CarWoo Steps on the Gas Pedal

7/30/12Follow @wroush

CarWoo CEO Tommy McClung shared some numbers last week that would make any startup founder proud. The deal-finder site, which we first profiled in October 2010, is on pace to facilitate 50,000 car purchases this year, with an aggregate value of $1.2 billion. That represents 600 percent growth over both figures from one year ago. The startup has doubled its employee head count in the last year, and today 9,000 dealerships, including 70 percent of dealers in the 50 largest U.S. metropolitan areas, use the service for lead generation.

On top of all that, the Burlingame, CA-based startup just signed a deal with AOL Autos, which attracts 10 million unique visitors a month. From now on, CarWoo will power AOL Autos’ “Best Offer” feature. In other words, once users have finished researching their options and are ready to buy a car, they’ll be sent directly to CarWoo, which will connect them with local dealers who have the requested make and model on their lots.

That’s a “pretty big deal for us,” says McClung. “It’s going to drive a lot of volume into the CarWoo marketplace.”

All of this is happening just three years after CarWoo exited the Y Combinator venture incubator program in Mountain View, CA, where it got its start. “It’s been a lot of work,” McClung says. “This is a very large space with a lot of entrenched players, and it’s a very difficult space to get traction in. But we have been fortunate to have very strong supporters and a good group of advisors. Every day is a grind, but when you take a step back, yeah, we have come a long way.”

CarWoo's co-founders. Left to right: Michael Young, Tommy McClung, Erik Landerholm

The big idea at CarWoo is the same as ever: It’s a place where consumers can get competitive offers from local auto dealers once they’re ready to buy. The emphasis is on reducing the stress, hassle, and badgering that goes into finding the right vehicle—what McClung calls the “last mile” problem in car buying.

“In the automotive space, nobody really touches the consumer between the time they figure out what car they want to buy and the time they hit the lot,” he says. “But there is a lot of work for them to do in that period—calling dealers, finding out what the inventory is, at what price, and how to finance it.” That’s the process CarWoo is trying to smooth out, by providing consumers with, concrete information about inventory and prices, along with background information on dealers themselves.

But it turns out that the details of CarWoo’s business have changed quite a bit since my last conversation with McClung. For one thing, the company has flipped around its revenue model; it’s now charging dealers instead of consumers. And rather than trying to make CarWoo.com itself into a destination site for car buyers, it’s pursuing more partnerships like the one with AOL.

The pricing change at CarWoo should be of interest to lots of other entrepreneurs, given that there’s an eternal debate in the world of Web-based services about the pros and cons of paid, free, and “freemium” plans. When CarWoo started out, it charged consumers $49 and guaranteed they’d get three to five quotes from local dealers. Dealers got access to the leads that CarWoo sent them at no cost.

There were two big reasons for CarWoo to charge consumers, McClung says. The first was that it helped screen out “tire-kickers”—people who weren’t truly ready to buy. “When somebody paid $50 they were extremely high-quality [leads] and the dealer knew they were buying a car,” he says.

The other reason was more about startup psychology. “When the customer is paying you, you are focused extremely heavily on making sure you build a great experience for the buyer,” McClung says.

By late 2011, the company felt its service was attracting such promising customers that it no longer needed to apply a charge to filter out the tire-kickers. It had also gotten better at using Web traffic data to analyze whether a visitor would make a good lead, based on factors such as whether they arrived at the site via a Google search, or an ad.

So CarWoo dropped its consumer fees and set up a freemium plan for dealers instead. Dealers can still look at incoming leads from consumers for free. But if they pay CarWoo’s subscription fee, they’re able to see the offers other dealers are making, giving them the opportunity to undercut competitors. They can also create profiles on CarWoo’s site explaining why consumers might want to do business with them. “If you get onto our subscription service as a dealer, you become much more differentiated,” McClung says.

The partnership with AOL Autos is important because it will fatten CarWoo’s pipeline and make the service even more attractive to dealers. It may also provide a template for other partnerships, and perhaps give CarWoo a way to work with other lead generation sites like Cars.com or AutoTrader.com, rather than having to compete against them directly.

“We can help those sites provide a much better experience to their users, rather than simply selling a name, a phone number, and an e-mail to dealers,” McClung says.

That ought to make dealers happy too. “The pain point on the dealer side is that if they are buying leads [from the big lead generation sites] those convert at a very low rate,” says McClung. “So the more highly qualified the consumer is when they show up, the less time they have to spend vetting the consumer, and the more they can focus on providing a fantastic experience back to the consumer. Those efficiencies are what the Internet has promised to all industries, and we are finally helping dealers realize some of them.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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