Business Model Matters
Situation
Creating business value does not always equate to creating market value. Business value creation is a two-step process. The first step is to create customer value. Many businesses in our industry fall short on this dimension, wasting precious resources on fighting the “feature function battle”, where companies mimic competitive offerings without considering how each will drive dealer profit. The second step is to deliver the value in a business model which captures and retains maximum value. The industry has focused on a very limited set of business models, preferring monthly per store subscription rather than pay-for-performance. These models become vulnerable to the scale negotiating power exercised by larger groups, particularly when delivered through a SaaS model with low per store variable cost. Gain share models not only refocus pricing on value over marginal cost, but also serve to guide on-going development, which reduces wasteful investments. Furthermore, dealer service providers are more likely to capture value from product enhancements than in more traditional business models where enhancements are often used to support retention and core product price enhancements. Finally, financial markets and buyers appear to distinguish between business models when valuing business performance.
Case Study
Autobytel and TrueCar are essentially in the same business, providing dealers with sales leads. Their leads do not perform remarkably differently in terms of close rate, yet TrueCar is able to command much higher effective revenue per lead and dramatically outpace Autobytel in market value per attributable sale. The 6.9 times greater market value creation is despite Autobytel having moderately positive cash flow and TrueCar still negative.
While there are many reasons TrueCar is more highly valued than Autobytel, most are driven from their differences in business model that position TrueCar differently in terms of future growth prospects and market perception as a “digital retailer”, as opposed to a “lead provider”.
Implications
When developing new capabilities, dealer service providers need to carefully assess the business model used to capture value. Defaulting to the prevailing model can lead to significant value leakage.