By Steve Greenfield

I guess I drew some attention.

In my column last month, I concluded that existing automotive marketplaces do little to alleviate major consumer pain points, which typically occur at the physical dealership, and that the industry needs a new, differentiated, compelling consumer buying experience for third-party marketplaces to evolve and for the category to grow.

That article generated a bunch of interest. As a result, I had several spirited conversations about what the auto marketplace of the future might look like.

Let me outline my thoughts in this follow-up.

Attributes of world-class marketplaces

World-class marketplaces have many, but not necessarily all, of the following attributes:

  1. Discovery
  2. Comprehensiveness (abundance)
  3. Trust
  4. Price transparency
  5. Convenience
  6. Automated matching
  7. Personalization
  8. Communication tools
  9. Booking
  10. Transaction
  11. Active oversight or management of service delivery
  12. Software tools
  13. Guarantees and protections

It would be an interesting exercise to rate existing auto marketplaces across each of these attributes. But we’ll leave that for a future article.

(For the record: A recruitment marketplace, or a real estate marketplace, probably needs most or all of the same attributes. But since I’m a cars guy, I’ll focus here on autos.)

Existing marketplaces might review this list and decide how they leverage these attributes to construct a value proposition that alleviates some of the ongoing consumer pain points associated with buying a vehicle.

Comprehensiveness: Yesterday’s advantage

In the early days of the internet, having the largest vehicle inventory was a differentiator in the mind of the shopper, and a defensible competitive advantage. But with the current state of web crawlers and widespread syndication of listings by dealerships, inventory comprehensiveness is pretty much ubiquitous, and no longer a defensible position.

Case Study: CarGurus

How did CarGurus evolve from startup challenger to the dominant site (by traffic) in the U.S.?

As Clayton Christensen laid out in his book, The Innovator’s Dilemma, incumbent automotive marketplaces were so wedded to their existing business models that they didn’t pay attention to (or understand) how CarGurus had diagnosed consumer needs and was attacking those incumbents from underneath.

CarGurus built a halo of trust for the consumer around the triptych of: Good Price, Good Dealer, Good Car.

Interestingly, the CarGurus brand hasn’t generally inherited the trust. The trust is embedded in their consumer experience, but hasn’t really transferred to the brand. A little later I’ll juxtapose this against the Costco Auto Program, which started with a trusted brand and built a shopping experience around the strength of that brand.

The future: Trust, convenience, network

 Amazon has proven convenience and experience can create tremendous consumer loyalty and satisfaction. Amazon succeeded by maniacally focusing on making it easy to do business with the company — reducing friction in the user interface, the shopping process, delivery and the return process. Notice that nowhere here did I mention price comparison, or validation that the consumer receives the best price, or even a good price.

To encourage good behavior and punish bad behavior, marketplaces need leverage over their advertisers. Leverage can be either positive (“carrot”) or punishment (“stick”).  Amazon exercises leverage brilliantly with merchants who list items for sale on Amazon. It can do so because Amazon has so much consumer traffic (92% of America’s online shoppers) and is so important to its advertisers. (A 2017 report showed at least 21 public companies generated more than 10% of their revenue through Amazon.)

Because Amazon is so critical to merchants’ businesses, it can dictate the rules of engagement in its marketplace.

The ‘managed network’ in automotive

Which auto marketplaces have a brand that gives them leverage over their advertisers, so they can dramatically differentiate their consumer experiences?

The best example is the Costco Automotive Program. It successfully leverages Costco’s tremendous brand equity to deliver prospects to car dealers, and those consumers complete purchases at a much higher rate than any other source in the industry. (Costco said more than 650,000 cars were sold through the program in 2018.)

Other than the inherent trust in the Costco brand, what are the program’s other elements of success?

Costco actively manages its network of dealers, making sure they offer a low price without haggling, and provide an outstanding experience for buyers. Costco has shown you don’t need every dealer in the market, which is counter to the comprehensiveness that marketplaces aspired to in the past. (Interestingly, Costco says it doesn’t make any money on the program; it’s a perk for members, to increase retention.)

Providing a better experience

How might this play out for a third-party marketplace that wants to provide a better experience for the auto shopper?

  1. The marketplace needs to set high standards: This experience, and the rules for participation, will exclude some advertisers.
  2. The quality of consumer introductions to the dealer must be far better than average. Dealers will need a compelling reason to participate.
  3. Dealers who misbehave will be eliminated, or won’t be invited back. Dealers with the best behavior will be rewarded and promoted within the experience.
  4. The marketplace must monitor dealers’ in-store processes. It needs a feedback mechanism to review and enforce the rules.

None of this will be easy for incumbent auto marketplaces. It will require major changes in strategic direction, and possibly even threaten their existing core businesses. But as Christensen taught us, large companies often need to embrace disruptive innovations, which favor outsiders and startup entrepreneurs, rather than existing market leaders. Market leaders typically discourage disruptive innovations when they emerge, because they’re not profitable enough at first and because their development can take scarce resources away from sustaining innovations, which are needed to compete against current competition.

Automotive marketplaces will need to have the intestinal fortitude to embrace change to significantly evolve the business model.

It’s an exciting time for auto marketplaces. I look forward to seeing how the next few years play out.

Steve Greenfield is a long-time executive at automotive marketplaces, and a regular contributor to AIM Group Marketplaces Report. He’s founder and CEO of Automotive Ventures LLC, which advises automotive technology companies looking to raise money, sell their businesses or energize growth. Previously, he was an executive at TrueCar and Cox Automotive Group, and has overseen more than $1 billion in automotive technology acquisitions.

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