E-Business Models: Lemon Aid

FRAMINGHAM (07/06/2000) - The Company: Carfax Inc., a wholly owned subsidiary of R.L. Polk & Co.

Founded 1984 by Ewin Barnett Revenues Privately held Location Fairfax, Virginia. Target Audience Dealers and individuals who purchase used cars Alliances/Partnerships More than 450 partners including 200 Web partners; among major partners: America Online Inc., AutoTrader.com, DaimlerChrysler AG, Edmunds.com, Kelley Blue Book, Yahoo URL wsf.carfax.com Purchasing a used car is an experience fraught with uncertainty. How does a buyer know for certain that the '97 Honda Accord with 30,000 miles had a prior life as a suburban commuter car with a single owner? The US$8,500 price seems too good to be true, but the assertions of the angel-faced seller are very convincing. Yet lurking beneath the newly painted exterior lies the survivor of a serious front-end collision and 130,000 miles of pothole-scarred urban streets. Oh, and that $8,500 price tag? Turns out it wasn't such a good deal after all, considering the car has a book value of $1,585.

Carfax hopes its Web-based vehicle report service will once and for all lift the veil of mystery that has shrouded many used-car and light truck purchases.

The company's reports are designed to disclose problems in a vehicle's past, such as whether a car was ever salvaged, junked or damaged by flood. The reports also detail whether a manufacturer's buy-back title has been removed or "washed" from a used vehicle's paperwork, thereby significantly affecting the safety, performance and resale value of the car. The reports can also uncover odometer fraud and provide valuable information about the vehicle's use, registration history and driving patterns, according to Carfax officials.

Unlike many companies that use the Internet to sell their wares, Carfax is not new to its core business. The company was launched in 1984 in founder Ewin Barnett's garage. Barnett's goal was to sell title histories to used-car dealers, says Dick Raines, Carfax's president.

Barnett operated the business solely in the Midwest until 1993, when the company had accumulated 75 million records detailing single events in a vehicle's history. At that time, Barnett sold the company to the Blackburn Marketing Group, a Toronto-based investment company, which scaled the business nationwide for the next six years.

In 1999, the Blackburn Group sold Carfax to R.L. Polk & Co., a Southfield, Michigan-based automobile information services company. That same year, Carfax expanded its focus to include all records that could detail an event in a car's history, such as service records, emission and inspection reports, auction sales data and accident reports. The company also began to target the consumer market for the first time, Raines says.

"It was obvious that consumers wanted to know everything about a car," he says.

"The Internet made it possible for us to go after the consumer market and deliver a great product. The consumer was clamoring for it."

Carfax is targeting a market that it estimates encompasses 41 million used-car transactions every year with a total value of $365 billion. It is also a market that has been affected by consumers' desire for more information about used cars, with potential buyers shying away from buying cars advertised in the classified pages and instead turning to used-car superstores with more selection and variety. Many auto dealerships are offering certification programs designed to guarantee a car's quality.

In addition, millions of used-car buyers now search the Internet to shop nationwide for a specific make and model, to obtain a vehicle's current resale value and to compare safety and repair reports. Carfax is maneuvering to attract those customers through links with hundreds of auto-related websites and sell them vehicle history reports as part of their online research for a car purchase, Raines says.

While many companies with websites have loosely structured agreements with partners that offer links to their site, Carfax has focused its attention on keeping its more than 200 Web partners actively working to bump up its own site traffic. Web partners that advertise a link to Carfax are offering customers a consumer-oriented service, which helps build trust, says Larry Gamache, Carfax's public relations manager.

As another incentive for its Web partners, Carfax has agreements with them to share a percentage of revenue when they steer customers to Carfax's site. "They get some revenue out of it. In return, [we] get traffic," Raines says.

