Zag.com Inc.
Santa Monica
Business: Internet auto retail site featuring up-front pricing
Founded: 2005
Two-Year Growth Rate: 727%
2008 Revenue: $9.1 million
Car buyers who research their purchase on the Internet soon confront an obstacle: If they want to know the price of a specific vehicle, they often have to disclose their name, address, telephone and e-mail. The automotive Web site then sells this information to car dealers, who immediately start calling the would-be customer.
Zag.com is different.
The 2,400 dealers who sell their cars through the site agree to disclose their prices up-front without requiring an inquirer’s personal information – and then honor those prices.
“What frustrates most people about buying a car is the salesman,” said Zag Chief Executive Scott Painter. “We’ve solved that problem.”
As for dealers, they like Zag because of its select audience. Rather than waiting for people to wander onto the site, Zag has agreements with groups such as the Auto Club, American Express and credit unions that offer car loans. These organizations steer members to the site. As a result, dealers get a motivated potential customer – and Zag doesn’t have customer acquisition costs, Painter said.
That business model has worked surprisingly well. Zag’s two-year revenue growth of 727 percent makes it the No. 2 firm on the Business Journal list of fastest growing companies. Even more impressive: It has come during a period of turmoil for the auto industry.
Even though many dealers have filed bankruptcy and U.S. manufacturers are eliminating thousands of franchises, Zag sold more than 8,000 cars in August, making it the sixth largest auto retailer by volume in the United States. However, its revenues are tiny compared with a traditional auto dealer because Zag takes a flat fee of only $300 to $400 on every car sold.
Up-front pricing also tends to limit dealers from up-selling extras such as accessories, insurance and financing packages. That has meant Zag has saved consumers more than $85 million, Painter said. But it’s also been tricky to police.
Bill Magarity, president of Inglewood auto sales consultancy Two Minute Marketing, said one challenge for Zag is keeping dealers honest.
“No matter how many promises you get from dealers, they will try to make money with add-ons, financing, undercoating and service contracts,” Magarity said.
Painter has already confronted this situation. So far this year, he has kicked 75 dealers off his site for violating the rules of engagement with consumers. Another 15 dealers are on a watch list.
Still, Painter sees bigger growth ahead. AutoNation, the nation’s biggest auto retailer, controls 1.4 percent of the new-car market, while Zag has about 1 percent. Zag’s goal is to account for 10 percent of the new-car market and 2 percent of the used-car market in two years.
Before starting Zag, Painter founded CarsDirect, an automotive research site, in 1998. CarsDirect is now a subsidiary of Internet Brands Inc., a publicly traded L.A.-based online retailer. Painter remains a stockholder in Internet Brands.
To fuel Zag’s growth, Painter has raised more than $100 million in debt and equity. Investors include, GRP Partners, Capricorn Management LLC, eBay co-founder Jeffrey Skoll and Galpin Motors owner Bert Boeckmann.
The company reached break-even this summer, and now plans to start acquiring auto-related businesses and sites. Painter hopes to make Zag “the Amazon.com of the car business.”
He believes the up-front model will change the entire auto business. He predicts only 30 percent of current dealers will survive and they will be megadealerships. Also, dealers will need fewer salespeople because buyers will select their cars online and show up at the lot just to complete the paperwork and pick up the vehicle.
“The new-car salesman is a dinosaur and should seek life elsewhere,” he said.
