy with its
new car business. Approximately 3 percent of unique visitors to TrueCar’s website visited a
dealership with their Guaranteed Savings Certificates, and approximately one-third of those
prospective buyers purchased a car. TrueCar believed that the vast majority of visitors to its site
were interested in buying a new car but were up to six months away from being ready to make
the decision. One reason for the long time frame was many consumers needed to sell their old
cars before buying a new one. While trading-in the used car at the dealership was an option,
consumers generally believed dealers would not offer a fair price. While they could also list
their used car on marketplaces such as Craigslist, called a private party sale, these were also
cumbersome and time-consuming processes.
With the residual value capabilities gained from the ALG acquisition, TrueCar’s vision was to
calculate an estimated value for any used car at any time, a price that network dealers would
honor. By creating transparent pricing for used cars and a more convenient process, TrueCar
believed that more users would trade-in their used cars to purchase new cars.
A Holistic View of The Car Experience
To Painter, TrueCar’s achievements by 2014 were only a small part of his vision for the
American consumer’s car experience. Painter envisioned TrueCar as a company that would
provide transparency, upfront pricing, and convenience to not just new and used car sales, but all
of the services that a driver needed in his lifetime, including insurance, finance, trade-ins,
accessories, etc. Painter commented:
Right now, the promise of the TrueCar brand is awesome, but we are still leaving
drivers to do a lot of the work. If you think about it in the terms of great
companies solve real problems, I think the problem of buying a car and not just
buying it but selling the one you have, buying the one you want, owning it the
way you want to own it, accessorizing it, getting peace of mind, paying for it,
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TrueCar: Transforming the Car Buying Experience E-527
p. 17
insuring it – all the things that go along with it that add up to five percent of GDP,
making it one of the largest and most inefficient industries in America today.
The future of car buying should be menu-driven, it should be about the features,
the product, the functionality of the car and the brand that you aspire to be a part
of. I think the negotiation around what’s the car going to cost, how do you insure
it, how do you finance it, I think those are all conversations that still have a lot of
information asymmetry between consumers and dealers. Some people get a really
good deal and others don’t and it’s based on how you can either resist a salesman
or how well a salesman is able to do their job. You’re dealing with an appliance
that people have fungible choices on where they buy it and then you add
transparency. The idea that you overpay for something becomes ridiculous at
some point. Transparency is here and it’s not going away. The issue is where are
we going to find that sustainable inflection point where retail can actually make a
living and consumers can feel good?
Painter and his management team were excited about the opportunities in front of TrueCar. With
the rapid recovery of the dealer network and the company’s IPO, it seemed as if the swirl was
behind them. But they were mindful of risks to the company as well.
For Painter, his biggest concern was the speed with which he could execute the balance of his
vision for TrueCar. How quickly could the company develop products around financing and
leasing? How quickly could it grow its used car business and how strong was its competitive
advantage in that area? Recently, several start-ups had created new models around used car
sales, and though none had scaled, Painter was aware that others were trying to disrupt the space
as well. For Stephenson, his worry was about ensuring the company stayed compliant with
franchise laws. The company had cleared its record in the aftermath of the swirl, but could they
be open to new attacks?
Guthrie wondered how long the continuing economic expansion would last. The June 2014
annualized rate of new car sales reached 17 million, nearing the last peak of 18.5 million in 2005.
In 2009, during the Great Recession, new sales slowed to just 10.5 million annualized units.
Guthrie wondered when the next downturn would occur and how well TrueCar would be able to
withstand its impact. Finally, how would the sharing economy impact TrueCar? Companies
such as Uber, Lyft, and ZipCar through which customers borrowed cars, or were picked up by
others driving cars, had made it possible for many consumers to not own cars. Was this trend a
threat or could TrueCar take advantage of it somehow?
As the management team assessed TrueCar’s progress, opportunities, and risks, they were
optimistic for the company’s future, but aware of how quickly things could change.
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p. 18
Exhibit 1
Open Letter To The Automotive Industry December 12, 2011
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. We would like to make our
position clear.
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.
