Dealers & Cars Both Commodities

Used cars and the dealers that sell them are commodities to the customer. Buyers search through thousands of cars trying to narrow their choices down to just a few cars, essentially ignoring the car seller. This isn’t to say that some customers don’t automatically go to a franchised dealership for better service, but most shoppers narrow down on the cars and ignore the dealership.

Adding in a service component to a customer’s decision is difficult. I know that Edmund’s has a review site for dealers, but I have trouble seeing it catch on. Several review sites, like Yelp.com, have become successful, but they have an engaged audience that can constantly come back and write reviews. Most people buy cars once every 5-7 years, not frequently enough to drive serious engagement.

How would customer and dealer interactions change if customers could search for dealerships by service/feedback ratings instead of just cars? What if, and I know this is slightly crazy talk, any dealer could sell any car, and customers made purchase decisions based off service?

Cars would become even more commodity-like, and greater emphasis would be placed upon the dealership’s service and the dealership’s ability to put a deal together.

Selling Cars Like Radiohead

I downloaded In Rainbows yesterday, and paid 5 pounds. I forgot how much the dollar had declined, so I thought I was paying around $7 or $8, instead of $10. Radiohead is one of my favorite bands, and I would have bought the album regardless, but it made me wonder how people value buying decisions.

I’ve read several behavioral economic studies that shows sellers of an item value it more than the potential buyer, no big surprise. Just for fun though, if a dealer asked a customer to suggest a “profit” amount on a car buying decision, I wonder what the customer might say. Each person may pay the exact amount they are comfortable paying.

While I think consumers tend to undervalue provided by dealers, as well as underestimate the costs, it may be worthwhile to try once.

Collateralized Car Obligations

The credit crunch was triggered by issues in Collateralized Loan Obligations (CLOs). Mortgage companies would package together a bunch of mortgages, slice them into different risk profiles (tranches) and resell the new securities to different companies looking for a certain return.

It should be possible to do something similar for remarketing, but hopefully without the negatives! Large consignors have hundreds of thousands of cars to sell a year. I’m sure they have statistics on the expected condition of their cars at the end of their fleet life (when the consignor decides to resell). The could segment cars based on condition, mileage, options, expected wholesale price, and underlying volatility for the dealer depending on make and model.

Dealers could purchase a given quantity of cars from a ‘tranche’ at a present date for delivery in the future. This is really a future/forward, but I thought CCO was a better acronym. The CCOs benefits both dealers and consignors.

Consignors can avoid the uncertainty of selling a car at auction, having a portfolio to manage, holding costs and, potentially, reconditioning costs. Instead of making decisions about where to sell the car, it is already sold.

Dealers can guarantee a constant flow of cars at a good price, depending upon the CCO discount. The discount should come from the time value of money, recondition risk of the car, and cost savings enjoyed by the consignor.

These CCOs could potentially be used to hedge car risk, as suggested in Fleet-ing Thoughts.

One Price And Efficient Market

Before launching Evenlevel.com I did a decent amount of research on price differences between wholesale and retail markets. On average, I found MMR to be about $4,000 less than the average listed retail price on Autotrader.com. That was a pretty big difference, and the price difference showed me we had a good market opportunity.

The price difference occurred because of friction in the marketplace, friction that existed because of legislation. Legislation isn’t the only source of friction in the used car market.

Geography and distance also create pricing disparities. If the retail used car market were efficient used car prices would differ only by an average cost of shipping. Instead median car prices can vary by thousands of dollars. Given how much consumers focus on price as a primary selling point, why do price differences persist?

I have a couple thoughts but I am curious to hear what others think, let me know.

eBay Making Itself Vulnerable

While trying to raise funding for Evenlevel one of the most common points of feedback we heard was, “How is this different from eBay Motors?”. From an outside perspective, that is a logical question. After all, Evenlevel was selling low priced cars, as is/was eBay Motors. However, I think eBay’s attempt to go after the local market has opened up room for a new lowest cost competitor.

I’m obviously not privy to the decision making to launch eBay Local Market, but I would guess it came about because of slowing sales in eBay Motors and the recognition that car sales are still largely local. eBay Motor’s therefore launched a transaction-based classified section.

However, consumers looking for great deals may be surprised to find that the cars on eBay are the same price as those on Autotrader. No dealer is going to list Local Market cars at a price different from Autotrader prices, meaning the average eBay Motor’s list price has gone up. eBay is abdicating the low price spot.

If a company like iBidMotors.com or Carliquidators.com can scale to a large level, there is a lucrative market opportunity awaiting either company.

Read more >> Options >>

 

 

 

 

Easy Answer to lanelogic liquidity

lanelogic forces dealers to buy cars at higher prices to create a liquid market. Why not create an exchange to resell the puts lanelogic sells? Instead of off setting the put position with a dealer forced to buy the car, give dealers a choice to receive a premium for the put in exchange for the risk of receiving the vehicle.

Does anyone know if they tried this?

New Blog From Another Evenlevel Founder

Eric, Evenlevel’s CTO and developer extraordinaire has started a blog. Check it out, get another perspective. I guess all of the Evenlevel Founders have a blog: Chris’s, Eric’s and mine. That’s some Web 2.0 for ya.

