Auto marketing website TrueCar enjoyed a quick trip to success, but the very business model that drove its growth now needs a repair.

Founded in 2006, the Santa Monica company helped car dealers sell nearly 250,000 vehicles last year. For each sale generated by TrueCar, the site charged the dealer a fee of $299 for new models and $399 for used. However, that arrangement violates laws in many states against “bird-dogging,” which refers to paying a third party for a lead that becomes a sale.

Some state regulators and dealer associations have long warned dealers that the site may violate their laws. They were largely ignored until recently. But in an announcement Jan. 9, the Virginia Motor Vehicle Dealer Board found the site’s payment system illegal and authorized enforcement.

TrueCar then announced it would drop the referral fee and switch to a subscription fee in certain states – including Virginia and California – where the transaction fee arrangement could cause legal problems. Although TrueCar wouldn’t tell the Business Journal exactly how many states would be affected, Automotive News cited Chief Executive Scott Painter last week saying that as many as 20 states would change to subscription billing.

But that change to subscriptions diminishes TrueCar’s big competitive advantage over other car sites, said Travis Miller, co-founder of automotive marketing consultancy Rich Dealer in Orlando, Fla.

“The reason TrueCar has grown so fast is that under its original model, dealers only paid if they sold a car so it was a no-risk proposition,” Miller said. “I believe (the change) will slow the growth of TrueCar. Their sales pitch to dealers just isn’t as sweet.”

In addition to the billing model switch, the company announced it has suspended operations in Louisiana, Colorado, Nebraska and Oklahoma until it can comply with local regulations. It also announced changes in its advertising messages and the formation of an advisory dealers council in an attempt to comply with state laws and improve relationships with dealers.

“Over the past several weeks, TrueCar has accelerated discussions with regulators in several states regarding its fee structure and advertising issues,” Painter said in an e-mail to the Business Journal. “It’s too early to tell how this will impact revenue.”

TrueCar has generated substantial opposition from some car dealerships. As the website grew, dealers complained that it has driven down their profit margins because they fight to underbid each other.

Painter has positioned TrueCar as a boon for consumers because it provides price information that was previously unavailable. He sees TrueCar as the catalyst for moving the entire industry into the future.

He said the company has grown about 130 percent each year since its 2006 founding. TrueCar has about 300 employees, 265 of whom are in Santa Monica.

“When a company gains this degree of traction with consumers and dealers, it attracts attention from a variety of industry participants, some of whom would prefer to stick with the old way of doing business,” Painter said in the e-mail. “TrueCar also believes that pay-for-performance, a model that exists in virtually every other type of Internet-based marketing and which has powered e-commerce for nearly a decade, has a positive role to play for both dealers and car buyers.”

Past prices

When buyers visit TrueCar.com, they can see the prices that nearby dealers charged for a specific model in recent sales. Then the shoppers can request prices from dealers on the TrueCar site, using past prices as a guide. Later, when the buyer goes to a car lot, the dealer is contractually required to honor the TrueCar price quote.

Under the new model, the bird-dog fees are eliminated and the dealers pay a subscription to be on the site.

Other websites, such as AutoTrader and Edmunds, charge dealers for contact information provided by car shoppers.

Jimmy Vee, a business partner of Miller at Rich Dealers, said most car dealers dislike TrueCar because it puts too much pressure on dealers to cut prices.

“With TrueCar, you have a company that portrays itself as an advocate for the consumer, but its revenue comes from the dealers,” Vee said. “That’s the inherent flaw in the business model and explains why all the changes they announced are in favor of dealerships.”

Other changes in response to regulatory pressure include new TrueCar advertising messages that emphasize a dealer’s proximity, selection and service rather than just price; enhancements to the reports that consumers receive about local dealerships to allow the dealers to market themselves; and the establishment of a national dealers council.

While TrueCar is trying to adapt to the threats of enforcement, the company also plans on working to change laws that prohibit its transaction fee model.

“TrueCar believes this model effectively shifts marketing risk away from participating dealers while providing customers the best possible car-buying experience,” the company announced Jan. 11. “TrueCar will continue to work with state regulators in an attempt to identify ways to improve current laws and regulations given the availability of data in the digital age.”

Steve DelBianco, executive director of e-commerce trade group NetChoice in Washington, D.C., said that TrueCar’s plan to lobby for change in the laws follows precedents of other sales professions, including travel and real estate agents, and ticket brokers.

“New Internet players in these industries worked to update laws so that consumer protection didn’t become an excuse for innovation prevention,” DelBianco said. However, he added that it will take TrueCar a lot of time to push for updating the laws state by state.

Vee at Rich Dealers said car salesmen might support changing the bird-dog rules, which were originally passed to prevent abuses in other industries, such as medical professions or mortgage lending, where the practice creates conflicts of interest. He said that most car dealers would love to give referral fees, and resent the fact that TrueCar has gotten away with it while they can’t.

Miller believes that under the subscription model, TrueCar will remain a force in the auto industry, even though it will lose some of its dealer customer base. He noted that Jan. 1, the company became the exclusive car-sales partner of Yahoo, opening a huge pipeline of traffic and sales leads.

“You are going to get dealers that are so hungry for leads they will pay the subscription fees, even if the leads are shared with other dealers,” he said.