After a decade in business, online used-vehicle retailer Carvana may, for the first time, record a profit this quarter. Although the company and its towering vending machines that dispense vehicles bought online created great excitement around a new way to buy, sell, trade in and finance used cars, it has clearly struggled with its business model.
Carvana is not alone; in general, used-car dealers and auto auction companies continue to grapple with digital transformation, even as consumer demand increases. The difficulty of building a profitable online model mainly stems from the fact that inspecting and placing a value on used cars has long been an in-person, bricks-and-mortar type of business; state laws requiring ink rather than digital signatures and other bureaucracy can also add extra in-person steps.
But that is changing. New technology is making it possible for used-car dealers and auction companies to move their businesses online and still make a profit. In addition, regulatory changes that are eliminating in-person signatures and other tasks are paving the way for making online vehicle transactions increasingly seamless. Online transactions will no doubt be an important element of success for both dealers and car auction companies, making it essential they figure out how to do them efficiently.
The Power of Computer Vision
Putting the right number on both the acquisition and sale price of a pre-owned vehicle is crucial to the success of any dealer or auction company. When done well, used-car sales have historically been more lucrative for dealers than new-car sales. In fact, profit margins on used cars are between 10% and 12%, more than double the average range for new cars. Advanced tech can potentially increase these margins further by cutting operating costs and improving pricing.
Until recently, dealers needed to physically inspect cars, in addition to considering their history of accidents, repairs and other factors, to understand their value. Not seeing a car in person has long been a risk. But computer vision tools, which can easily be used via mobile apps to scan vehicles and upload the images, allowing dealers and car auction companies to see and evaluate cars remotely, solve this dilemma. In addition to providing images, these systems can detect damage and irregularities faster and more accurately than humans, allowing for a more efficient and precise base for determining a car’s condition and value. Other AI and data analytics tools can provide estimates on how much it would cost to repair or replace parts, which further helps dealers figure out how much they should pay for used vehicles, and how much profit they can expect from selling them to others after they are refurbished.
Regulatory Changes Transforming the Online Sales Landscape
Regulatory changes are also slowly removing barriers to online used-car sales – and potentially changing the game for dealers and auction companies. Several states have already removed, or are considering removing, requirements for a “wet ink” signature for vehicle purchases. This would allow sellers and buyers to complete the entire transaction online and have their vehicles delivered to their driveways, without having to stop by a dealership or Carvana vending machine facility to sign paperwork. Eliminating the need for in-person signatures and other processes reduces friction for consumers and improves efficiency for dealers and auction companies. Dealers and banks, as well as other financial institutions, are increasingly working together to package online used-car sales together with online financing; this cooperation is necessary for dealers and other auto remarketers to become the one-stop, online-only businesses that consumers increasingly demand.
Another change that could transform online car sales, or at least light a fire under those dealers who want to succeed, are proposed laws that would allow OEMs to sell new vehicles directly to consumers. Many analysts say this is unlikely to happen in most states, as dealers traditionally have been well-protected by laws that ban direct sales. But it is something that dealers and auto auction companies should keep in mind as possible competition going forward, as direct new-car sales would also likely mean direct trade-ins and used-car purchases from automakers.
In fact, automakers already are moving further into the online used-car space, with General Motors and Ford recently launching sites that connect consumers with used vehicles at certified dealerships. This increased competition highlights why independent dealers, auto auction companies and other auto remarketing players must create successful online businesses.
Dealers should not rely on regulators to protect their traditional business models; rather, they should focus on finding a way to build the car-buying experiences that consumers and B2B customers are demanding, while still turning a profit.
Eliron Ekstein (pictured, above left) is co-founder and CEO at Ravin.ai, which uses AI to track the condition of vehicles.