LifeGame

Can Car Dealerships Be Disrupted?

I WANT A NEW CAR

I've been looking into purchasing a car recently, and I must say, as I remember, it's incredibly unpleasant experience.

Why is this?

Because the relationship is adversarial by design. The combination of salesperson incentives and quotas along with an expectation of haggling and mutual perception of information advantage makes buying a car a more or less lose/lose situation.

I'm going to give some details of my experience, conclusions, and recommendations and see what everyone thinks.

I apologize for the super long post, but there really isn't a simple way to do this. If you just want to know the conclusions, skip to the end.

 

THIS WILL BE EASY, RIGHT?

First, there's what I want. This is simple. I would like a 2012 Toyota Camry XLE Hybrid. I want the basic package, no leather (about $1,745) and the remote car start ($499). Conveniently Toyota lets me build my own car, just like almost every other site.

You can see my practical dream machine here:

So, the price, $30,539, right? Well... as we all know MSRP doesn't really mean anything other than this is the number the "manufacturer" recommends. It's common knowledge that no one REALLY pays this price. So... the next step in our journey is figuring out what the price SHOULD be. That's where it all gets messy.

A number of internet services help. First, there's CarGurus.

I quickly plug the details of my desire into it's site and it spits this out:

$28.458! Wow. That's a much better number. But wait... CarGurus doesn't let me add the features the same way the Toyota builder does. I included Navigation package, but is that the same thing? I'm not sure. I suppose I could call a dealership to ask, but I know that then I'll be entering the adversarial quagmire I'm trying to avoid in the first place.

 

MAYBE NOT SO EASY... HELP ME INTERNET

Fortunately, there's lots of other sites as well! Edmunds, KBB, Cars.com and so on. They all make the same claims, "actual" prices that you can use to make sure you don't get screwed. Ok, their marketing speak is better than mine, but that's the meaning.

I'll break them down next.

Edmunds "True Market Value:" $28,566

Cars.com "Smart Target Price:" $28,870

KBB "Fair Purchase Price:" $28,124

Consumer Reports Base Invoice Price: $27,404 - I didn't want to subscribe to get more details, but they DO promise to save me $1900 on my next car! Also, this price doesn't include the 1500 or so cost of options, so that would put things close to the $29,000 mark.

 

WHAT TO PAY

I'll stop there. I can tell that the price is right around the mid $28,000 mark. But how can that be? Toyota put it at $30,500 which is about $2,000-$2,500 more... Is Toyota artificially boosting the anchor price by 5-8% so that they can give the dealers and buyers room to find middle ground? Or is that what Toyota truly recommends and market pressures are causing the poor auto dealers to take major cuts into their profits... potentially even losing money.

Armed with this information, am I at a huge advantage?

Obviously not. The dealers know about all these sites and have huge incentives to mine them for information.

 

TRUECAR

I decided to try and use TrueCar's service. It's free, it's fast and it seemed easy. This is where I discovered the next part of the confusing world of car buying. Here's the quick breakdown on how TrueCar works:

1. You got to their site and punch in your dream car.
2. They collect your info before they give you a "Estimated Savings Guarantee".
3. You verify your email and they send your info along to Official TrueCar affiliates who then send you a quote.

All of this by email, so nice and convenient... not in person negotiation... no 3 hours at the dealership while the "finance guy sees what he can do."

So what did I get back?

There it is again... the $2,500 difference. One thing to note is that TrueCar doesn't give me a price, but rather a guaranteed estimated (paradox?) savings from the MSRP. The idea here is that every dealer has completely different versions of the same car with slightly different tweaks, so prices fluctuate. By focusing on the savings amount, the customer is protected from this fluctuation, right?

Well, kinda. The problem is that each of the options don't have a fixed price-feature associate relationship either, so one dealer might charge $465 for the remote start feature, while another might charge $534. Without seeing the detailed invoice and comparing, how can I know?

A few hours pass and I get three offers from specific dealers. I left the names off:

These are direct offers from actual dealers, so I can go out there and just pick the car up for that price. So why not just take the lowest offer? Well, again I run into the whole detailed configuration problem. These are not the same exact vehicles. For example, the 28,774 car includes leather (which I don't what, but it matches all the other features) whereas the $28,024 does not (but it's not the color I want).

