Carvana's Bold Plan to Change How We Buy Cars

Most people of a certain age know what it's like to buy or lease an automobile, a process that really hasn't changed too much in decades. Sure, the Internet happened, and consumers are arguably more informed than ever. Still, the folks behind Carvana believe that they have invented a new mousetrap.

I recently sat down with co-founders Ernie Garcia and Ryan Keeton to talk about the company and the problems it's trying to solve.

PS: What is Carvana?
Ernie Garcia, co-founder: Carvana is a company that allows people to buy cars in a completely new way. 95% of people start online, then go to a dealership to buy. Our customers can complete the entire transaction online without ever going to a dealership, and then we bring the test drive to their door with all the details already worked out (financing, verifications, e-contracting). Beyond that, the whole thing comes wrapped in a 7-day return policy, allowing the customer to return the vehicle if they don't like it for any reason, no questions asked.

PS: Why does the market need a solution like this?
EG: The entire industry has undergone massive changes over the last 20 years. Customers used to choose a dealership, then pick the car. Today they find the car online and that determines the dealership. Customers used to test drive multiple cars. Today 70% of people test drive one car or less. Customers used to not know much about vehicle prices before they walked into the dealership so dealers would make money in obvious ways, but today customers come armed with 3 price quotes before they set foot on dealership lots, so in response dealers have moved 60% of their retail profits to additional products like vin etching, marked up interest rates, and theft protection devices according to automotive market research firm CNW Research. This all has led to consumers spending on average five hours to purchase a car, which is 12% higher than 2010 according to J.D. Power.

All of that has made "dealerships" less important, but they haven't gotten any less costly. It costs dealers about $2,000 to pay the sales guy, managers, F&I managers, and for the big showroom (source: NADA). Very few customers would say that the value for this experience is worth $2,000. Carvana wanted to find a solution that took advantage of all these trends, was built upon an innovative technology platform, and resulted in customers saving $1,500 in the process. We believe we have built that - our technology is so easy to use that our fastest purchase to date was ten minutes and 30 seconds, and the customer had their car delivered the very next day.

PS: What are the biggest challenges you face?
Ryan Keeton, co-founder: Buying a car has been largely unchanged in the last 50 years. That creates a lot of opportunity, but it is also responsible for deeply engrained behaviors that are hard to change. Buying a car is a big decision and there is comfort in doing it the way it has always been done. In addition to that, we are part of the least trusted industry around and the idea of transacting online and having the test drive delivered to your door is predicated on trust. Customers have to trust that the right car is going to show up and that we will honor the 7-day return policy. That is trust that we take very seriously, but it is something we are earning at different speeds from different people.

PS: What is the most interesting thing you have learned so far?
EG: I think it goes back to trust. We have roughly twice the level of referral business that is normal in the industry and we have only been in business for nine months and don't pay for referrals like the rest of the industry does. This tells me that once we are trusted our product is very desirable, but that it is very hard to earn that trust. Having high referral business is a great thing in a vacuum, but part of it making up a large percentage of our business is that we aren't selling as many cars to new customers as we wish we were and we believe that is because we haven't earned their trust yet. The great news is that we are delivering a great product and treating people very well. We believe if we keep doing that trust will inevitably be earned.

PS: What's next for Carvana?
RK: There are three branches to our strategy going forward: Continued functional development to make car buying easier and more straightforward than ever before. An ongoing emphasis on the consumer experience to make sure our website is easy enough to use, so that people become more comfortable with such a large purchase being done in a new way. And growing our geographic and logistical footprint to be able to service more people nationwide more effectively every day.