At TrueCar, we believe that upfront price is at the core of a good buying experience for dealer
and consumer. Informed consumers buy more confidently and are more satisfied. At TrueCar, we
publish the most accurate reflection of the retail market that has ever been available. The goal is
to establish an objective, credible and transparent baseline for fairness—both for the customer
and the dealer. That being said, TrueCar does not set this market. Our dealer partners set their
own prices 100% of the time.
Dealers earn their business every day and we believe that their marketing programs should too.
TrueCar is the only fully accountable source of new business where our dealer partners only pay
when they sell a car. Gone are the days when dealers have to assume all of the marketing risk
and pay for advertising and for leads as a primary way to secure new customers.
TrueCar requires DMS integration for tracking of this accountable model, the core of what
makes us unique. We use DMS feeds from our dealer partners for tracking and optimization of
introductions made to the dealership. We don’t use our dealer partners’ information to populate
the TrueCar pricing curve. That information comes from entirely separate sources of anonymized
data that represent nearly 90% of all vehicle transactions in the U.S.
At TrueCar, data integrity, security and privacy are job #1. Our policies, systems and technology
have passed the scrutiny of partners like USAA, Consumer Reports, American Express, AAA
and many others. TrueCar has never, and will never, sell or repurpose DMS data for any reason.
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p. 19
Exhibit 1 (continued)
Open Letter To The Automotive Industry December 12, 2011
In spite of all this, we recognize that change is threatening for some. Ours will always be a high-
touch industry. The service of our dealer partners and highly-trained sales professionals becomes
increasingly important the more consumers know. At TrueCar, our commitment is to relieve
those professionals from needing to resort to high-pressure sales tactics or misdirection. These
tactics have been an albatross for our industry and they are at the heart of why consumers have
become generally mistrustful of the car shopping experience in the first place.
Is TrueCar good for all dealers? There will always be those that resist change. To our dealer
partners, we applaud your understanding that truth, transparency, and customer service is at the
center of success in our changing market. And, to those that still have questions, we invite an
open dialogue. One of the great virtues of transparency is that we have nothing to hide.
Scott Painter
FOUNDER, CEO
Source: TrueCar, reproduced by permission.
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p. 20
Exhibit 2
U.S. Annual Rate of New Light Vehicle Sales 23
June 1976 to June 2014
(millions)
Source: Bureau of Economic Analysis (BEA).
23
Seasonally adjusted.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1976 1981 1986 1991 1996 2001 2006 2011
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TrueCar: Transforming the Car Buying Experience E-527
p. 21
Exhibit 3
Distribution of Price Paid by Consumers for Average New Car
Source: TrueCar, reproduced by permission.
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p. 22
Exhibit 4
Dealer Value Proposition and Market Opportunity
Source: TrueCar, reproduced by permission.
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p. 23
Exhibit 5
Select TrueCar Financial and Operating Metrics 2011 to 2014
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1
Transactional
Revenue
(thousands)
$13,846 $16,143 $18,251 $22,983 $16,521 $13,402 $16,848 $17,932 $21,523 $27,436 $33,538 $36,216 $39,992
Units 46,795 53,502 59,808 79,364 59,455 48,413 54,228 60,587 72,871 96,614 116,503 113,931 125,980
Unique Monthly
Visitors
(thousands)
925 916 1,109 2,341 1,905 1,465 1,541 1,727 2,185 2,441 3,201 3,296 3,936
Dealer Count 4,835 5,129 5,310 4,916 3,734 4,322 4,735 5,306 5,881 6,176 6,327 6,651 7,210
Revenue/Unit $296 $302 $305 $290 $278 $277 $311 $296 $295 $284 $288 $318 $317
Revenue/Dealer $2,864 $3,147 $3,437 $4,675 $4,424 $3,101 $3,558 $3,380 $3,660 $4,442 $5,301 $5,445 $5,547
Revenue/Unique
Visitor $4.99 $5.87 $5.49 $3.27 $2.89 $3.05 $3.64 $3.46 $3.28 $3.75 $3.49 $3.66 $3.39
Source: TrueCar.
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