 

CONFUSED AND FRUSTRATED

All of this is incredibly frustrating. I have now spent hours of precious free time figuring out what the real price for my car should be? After doing all this work and analysis it appears as though my 10+ hours of research will result in a price differential of +/- 100$. Hardly a good cost/benefit decision.

However, my biggest problem is that because none of the numbers ever agree, I can not shake the suspicion that none of this information is reliable; thus, the 28,500 or so number that keeps showing up could be off by thousands, perhaps more! Or so I tell myself.

This leads me to feel as though I have no choice but to go to the local dealer, armed with my negotiating power and new found information (which they will also have, plus much more) and spend the rest of my day grinding a few hundred dollars.

The thought of that is so unpalatable that I'm now questioning if I even want a new car.

Thus what could otherwise be an exciting experience (I like driving and I like new things) has become tedious and dissatisfying.

 

ROOM FOR IMPROVEMENT

I want to go back to my original problem and do some thinking. I wanted a new car. I wanted a hybrid. I wanted something reliable, not too expensive, someone advanced technologically and powerful enough. I did a lot of research on total ownership costs, reliability, fuel efficiency, space, etc. and knew exactly which car I wanted. I also knew precisely which features I cared about and about what price I wanted to pay (around $25,000-$30,000). At this point I was SOLD.

It wasn't until all the details and confusion around options, prices, and other decisions came into the picture that I became unsold.

Why doesn't this happen with other things?

For example, if I want to buy a new HDTV. I look on-line, maybe I got to Best Buy or Costco. I find the size and resolution I want and all then I purchase one. Sure, I look for the lowest price perhaps, but they are all within a tight cost range, and the options are pretty well set.

Most consumer electronics are the same way: Laptops, Game systems, even Cable and Satellite packages.

Cars appear to occupy a unique space here.

So, my top 10 disruptive dealership ideas would include the following.

New Dealership: Welcome to CarFast - where speed, transparency, and self-service rule.

Pitch: No commissions, no markup, no long, drawn out negotiations. You research, you test drive, you configure, you price, you drive. We help as much or as little as you want.

Our Guarantee: If you don't like it, return it within 24 hours.

Here's what I'd change/include:

1. Unlimited test-drives for a non-refundable payment that can go towards a purchase: so I pay $100, and that allows me to test drive a bunch of vehicle prototypes the dealership has. If I buy a car, it goes towards the price, if not, I lose the $100.
2. Show the profit clearly: Essentially display what the car cost the dealer (at auction, wholesale, etc) and then what the markup is. As a customer I have no problem understanding the businesses need to make a profit, I just want to not feel ripped off. This may not work well because of the built in suspicion I have... how can I trust the dealer? I think that's why this has to be part of the whole package.
3. Non-commission sales people: I think some dealers do this, but I would advertise it prominently. I hate buying things like cars and furniture because I feel like a dying corpse at a vulture party.
4. 24 hour right to rescind: Car dealers HATE giving any guarantee. Why? Because they know that many people are pressured into buying cars they can't afford, end up regretting, etc. By preventing you from returning it, they can bully you. Almost no other purchase has this kind of problem (house buying being a notable exception). By telling customers up-front they can bring the car back, it makes them more willing to buy. I suspect most people are far too lazy to come back and the rescind rate will be low anyway. It's possible that there are all kinds of regulations that make this not as easy to do, but I've actually seen people get this from dealers before (After many hours of negotiation) so I know it is possible.
5. Total Electronic Transactions: Let me do all of this on-line, without talking to people, emailing back and forth, and other forms of protracted negotiation. They cost my time and the dealer's time and because of the environment it makes the entire experience uncomfortable. If all I have to do is go to the dealer and pick up my brand new shiny car, I'm much happier. I understand that some people are the exact opposite here, so obviously personal service is needed.
6. Fixed Payment Ranges: Post very clearly the credit range/APR relationship. I get that if I have shitty credit I pay more. The banking industry has beaten that into our heads. Just tell me in advance instead of making it a mystery and making people feel bad. My social goes into a machine, my score comes out, and I know my APR is x, y or, z.
7. Less Choices: Get rid of all the complex choices: warranties, paint protection, blah, blah, blah. Everyone knows that these are just ways dealers try and increase their margin (which they have to do because of the adversarial relationship). Get rid of both at the same time. Make it easy for me to decide and I will!
8. Speed: Buying a car should only take an hour or so, yet I know it will be a full day affair. Promote speed just like other businesses. If the customer WANTS to spend hours asking questions and deciding, fine. But for pre-sold people that know exactly what they want, give it to them (or as close as possible) and let me go home.
9. Self-Service: Most dealers put their inventory on-line, that's great. But almost none of the vehicles have any pricing info. Let me do ALL of the above on-line or on-site at a kiosk. The only reason I have to go through an intermediary is because of the commission based, adversarial relationship. There's no reason I can't go to a dealer, sit down at a terminal, browse inventory, add options, get a price, qualify for payment, print out the papers and drive away without talking to or negotiating with anyone.
10. Focus on Customer Experience: Everyone says they do this, but I would go out of my way to detail HOW I'm doing this. Hire people who are knowledgeable about the vehicles, train them well, don't be pushy, drive customer satisfaction incentives- and advertise them.

