Vroom, Carvana, & Optimising Vertical Integration | In Practise

Vroom, Carvana, & Optimising Vertical Integration

Cofounder at Vroom

Learning outcomes

  • How data science is at the heart of Vroom’s business model
  • Why Vroom started selling only low mileage, later models
  • How to think about optimising vertical integration
  • Why reconditioning is potentially less important than last mile logistics for online used car platforms
  • How Carmax could compete with online retailers
  • Limitations to online players scaling to 1-2m retail units sold per year
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Executive Bio

Elie Wurtman

Cofounder at Vroom

Elie Wurtman is the cofounder of Vroom, one of the largest online used car retailers in the US, and has over two decades of experience as an entrepreneur, executive, and investor. He is also the co-founder and Partner at PICO Venture Partners, a venture capital firm that led the first financing round in Vroom in 2014. Elie started his career as a serial entrepreneur and company builder. He launched his first company in 1993 and took 3 companies from founding to IPO. As co-founder and CEO of Deltathree, Jerusalem’s first unicorn, Elie led the company from its founding to 60 points of presence globally with operations in 35 countries. Elie has led the second chapter of his career as a venture investor and social entrepreneur. Elie was previously a General Partner at Benchmark Capital Israel. Prior to Benchmark, he was CEO of JVP Studio, before founding Vroom in 2014. Elie is passionate about education, social impact, and positioning his hometown Jerusalem at the forefront of innovation. He is also an Aspen Institute Global Leadership Fellow, and sits on the boards of the Tower of David Museum and Regavim.Read more

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Elie, can you share some context to the genesis of the idea for Vroom?

Many big ideas start with a drop of naivety. I found myself visiting a dealership, for the first time and I could not believe that this was the way that people bought and sold cars. Who would have imagined at the time – 2014 – that you go in, you speak to a salesperson. You don’t, necessarily, trust the process; there is a lack of transparency and you have to wait a long time to get through all the paperwork.

As a digitalpreneur, I said to myself, there must be an easier way to do this. I quickly sketched out, in my head, that we could buy and sell cars online and deliver them directly to your front door. Granted, I didn’t think through all the downside of delivery to your front door, anywhere in the United States; it’s a pretty big country. But the original spark was there and the original opportunity, to fundamentally disrupt a very poor consumer experience to, hopefully, a transformation to a very good one, is what we set out to do.

What were you focusing on in the early days?

There were a few big things. Today, we think that we take it for granted that you will buy a $30,000 item, sight unseen, and have it delivered to your front door. It’s not like buying a toothbrush, on Amazon, where you could send it back. The first real challenge was, will people buy it without kicking the tires or taking a test drive, which has long been thought to be the backbone of selling cars. My analysis is that that was just a sales tactic. The idea that we come and look at the vehicle, get in the car for a test drive, was much more about it being in the high-pressure sales pitch. There is no reason that, with proper warranties and guarantees, we wouldn’t be able to convince people to buy the car, sight unseen.

Fast forward six years, to today, I think most people accept the premise that you can buy a car without seeing it first. From that perspective, I think it’s a real victory, in terms of behavioral change and consumer perception of what you need to do before you buy a car.

When looking at the essence of Vroom versus Carvana, CarMax or any of these other businesses, what is really the difference in the essence of Vroom versus the other players?

I think each company has its own flavor. I used to think of CarMax as the big box retailer. You go to a physical store and while it’s a much better process than most other dealerships, nonetheless, it is still a retail experience. Obviously, they are trying to update that and I’m sure they will. Carvana and Vroom are really two similar companies, but very different companies.

Carvana still has these vending machines, whereas Vroom is really about full, online experience, door to door delivery, white glove service and really focused on delighting the consumer. In the end, everyone is selling cars; everyone wants to be a more responsible seller and everyone wants to provide a high-quality experience. I think Vroom is probably the most consumer centric but they are all doing it in a slightly different way.

Why would you say Vroom is the most consumer centric, over other players?

