While consumers are used to buying items like clothes, tech gadgets, and books online, big ticket items like boats, cars, and houses are often something that requires an offline touch. When it comes to cars, there are a wealth of online resources that let users search for and compare vehicles, but often it requires a trip to the dealership to make the final purchase. Startup Carvana is trying to change that with its ecommerce platform that lets users go from initial search to purchase, financing, and delivery online.
In November BetaKit covered TechStars Seattle grad Tred, which brings test drives to consumers’ driveways and lets them purchase a new vehicle without having to visit a dealership. While Tred is trying to simplify the new car purchase process using an online platform, it only covers brand new car purchases, so Carvana fills the void for used vehicles. The company lets people browse used cars in their area, and take online tours, viewing imperfections and features. Once users find a car they like, they can complete the financing and purchase process online, and the car is delivered the next day (with a seven-day money-back guarantee if users don’t like it after driving it).
The new company was spun out of used car platform DriveTime, where Carvana President Ernie Garcia was formerly an executive. Carvana is leveraging DriveTime’s infrastructure to target a mass market audience, aiming for an average sale price of $20,000.
“When you’re buying a car online, the fears are obvious. I don’t get to test drive it, is it really going to do what I think it is, what’s my level of commitment when it shows up at my door, am I really going to get what I thought I was going to get and when it breaks down later is there a real company standing behind it to kind of help me out, those are the concerns we have,” Garcia said in an interview, adding that the company believes its careful selection process, the average $1,000 of improvements it puts into each car, and the seven-day return policy will help get consumers over the idea of buying without a test drive.
The key aspect to purchasing a car with confidence is often the test drive, and Carvana doesn’t facilitate test drives, rather it focuses on online photography, giving a 360-degree view of the interior and exterior. The other key factor for car purchases is price. The company purchases its cars primarily through in-person and online auctions, and houses them in a warehouse in Georgia owned by DriveTime. It prices its cars not based on what it pays at auction, but based on the market average for that make, model, year, and mileage, subtracting $1,000 from that price and rounding to the nearest $250 (in comparison, Tred works with dealers on bulk pricing arrangements for its new car sales).
In terms of financing, users can either pay cash, use their own financing, or get financing through Carvana, which has partnered with several financial services companies. If they choose to finance through Carvana, they can use its online engine to figure out their down payment, monthly payments, and loan term, and sign the contracts online.
“One of the problems that exists in the current car market is that financing is generally something you figure out afterwards, and it’s generally a pretty opaque process. Most consumers don’t have a great idea of what interest rate they should pay, and they probably don’t have a great idea of how their interest rate affects their payments,” Garcia said. “What we’re basically doing is starting with pretty average terms…and then we’ve built these dials so the customer can get a sense of as I move my down payment around how does my monthly payment change.”
Carvana’s biggest competition is offline dealerships, not to mention private used car sales facilitated through Craigslist and other classifieds sites. Tred is the company’s closest competition in the online space, but its focus on new vehicles means it doesn’t compete directly, though founder Grant Feek told BetaKit in an earlier interview that they will be getting into the used car market eventually. Tred’s advantage is that it lets drivers actually test drive vehicles, rather than relying on online photos to tell them how a car will drive.
The company launched in Atlanta in late January, and in just over a month has sold 10 cars on the platform. It plans to expand in the southern states before expanding across the U.S., leveraging DriveTime’s warehouse spaces as it grows, though Garcia didn’t set a timeline for expansion. Its biggest challenge will be convincing users that they can trust a used car solely from online photos, which won’t be an easy task considering the stigma that’s often associated with used cars and dealerships. It’s inevitable that the new and used car buying process will move online eventually, but whether Carvana’s timing is right will be tested as it launches across the country in the coming months.