 

CONCLUSION

The over-arching theory is that experience adds value. If I actually had a great car buying experience, I would recommend that dealer to anyone. I'd also always go back there for service, which is where even better margins are - and similar rules can be applied.

On the opposite side I would cut down on the dealership costs by promoting self-service, simple rules, speed of transaction and reduction of conflict. I might bite it on the 24 hour guarantee, but if you put reasonable provisions in (I.e. you can't do it more than once a year, etc) I am sure that it will be a value add.

So that's my amateur pitch for a new kind of dealership. It might be a series of terrible ideas that have all been tried and failed - thus resulting in the current car buying market; but as of today, I'm dreading the prospect of actually finishing off my car buying experience and I feel the entrepreneurial urge to redefine it.

Neil Armstrong Dead at 82: Last Person to Walk on the moon is...

78 years old! Yes. That's right: Eugene Cernan is the last person to walk on the moon and return to earth.

That's so pathetic. In the 1960s it was people in their 30s leading the charge to get into space. I wonder if they thought that our exploration into space would be so sloth-like.

I'm so happy about the recent Curiosity Mission and Elon Musk's statement to put a Man on Mars in 10-15 years. Elon's statements seem crazy... establishing a base, potentially growing vegitation.

"Mars is the only place in the solar system where it's possible for life to become multi-planetarian,"

"We could make Mars like Earth…it's more than our life raft, it's like backing up the biosphere."

You said it Elon...

Just like JFK's commitment to putting a man on the moon and bringing him safely back to earth before the end of the 60s.

Let's remember the lunatic fringe of fearless explorers.

I hope you go in peace for all mankind, Neil...

 

Real Long Term Home Values Visualized

Whenever I talk to anyone who makes their living in the housing industry... it's always a good time to buy or sell or refinance or whatever. If interest rates are low, they might go up... if they are high, they might go higher. If prices are high, they might go higher, if they are low, they might be near a bottom. It's so confusing.

This leads me to the question of how good of an investment houses are... in the long term... I mean the REALLY long term... like a hundred years or so. We just kind of assume that houses are these great long term investments and are integral to "the american dream." Maybe so, but when I look at the inflation adjusted Case/Shiller index, it looks a bit different.

 

A few things I noticed right away:

• Until the mid 1990s, a house was about a 10% or so ROI over a 100 year period, with a couple of spikes at around 30% with corresponding drops. That's not that bad really, but not amazing either.
• The great depression didn't kill home values... they were dead BEFORE the great depression.... interesting. I didn't know that at all.
• Timing badly can take a long time to recover from. 
• If you bought a house in 1895, you didn't recover until around 2001. WOW! 
• If you bought in 1912, you recovered in about 1942. 
• If you bought in 2006... I shudder to think... might be 2142 I guess? Then again we could just wait for the next real estate bubble and sell then...
• Of course if you bought in 1920s and 1930s and sold in 2006; you made about 110%... good for you I suppose.