You asked about the culture and the culture of Vroom has always been delighting the customer. It’s going one step beyond what is to be expected. Our top priority, when we set up the business, was always measure customer satisfaction. Are we doing everything, along the line, from the person reconditioning the car and taking out the slightest dent, to the person handling the delivery, to the person who might be helping you on the phone? The single most important metric was customer delight. I think that is a culture that is very strong, when you try and build a new brand, which says that the customer is first. It’s not about maximizing the profit for the dealership; it’s not about other things, such as making the most money on F&I. The customer comes first and that’s how we built our brand at Vroom and how, I believe, our culture stands out.

One thing that stands out, when I was reading Vroom’s S1 and the filings, is data science. That seems to be a word and terminology that comes up almost religiously, at Vroom, versus the other players. Is that on purpose and, if so, what is the advantage one can get in this space with data science, over other players?

My background and my partner’s background has been in building data driven companies. We live in a world which is filled with data. When you want to understand the pricing of a vehicle, what you should pay for it, what you should sell it for, how much it’s going to cost to recondition it to just the right level that will maximize customer satisfaction, it’s with data that Vroom has an unfair advantage. We built a company based on the premise of a data science platform, which analyses real time pricing, across the entire country, understanding how to do things most efficiently. We used to say, jokingly, algorithms don’t get commissions. When we use data to make all of our main business decisions, when we price cars fairly, when we offer people a fair price for the trade in, it’s based on data science. We fundamentally believe that that drives better business outcomes and that will enable Vroom to be the biggest, most successful and most optimized company, over the long haul, in general. I’m a venture capitalist; I’m a big data driven digitalpreneur. It is data that is fundamentally changing our economy at light speed. The companies that embrace data are the ones who are thriving and growing and, essentially, driving better value for their customers.

CarMax sell over a million cars a year; Carvana sell triple Vroom’s capacity. Wouldn’t they say they have an advantage in the scale and data, over smaller players?

You’re looking at three of the best companies in the industry. I don’t think it’s one versus the other. You have to remember that those three companies combined just represent a few percentage points of the entire industry. It is companies like Carvana, Vroom and CarMax who have what it takes to differentiate and pull ahead, as the industry rapidly moves from this in-person experience to a remote experience. The fact that Covid came along and disrupted all of our lives also meant that it put that disruption in the automotive retail market into hyper speed, in terms of the pace at which things are changing. I think all three companies are benefiting from scale; all three companies are benefiting from more transactional data than any other kind of dealership group combined. I think you will see these companies pull ahead, over time, at the expense of smaller dealerships. Not immediately; it’s a very fragmented market so the direct impact on any given dealership is small today. But if you look five, 10 years ahead, as we move from single percentage points of market share, to double digit market share, then you will start to see that the traditional model may not keep up forever.

Going back to the start of Vroom, why did you choose to focus on low mileage vehicles, to begin with?

The best way to run a healthy business is not to have too many customer complaints or the cost of dealing with customer returns. All the more so when you are sending a car thousands of miles away from home base and, if something is wrong with it, you have to take it back in and that can be pretty expensive, not only to your reputation, but actual dollars and cents. Low mileage cars, cars that are late models, under five years old, tend to have all of the really heavy stuff under warranty.

If you are under a manufacturer warranty for a major engine problem, our risk to something going wrong with the product that we are selling and we are warranting, to our consumers – a seven-day money back guarantee – by selling newer cars, you are alleviating 95% of the issues that might arise. If the car is under warranty, you can send it back to an authorized dealer, that is sponsored by the manufacturer and Vroom can provide excellent service whilst not necessarily having to foot the bill.

You have a tighter understanding of the residual value of the vehicle, effectively?

It’s more than that. It’s also that when issues come up, that the customer is benefiting from the original manufacturer warranty. The last thing you want to do is to have a customer buy something from you and then, a few months later, for them to get a big bill for a repair that needs to happen. When you sell it with the original manufacturer warranty, a lot of those issues are, basically, moved off our balance sheet and, more importantly, from a consumer experience, they don’t feel as if they have the risk that they bought a car sight unseen and what if something goes horribly wrong. They know that they are getting the original manufacturer warranty on the big stuff.

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Vroom, Carvana, & Optimising Vertical Integration

January 11, 2021

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