In 1999, the Carfax website had 12 million visitors; out of this traffic, the company ran checks on 10 million vehicle identification numbers (VINs) against its database of more than 1.1 billion records on 250 million cars. (A record is one event in a car's history; each car in the database has an average of three to five records.) For $14.95, a customer can purchase one vehicle history report; for $19.95, a customer can receive an unlimited number of reports for 60 days.

Carfax also offers a "clean title history guarantee." If a customer purchases a car based on a Carfax report that gives the car a clean bill of health, and problems crop up within three years after the report is purchased, Carfax will give the customer 10 percent of the value of the car, up to $1,000. If a customer is not satisfied with a report, Carfax will refund its purchase price.

INFORMATION AGGREGATOR Carfax processes raw data it purchases from various sources to pull together a comprehensive profile of a car's history. The information is compiled from more than 100 sources, including state title records, state registration records, auto and salvage auctions, rental car companies, consumer protection agencies, state inspection agencies and maintenance records. Because of the variety of sources, Raines says Carfax reports provide customers with a service they can't get anywhere else on the Internet.

"You could go to each department of motor vehicles in the United States and wait in line to get title information," says Scott Fredericks, marketing vice president. "Or you can go to Carfax and get it immediately."

Carfax uses a proprietary software program coded specifically to look for the 17-digit VIN located on the dash and title of every car. As a result, company officials say the size of the database doesn't affect the search once a user makes a query via a Web browser. However, company officials are now evaluating if the two high-end enterprise servers Carfax uses will be enough to handle anticipated capacity.

SUCCESS FACTORS While Carfax's target audience is shifting as it adds more consumers to a base that has thus far been made up predominately of dealers, the company still leans on its 10,000 dealer customers for marketing support.

Dealers can use the Carfax subscription service to research the history of cars they are preparing to sell, and advertising the service to customers is a way to back up their own claims about a vehicle's history. The subscription service costs $50 per month; a single car's history report costs dealers $10.

"Our strategy looks at the dealers as our retail distribution network," Raines says. "They're our stores."

However, the Carfax website is also a store of sorts, and company officials emphasize that Carfax often tweaks the site in an effort to get the best consumer response rate. For example, Carfax created various versions of the lemon check offer; one includes the phrase buy now, while another incorporates red text and an exclamation point. Groups of users see one version or the other, and Carfax monitors the close rate.

In addition, Carfax strives to stay tuned in to customer needs, Raines says.

From the 10,000 consumer e-mails the company gets every month, Carfax chooses one customer story a day to send to its 144 employees to remind them of their potential to help customers. "We really use the Web to get good feedback from consumers," Raines says. "It's a wonderful source of customer feedback if you bother to listen."

For example, when Carfax first launched its Internet offering, users had to call the company if they wanted to take advantage of the money-back guarantee.

However, after receiving numerous e-mails from customers who wanted to request their refund online, Carfax changed its policy. Now consumers can fill out an online request form.

Like many Internet-based concerns, Carfax needs buzz, so this April the company launched a nationwide $20 million radio and television advertising campaign designed to pique consumer interest. The timing for the campaign coincides with the busiest used-car buying season, which traditionally stretches from April 1 to Sept. 30.

BUYER BEWARE Carfax customer stories reflect the high stakes buyers face when negotiating the sometimes treacherous landscape of the used-car market. Vicky Frank of San Diego says a Carfax report saved her from paying $11,000 for a 1997 Honda Accord station wagon that had a junk title. The owner told Frank that he did not know the history of the car but that it had a salvage title.

"Cosmetically it was fine," Frank says. "The price was really good. But I found it had a junk title. In California, that means you can't even drive it. You're supposed to use it for parts. Carfax definitely saved me a lot of heartache. I just can't afford to make that kind of mistake."

Frank, who used Carfax to generate more than 20 reports on used cars, found a car with its odometer rolled back 20,000 miles.

Some used-car customers have not been as fortunate as Frank and have turned to Carfax to trace the history of a car they already own that is having problems.