I figure I'd be much more interested in buying a house when that blue line goes closer to 0. This is 2010 data, btw. I'll look for the 2012 data to visualize, but what I can say is that things have "stablized" well above the 1994 levels. I believe this is a result of lots of foreclosures and abandoned properties (Which the case/shiller index does not track) and as that story plays itself out we'll see more decline. It's also impacted by really low interest rates, since people generally think about how much they can pay a month, rather than how much a house "should cost" (something people don't really have an easy way to know).

 

Incidentally... this further solidifies my belief that houses are not assets, they are consumable goods. When we think a consumable good is an asset, dangerous things happen. With an asset, the more money you put in, the more valuable you think it becomes, causing you to put more money into it. With a consumable good, it's just kind of losing value over time so you don't really behave this way. Thus, when we think of consumables as assets we get really terrible bubbles: think, Tulips, beanie babies, etc. here... are Tulips REALLY assets? They are if we think they are, I guess.

Hermann

Most of the Universe is Unconscious

I am often amazed at how much of my body works without me having to do any work. Food is digested, blood moves around, my hair grows, my cells fight off infection, if i cut myself... boom... my body fixes it.

In fact, I have very little control over much of anything. I suppose I can decide which color socks to wear or which flavor ice cream to eat... but even with those choices, its quite mysterious to me HOW I decide which I like.

The reality is that most things happen without any conscious intent or diacernable reason. The big bang, the stars forming from dust and hydrogen, the creation of complex atoms, the formation of planets and the evolutionary process eventually leading to intelligence that can finally reflect on and begin to understand the process that lead to its own creation.

It's a lot of amazing things.

Your Hair is Several Billion Years Old...

Everything you see around you, your bed, your walls, the ring on your finger, the plastic on the device you are using to read this blog... it's all made of elementary particles that were made billions of years ago and, probably, millions of light years away.

How did this happen?

It begins about 13 billion years ago. In the beginning, there was hydrogen and gravity... that's about it. Space. Hydrogen. Gravity.

Over a few hundred million years, the hydrogen began to collect into clouds and, eventually, when the clouds are large enough; they collapse into what is called a protostar. In a sun like ours, this process takes about 50 million years. At this point the sun enters its "mature" phase during which the heat generated by the compressed atoms causes a fusion reaction resulting in the production of helium and the release of a photon of energy... and that's what makes the stars shine. This phase lasts around 10 billion years in stars like our sun, but varies enormously.

The basic rule is that the greater the mass of the star, the higher the temperature and, therefore, the more energy it gives off, the more material is fused and the shorter its life. Also the fusion reaction produces progressively heavier materials: helium, iron, etc. Iron is, in fact, the heaviest element that can be produced in this way. If the star is sufficiently massive, however, it will continue to collapse and then explode. This is what we commonly refer to as a "super nova." The speed of this collapse is truly staggering. Stars will shrink from thousands of miles across to a few dozen within the span of a few seconds - an incredibly short crecendo to a build up of billions of years.

This process produces an enormous amount of heat - 100 billion degrees or more. And it is during this brief time that all the heavier elements in the universe are created. All the gold in all the jewelry. All the copper in every penny. All the silver in every trophy. All of it is formed during these brief, violent, explosions...

So. Next time you stop and look at something of beauty consider that it was created billions of years ago in the long life and violent death of a faraway star. I think that's quite amazing.

Slicing the Pizza

There's a lot of excitement around the mainstream-ification of the various "free" business models. In many cases, there's a conversion back and forth from social to real capital and various toll keepers take a cut when those currencies are exchanged. It's tempting to believe that this is somehow new, but it's not. If we just consider that "interest" or "engagement" is another abstract representation of our time and effort, it's not that distinguishable from other forms of currency. When civilizations converted from raw material trade to official "coinage" and then eventually representative coinage (I.e. coins made from non-precious materials but stil guaranteed by official entities), similar social transformations took place.

These transformations also allow for an increase in leverage. If you need to trade raw materials, you have essentially 0 leverage. If you have coins that represent raw materials, you have convenience but are still limited to the material you are carrying around. As soon as you have coins or paper money that represent a guarantee; you can now engage in leveraged borrowing which allows for economies to do things like speculate, sell future interests, charge interest for risk and most of the normal things that all of us are now used to when we buy stuff we can't or don't want to afford.

