With the creation of Auto-By-Tel, Ellis has hit upon a simple formula for success on the Net: offer a service that is easy to use, provides great savings to consumers, and eliminates traditional shopping hassles. The online world is beating a path to his door...er, home page...and Ellis now reigns as king of the hill in the auto purchase referral business.
His company, Auto-By-Tel, is an online service via which interested car buyers may ask for a price quote on a new car that they are interested in. Auto-By-Tel passes the request to a local dealer who then delivers an astoundingly low bid directly to the buyer. By cutting out so many middlemen and eliminating the haggling that usually goes on when buying a car, the car dealer can pass on to the consumer a savings of well over a thousand dollars. "It's hard to get a better price from a dealer than Auto-By-Tel can provide," says Ellis.
Right Place, Right Time
Ellis wasn't always into computers. He first got into online services in early 1994. As late as October 1994 he was getting expert opinions that the Internet wasn't yet suitable for successful commercial ventures, but by the start of 1995 Ellis began to feel that the time was right to jump into the waters.
Ellis had the idea of offering a service which would provide potential buyers with a low cost quote on a new car, with no hassles or head games from the sales manager. So Ellis formed Auto-By-Tel. The first outlet for selling was via the cable channel QVC. Too far ahead for its time, the offering never did very well. "But then Prodigy came along," Ellis recalls, "and we opened a site on Prodigy in March 1995." By July 1995 the Auto- By-Tel Web site had opened on the Internet.
The Auto-By-Tel site is clean and well organized, and is complemented with a presence on all of the major online services.It gets the highest usage on Monday and Tuesday, probably due to Web surfers who have spent the prior weekend test-driving cars at dealerships, and are now ready to get a quote on the model that they want. Incidentally, most users tend to come in from a commercial work address instead from home via one of the popular online services.
Success
So, how successful is Auto-By-Tel? Right now, Auto-By-Tel generates sales leads that turn into sales of almost $300 million per month. That's right—$300 million per month. Ellis expects that by the end of 1996 fully 1% of U.S. auto sales may have been generated by Auto-By-Tel. And that number may double next year.
Of course, Auto-By-Tel acts as a referral service instead of actually selling the cars; dealers who wish to get Auto-By-Tel referrals can sign up to become "subscribing dealers." Such dealers pay Auto-By-Tel a monthly fee (usually around $1000) and typically generate about 80 sales per month from the leads that Auto-By-Tel sends to them. In addition, Auto-By-Tel requires that subscribing dealers close a majority of the leads sent to them, and does extensive follow-up work to track dealer performance and customer satisfaction. "We've had to let go a number of dealers," said Ellis, "because they weren't giving low enough prices and good enough service."
That's fine with competing dealers in most regions; dealers across the country are eager to join Auto-By- Tel. Ellis already has dealers signed up in every area of the United States. His service is popular all across the U.S., particularly in the Northeast. Not content to conquer just the domestic market, Ellis has another 100 dealers in Canada (which should be fully covered within 18 months), and is considering expanding into even more countries.
A significant factor in the success of Auto-By-Tel is that the economics of the deal are dramatically different for car dealers when they sell an auto via the Auto-By-Tel method. In a traditional situation, a dealer must make $1500 - $2500 profit per car in order to stay in business. This is because the dealer incurs approximately $400 in advertising costs, $1150 in personnel costs, and $200 in inventory carrying costs and other costs. But with Auto-By-Tel, the dealer pays $1000 to get approximately 80 sales in a month. That means that the cost to generate sales is about $25 per sale, so the dealer can automatically pass on a savings of $375 to the customer. Personnel costs are also reduced dramatically because one person now handles everything: issuing the quote, signing the contract, and all other minor details. In addition, the dealer often receives incentives from the manufacturer, a portion of which they pass on to the customer. All told, the customer receives dramatic savings and leaves the dealership feeling that he/she was given an excellent deal. For their part, the dealer makes less money, but the sale also costs less time and money to consummate. Everyone wins.
Ellis is starting to branch out by offering auto insurance through an arrangement with AIG, one of the nation's largest insurance companies. The future also holds plans for offering immediate online financing of car loans via a partnership with industry giant EDS. All of these deals follow the basic Pete Ellis philosophy: quality product, low price, no hassle.
Interestingly, Ellis has figured out another way to make money from Auto-By-Tel. A potential gold mine lies in the marketing data that can be derived from the database of bid requests. This information lets Ellis know exactly what models are most popular at any given time, in any given region. This information could be used by car manufacturers to build a mix of models that more closely matches demand. Contrast this with the current method, whereby manufacturers spend a lot of money to make educated guesses about what the demand for models will be. The current method leads to a poor match between supply and demand, creating a need for unwanted cars to be inventoried until they are sold, and ultimately leading to less choice for customers.
Ellis' empire continues to expand. Auto-By-Tel has extended its reach on the Internet by becoming the referral service for the Microsoft CarPoint Web site. This Microsoft site has extensive information about all new cars available in the U.S. When a visitor to the site is ready to purchase a car that they've been looking at, they can fill out an online form which gets sent to Auto-By-Tel.
Auto-By-Tel has grown rapidly—the company currently employs 45 people—and recently moved to a new location near John Wayne Airport in order to have even more room to grow. They'll likely need it; the business is growing 5-10% per month. To further help with their rapid growth, Auto-By-Tel has just raised $15 million in funding from private sources.
A Look Down the Road
What does Auto-By-Tel mean for the future of car buying? Of course, most car buyers will still need to test drive automobiles and decide what model they want. Ellis expects that at some point in the future the car manufacturers may have to set up auto showrooms where people can come to look at cars and take test drives without an expectation that they will actually buy. The consumer can then return home, get quotes from several online dealers, and then choose the best bid.
Nevertheless, Ellis expects that within three to five years, close to half of all new car sales will involve the Internet. He feels that there is still room in the market for three or four competitors with Auto-By-Tel.
Of course, the success of Auto-By-Tel raises the obvious question: can other businesses profit from the same model? Ellis isn't sure that the same formula will work with all industries. One of the advantages for Auto-By-Tel was that the auto dealership industry was ripe for change; the current system is hugely inefficient and does not offer good customer service.
By combining the Internet with his extensive personal knowledge of the auto sales industry, Pete Ellis has come up with a winner in Auto-By-Tel. And with Ellis in the driver's seat, Auto-By-Tel is sure to be successful for years to come.