Terry Donscheski, of Dunlap, Iowa, purchased a 1994 Toyota 4Runner with an apparently clean title from a dealer in Council Bluffs, Neb., in 1997. After a trip to the local body shop for repairs raised questions about the car's history, Donscheski enlisted the help of a consumer protection program at a local television station.

The television station worked with Carfax to track down the cause of the car's persistent problems, including a hood that flew up while Donscheski was driving. They found that the car's title had been washed; the car had been totaled in Colorado before the Council Bluffs dealer bought it, and therefore it should have had a salvage title.

Donscheski paid $21,000 for the car, which he says was not worth more than $10,000.

"I wish I had known about Carfax before I purchased this car," he says. "I wouldn't be in this situation."

With a testimonial like this, Carfax hopes its service will resonate with many more consumers who are in the hunt for a quality used car.

Heather Harreld is a freelance writer based in Cary, North Carolina. She can be reached at heather_harreld@mindspring.com.

EXPERT ANALYSIS BY RANDALL S. HANCOCK ESTABLISH TRUST Carfax has done a good job transitioning from a traditional business to a dotcom. Here are a few questions for the Carfax management team to consider.

What value does Carfax provide? Carfax markets itself as an "insurance policy," protecting car buyers from hidden problems in a used vehicle's past by collecting and synthesizing a vast amount of data from a variety of publicly available sources. By integrating this data, Carfax provides significant value.

However, organizations like TRUSTe help consumers determine the reliability of online retailers. Given the lack of trust inherent in the used-car industry, Carfax could fulfill a similar role.

Who benefits most from Carfax's service? Traditionally, car dealers use Carfax to guarantee the quality of their used cars. Carfax might also target the millions of people using Internet classifieds and auctions to sell their used cars. A recognized seal of approval from a trusted third party might result in a better price for the seller. Furthermore, what about providing car sellers with a premium service including a copy-proof hologram sticker that can be placed on a car, authenticating it by date?

Carfax could also collaborate with hundreds of online auctions and newspaper classifieds selling used cars, allowing buyers to link to Carfax's site to research cars for sale. Carfax can also add value to other businesses interested in used-car transactions, such as auto insurers and finance companies. With more transactions on the Internet, third-party validation is crucial.

How can Carfax effectively attract customers? It's not clear that Carfax's strategy of linking with 200 websites or its $20 million advertising campaign will pay off. Unlike an e-tailer, which can spend millions to attract frequent customers, Carfax's service is likely to be of interest only when someone is buying or selling a used car--an event that usually happens to an individual only once every few years. How can Carfax ensure visibility during a used-car transaction?

One idea: Develop a customer-acquisition strategy that integrates online and offline channels. Carfax has relationships with used-car dealers, why not put up Internet kiosks in those dealerships so that customers can access Carfax directly?

How should Carfax earn revenue? Carfax offers a subscription-based model.

Unfortunately, there are few successful examples of subscription-based online services targeted to consumers; even traditional publishers of automotive information--such as Edmunds.com and Kelley Blue Book--provide Internet services for free.

Carfax has three revenue choices: its current subscription model, collecting transaction fees from sellers or generating subsidized revenues from third parties. The last two alternatives probably offer the greatest upside and most difficult challenges.

How can Carfax sustain its business? Given the reliance on nonexclusive data sources, a competitor could emerge with a free service that could make Carfax obsolete overnight. Ultimately, the best defense may be a strong offense.

Carfax should broaden the customer base, expand its channels and cannibalize its revenues before anyone else does.

THE LEMON CHECK Many of the partner websites advertise another Carfax marketing strategy: the free "lemon check" service. Scott Fredericks, Carfax's vice president of marketing, says the lemon check is used as a teaser to give away a portion of the vehicle history reports. "Lemon is a very popular term that many consumers hitch onto," he says. (Technically, a lemon is a car that was bought back by the manufacturer because of too many repair problems.) For more in-depth reports detailing accidents, odometer fraud and cars used by rental agencies, consumers have to purchase complete reports.

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