In any case, for the sake of this post, the pizza just represents the total volume of a "free" serviced market. In most cases the pizza is expanding as more people become interested in whatever the market represents: games, search, apps, etc. Slicing the pizza occurs when a new service provider enters the market and competes against the existing providers.

We've all seen how this goes... A company has a "great new idea" which will hopefully disrupt an incumbent via a new feature, a superior offering or some other perceived increase in value. Most of these ventures fail for lots of different reasons but it generally is a result of overconfidence in one form or another. Of course, these failures usually take SOME amount of the pizza on their way. As a market heats up, more of these providers enter the market, backed by various sources of leveraged risk.

The pizza is, of course, sliced in an incredibly uneven manner. Generally the top 2-5 providers take a huge share (50-90+%). For example, android and iPhone or google and Microsoft or zynga and... Well... Zynga. The remainder of the pizza is left for all the other providers to fight over. Early or dominant players may survive in the 5-10 rank, but as hundreds more flood in, even those providers find it more and more expensive to maintain their share of the pie. Their relative success feeds the investment to the ever crowding field. Eventually, most of the providers are unable to get enough pizza and they starve. As they do so, they also thin out the pieces of the other providers who then also starve. Thus, aside from the dominant providers, everyone else is starving even though they have some small piece of the pie.

None of this is new or revolutionary of course.

The thing that is interesting to me, is that it's challenging to see what comes after free? Once most of the major services stop charging, compete with each other for eyeballs at an ever increasing acquisition cost, and drive each other to near starvation, what will happen next? What is the value proposition for the customer in a world of competing free services?

Airlines have faced this to some degree in the past decades. As consumers became more price conscious, travel became more mainstream, energy costs more volatile, and so on; airlines became far less stable. So much so that aside from a few stars (like southwest) airlines are not really considered a "smart" investment... Yet they are services nearly all of us use.

From what I can tell the airline industry has yet to solve this problem and so they just kind of lumber along and have occasional disruptions (like JetBlue).

Im wondering if it would be feasible to have a "free" airline. Imagine, for example, that your ticket is free, but you have to stand. For $50 you can sit, for another 30$ you can check a bag, for $15 you can board before other people (thus having a better standing position). I have not done any investigation on the regulations or cost logistics, but a free to fly airline would obviously be very compelling... And I wonder if people would pay close to normal ticket prices by customizing their level of convenience...

Eastwood Movie Film Scores and Creative Constraints

The opening theme to "The Good, The Bad and The Ugly" are now legendary and is probably one of the most recognized pieces of music in cinema. It's also one of the most "fitting" pieces of music. It goes so perfectly with the film... all the odd sound effects, whips, cannon blasts and gun shots... used brilliantly to augment the sparse score combining electric guitar (Morricone used a Fender in those movies) with a few trumpets, whistling, voices and other odd sounds.

It seems so well thought out and planned. Each sound composed perfectly to fit the scene. Surely it's the work of a creative visionary, planning each sound and hearing it all in his head. Right?

WRONG.

The truth is that Morricone and Leone didn't have any money but really wanted to make movies the way they wanted to. Morricone couldn't afford to do it the real way - hiring an orchestra - which is what he would have liked to have done. John Ford movies were super popular and that was the sound of the western: sweeping strings, woodwinds, brass... you know... real music. Morricone didn't have access to this, so he had to cobble together a guitar, a few crappy trumpets and cheap sound effects (whips and whistles are much cheaper than 1st chair violinists).

The result? A completely new vision for the western and a lasting image for what music in cinima could be. So successful was this new vision for the western and so instrumental the music and sound that Morricone did about 18 movies between 1960 and 1970 in addition to Leone's four films. That's a lot of composition!

It was through constraints, lack of resources, and inability to gain access to the desired "requirements" that Morricone was forced to think creatively and invent a new art form.

We think this might be uncommon, but I think it's much more likely that someone with a creative urge that is so loud they can't silence it bursts through despite creative constraints than it is that someone has access to everything they need.