What is Good Customer Service

Defining good customer service is tricky. The goal in any interaction with the customer is to have the customer come away satisfied, and willing to say good things about the company. But, sometimes things just go wrong, and neither the cause nor the solution is obvious. Here is an example of a problem with which I am struggling.

An Evenlevel customer that lives a thousand miles away from Evenlevel’s HQ, purchased a car through Evenlevel. The car was a thousand miles away from the customer and from Evenlevel. Evenlevel never recommended the car, or said this was a good car, but simply bought the car and arranged transportation. The car had a condition report provided by the auction, I ordered a post sale inspection, and also extended a 3 day return policy (3 days after receiving the car, not after purchase) as specified in our purchase arrangement.

No surprise, but a fairly significant issue has arisen. Without specifics on the mechanics, the previous owner had tried to modify something they shouldn’t have, voiding the warranty on the part (this is an ‘07 car). The auction has offered to take back the car, but I’m fairly certain the customer would rather keep the car at this point. Obviously as the dealer I am responsible for the transaction, but the deal was as-is, except the return policy.

When I try to imagine my self in the customers position, I can see expecting the dealer to pay for it. The car is an ‘07, under manufacturer’s warranty, no disclosure was made about material alterations, and a reasonable person should not expect an issue like this to arise. On the other hand, as the dealer, I didn’t pick out the car, make any warranties about the car, and extended a return policy that has since lapsed. Finally, add in the fact that as we are winding Evenlevel down, I would like to return as much money as possible back to the investors, after all, it’s not my money.

Good customer service is difficult because it requires balancing the needs of the different company stakeholders, the future of the business, and the wants of the customer. Difficult situations often require compromise that can leave all parties feeling unsatisfied. And full disclosure of the cause of a situation can actually make things worse by confusing different stakeholders that may not understand the process. A fine touch, an understanding of people and their motives, and balancing everyone’s needs make for good customer service. Customer service is an art of negotiation.

Few Lessons From Evenlevel

I am waiting for my girlfriend to get ready for her birthday dinner and wanted to quickly write down a few lessons I’ve learned from Evenlevel. I went in to Evenlevel with the idea that dealers were antiquated, I was wrong. Dealers provide serious value to the consumer:

1. They help the customer make an informed buying decision
2. They make it easy for the consumer to find financing
3. They make it easy for the consumer to get rid of a trade
4. They provide service after the sale

Consumers are looking for a change in the interaction between sales people and customer, but not an end to dealerships.  Customers may think they want to save money, but really they want convenience. If something goes wrong with a car, regardless of how much they saved, they want the dealer to take care of the problem.

The trick, in the coming years, is how to make dealers more profitable by more aggressively adopting technology to improve sales, margins, and the customer experience.  2% net margins are ridiculously low, and according to a McKinesy report, well run dealerships are four times as profitable as poorly run dealerships. The industry still needs to change, it’s just back to the drawing board.

Car Portfolio Optimization

As Evenlevel’s website suggests, we are “shifting gears” after some excitement this week end. I’ve had more time to think this week end than I’ve had in years, and I’ve been thinking a little more about lanelogic’s liquidity issues, vehicle risk, inventory risk, cash flow issues.

lanelogic needs more market makers like itself to provide the liquidity, but the necessity of dealing with actual, physical inventory limits the number of companies interested in entering the market. The car market needs more derivatives, financial instruments that can be used by dealers to hedge risk, that could be bought and sold without taking ownership of the car.

Some type of risks do dealers face:

• Interest rate risk – interest rates taking an unfavorable move against dealers, hurting profitability
• Vehicle reconditioning risk – the risk that a purchased vehicle has significantly more repair work than originally anticipated, or has undisclosed frame, flood, or other title damages
• Vehicle sales risk – the risk that a specific vehicle wont sell, or the profit margin will under perform a dealer’s average margin per copy

Any dealer can currently use financial markets to hedge interest rate risk, and OVE and lanelogic have come up with ways to hedge repair and sales risk. However, neither of these options invite liquidity into the marketplace.  Car dealers have another way to hedge these risks.

Portfolio diversification. Modern portfolio theory could be adapted to the car market to help dealers make efficient used car purchase decisions. Each type of car has an expected return (average gross per that type of unit) and volatility (look at past sales and returns of the models and calculate the standard deviation). Then, there is correlation. Are there certain types of units that tend to sell together? For example, in high gas price environments, truck sales likely decline and econ models increase.

Each dealer likely has a set of efficient portfolios depending upon their risk profile (aaXchange – I know). Other market participants would benefit by knowing these portfolios. For example, wholesale consignors could mitigate the risk of remarketed cars not selling quickly, or not selling for the right amount, by buying puts on specific cars from dealers. The dealers would profit from the premium and the consignor would hedge risk.

Alternatively, and even more out there, the expected cash flow from a dealership portfolio could be stripped and then resold. Dealerships would maintain stable cash flows and pass off the vehicle sales risk to other participants better able to take the risk.

Finally, to hedge vehicle reconditioning risk could be hedged with a vehicle reconditioning risk insurance policy. Dealers pay in to hedge the risk of thousands of dollars of unexpected repairs, and the insurance company collects premiums and then pays out to cover those repairs…

That’s it for the day, back to the Evenlevel relaunch (new business plan)!