There's a great exchange in the movie Citizen Kane where Kane is talking to one of his colleagues:

Kane: You know, if I hadn't been rich, I might have been a really great man.
Colleague: Don't you think you are a really great man?
Kane: I think I did pretty well under the circumstances.

That line always sticks with me. I think that many times access to too many resources, too many options and too many choices crushes our ability to think creatively. It suffocates the urge. Creativity is born out of sparseness and desperation... people bursting with energy to do something amazing even though there is no reason they should be able to do so.

People are amazing creatures.

Rapid iteration and organic evolution... Secret of the past and key to the future?

http://venturebeat.com/2011/10/14/tango-growth-rapid-development-cycle/

Washington Wins, The Future Loses

Ok. I am not usually prone to hyperbole, not am I a big fan of "News" programs: Fox, CNN, MSNBC, take your pick. Their job is to sell entertainment to their audience as it's represented to their advertisers. So let's go past those guys. My favorite one is CNN's "countdown" clock which turns an incredibly serious issue into a SuperBowl countdown timer... as if there is some concept of "winner" and "loser" here (hence, my selected title).

Let's look at what's going on here. I would bet about 10:1 that the absolute minimum compromise will pass at the last possible second preceded by a lot of aggressive posturing by party figureheads. Why? Because that's how you hedge for future elections. If a few minor senators on both sides cave at the last second (on both sides) they can always run on the "had to do what's best for America even if it wasn't what I wanted" ticket - which might work if you're a low ranking schmuck. The high powered guys, in the mean time, need to posture very hard and strong so they can run on the "I refused to bend to the other side" ticket.

Don't get me wrong... I think politicians are by and large good intentioned. I think underneath this posturing, most of these guys really DO want what's best for the country.

Here's the problem. We elect leaders every few years, not every few decades. The debt problem requires a multi-decade approach. How can people incentivized for a couple of years of performance possibly embrace a policy that requires multiple decades unless they are some kind of self-sacrificing idealists - who don't do well in US politics anyway. In reality, we don't really want to solve this problem... not right now; but we never want to solve it right now.

Imagine if you've maxed your credit cards and your rent is due. You don't have the money. Suddenly at the last second you get a bump in your debt maximum. Lucky you! It would be IRRESPONSIBLE to let your family go homeless when you have access to the debt. It would be inhuman of the bank to force your family out on the street and increase the chances that you'll never pay it back. And so this confederation of insanity meets to ensure that the debt will essentially never decrease.

Beyond this is something even more tricky. Despite all the posturing and "reporting" on the news, the major politicians do not really fundamentally disagree on some key issues.

Let's look at the spending breakdown:

 
Neither side has ever really talked about cutting defense, Social Security or Medicare. There is some debate around "Safety Net Programs" but even if that's completely slashed it doesn't really get us there. As for all the other "Infrastructure" programs... you know useless stuff like education, transportation and scientific research. You could kill every last one of those and we still would run up the deficit.

At least the democrats are saying that to continue spending we have to get more money (in their case from additional taxes).

The real problem here is not that the parties can't agree or that the Tea Party has radicalized the political system. The real problem is that there is no incentive for a long term, serious solution based on some mixture of reduction in spending (perhaps in the holy trinity of Security, Social Security and Medicare - Medicaid) and/or increase in revenue. We just can't have it all people - no matter what the advertisers that pay the news shows to sell their products tell us.

Where is the universe?

Perhaps a silly question... but I was wondering about it on my walk home today. It seems that in order for a "thing" to have a "place" it has to exist in comparison to some other thing that is in a different place. As we zoom out or zoom in far enough, this way of thinking about things breaks down.

The other way of thinking about it, I suppose, is that this is in itself just a linguistic trick. If we think of the universe as "everything" then by definition it can't be in a place relative to some other thing, since that thing would itself be part of everything. But this may have nothing to do with how things are outside of the world of linguistic trickery.

In any case, if the universe is "everything" then I must admit it was hard for me to explain or consider where the universe is... but it was also hard to consider that the universe doesn't have a "where" since everything that exists seems to occupy some kind of location - and yet without a relative point to compare something too, it's really hard to say "where" something is...