Austin Ligon on Information Dominance, the Right Number of Competitors (Zero), The Lift Created by TV Ads (30%) & How Fast You Can Expand (20% per Year)

CarMax founder and former CEO Austin Ligon visited Redfin yesterday. CarMax is a $10 billion superstore that is taking all the sales slime & financing shenanigans out of the used-car business. Customers love it. As part of our brown-bag lunch program, Austin came by to talk to us about how to build a customer-driven consumer brand, and how to scale an operationally intensive business. The crowd went wild. Here’s what Austin had to say in his talk, and how he answered some of the questions we threw at him…

Who here has heard of CarMax? Only a few of you? Well we’re not in Seattle. We sell $100 million worth of used cars per store. We have the same ethics as Costco. It’s guaranteed. You can return a car you buy from us in five days and get all your money back; elsewhere the guarantee is “fifty feet or fifty seconds.” The financing – there is no financing person wheeling and dealing, there’s just a computer screen telling you what the rates are — is totally straight.

The challenge is getting the cars on the lot. It takes us 23 minutes to buy a car from a consumer. The price we give you should reflect what it could be sold for at an auction in the next seven days, minus the frictional cost of our having to deal with it. We buy about a third of the cars we look at.Austin Ligon

The best cars out there are hard to buy. Who has a Honda Odyssey? GREAT cars. A Honda Odyssey isn’t available in lease fleets and rental fleets. We have to buy it from customers. That’s the key challenge. Any customer can come in and we’ll buy their car, so long as they have the title to the car. That’s a real commitment. It means we buy cars we don’t want. We have an auction every 14 days for mom & pop dealers, selling whatever our own customers don’t buy from us.

Our service is a fixed price, a la carte offering – we don’t play games by offering you a lot for the trade-in then over-charging you on the sale of a new car — we’re totally transparent. Our website lets a Sacramento customer buy a pink Caddy in Miami. You pay to move the car, but if it’s not as described, we pay you back those moving costs.

And the whole purpose of our advertising is to drive you to our website. People who come in to our store after having looked at our site are twice as likely to buy. Our sales managers used to prefer walk-ins off the street and groan about the Internet leads. Now, it’s the other way around.

How fast can we grow? Well used cars alone are a $300 billion industry. We’re about a fourth or fifth as big as we can be. We have zero competitors. And that’s because it’s really, really hard. You have to build systems, processes, culture. We’ve been at it nearly 20 years.

Costco has a rule that you can’t grow more quickly than 10% store-on-store because you just can’t get the right people. In the big-box world, it takes 25 – 30 years to cover the United States.

The time you put in lets you build overwhelming competitive advantage. I’m not viciously competitive, but the right number of competitors to have is ZERO.

Every month that you do what you’re doing, and you do it really well — satisfying customers, perfecting processes, developing people — that’s a month that no other competitor can short-circuit. Once you get a big lead on somebody, the only way to get caught is for you to screw up.

How do you know what to pay for a car? How do you know when to discount a car that isn’t selling? We know more than anybody about how to price a car. We strive for information dominance on the market for used cars. We have 21 math geniuses who have figured this out, and we make sure they never meet anyone.

The only bigger retailer than CarMax in terms of sales per store is Costco. But unlike Costco, we can’t call up Coca-Cola to get more Coke. We have to source our own inventory. We worked with Toyota to figure out how to recondition a car efficiently. At heart, we’re a bunch of process engineers.

We have technicians, we have car salesmen, we have office people – you need office people because there are 14 documents you need to have signed to buy a car – and the office people are anal-compulsive. And then we have buyers.

Like Enterprise, we focus on the talented folks who may not have been in top half of their class…. natural leaders, maybe high-school athletes, but they perhaps didn’t focus completely on their studies while they were in college… know anybody like that? But they are smart, hard working, and looking for a great opportunity.

We have to train everybody from scratch. The only way to be a Marine general is to be a Marine. To be a CarMax buyer, you have to have a good memory, you have to be bright, you have to be willing to take the shot. That means, you have to be willing to make a bid. They tend to be like sales-people, but they’re also a bit full off themselves and they’re often young.

The point is that we systematize everything except – our associates and our customers. The key with our associates is that you have to get these four groups of people – technicians, salesmen, office people and buyers — to work together to sell as many cars as we possibly can, in an honest way, with the lowest possible price that still allows us to make money. That’s really hard.

It’s hard to make the business succeed. It’s easy to make it fail. Anybody in the chain can make it fail. I’m always asked when I meet with Wall Street if there’s another opportunity like CarMax out there. And I always thought, well what about selling used houses? That seems like a good business.

Did you ever consider getting into related businesses?
When we had one store, we tried renting cars out of it too. An Enterprise VP showed up right away and talked us out of that business. That says a lot about Enterprise – if it wasn’t a private company, I’d buy their stock, because that is really paranoid, and I really like paranoid people — and he convinced us that what he did with rental cars was hard, that used cars was enough. So we decided to focus, focus, focus.

And what we really focused on was the quality of the service first and foremost. When I worked for Marriott hotels, Bill Marriott used to tell me: “My brand is the night you just spent. If the bathroom was dirty, you don’t care about the television ads.”

That means you have to pay people to do the right thing. If you want to know what you’re paying people to do, go watch what they’re doing. People are pretty smart. At CarMax, we pay associates to help our customers find the right car for them. We pay $150 per used car, whether it’s a six-year-old Kia or a $75,000 Mercedes.

The branding challenge is to convince people that we’re honest; but if they haven’t experienced it, it’s well-nigh impossible. Our goal is, make you happy and we’ll sell more cars than anyone else, more efficiently.

How do you use technology? Is transparency the key to your success, or just having better technology?
We spent $10 million on information systems before we opened the doors on our first store. We used RFID to track every car, we used the first-touch screens in retail to show people every car on the lot.

Transparency is our friend. It helps contrast us with every other car salesman because they all hide information to control the customer. Being transparent prepares our customers to buy a car, prepares our customers to trust us.

We hired a Ph.D. in statistics three months after we opened our first store. She worked for two years, no results. Then we found a guy from Duke, who found a correlation between cars on our lot and our discounting strategy. I can’t tell you what the correlation was, but man it was a big one. It took two and a half years to get any value out of it, but we are still getting value. Now we’re running super computers to try and track every car on the road in America, when it has sold and what it sold for and all the rest. Our goal is information dominance.

Our buyers quickly build up a huge amount of field experience and a great sense of what cars are worth. But we work really hard to get them to recognize the insights that the data analytics folks can provide them that are not intuitive, but make them even better… it gives them a real knowledge edge in the marketplace. The two groups have very different personality types, but have learned to respect each others’ talents, and to work together to make the buying, valuation, and inventory processes fast, accurate, and customer-friendly. As a result, we know more about what any car is worth than anyone in the country, and we know it faster.

And that helps us wear down the traditional dealers. We take market share from them year in and year out. It’s like a sales tax on their business. The first time they really reacted against us was when we tried to get in the nation’s largest new-car mall in Sacramento. They refused to let us operate there. So we opened a store just outside its wall that everybody had to drive by to get to their mall. It killed them. You know you’re on to something when you like being right next to your competition.

Who’s your target customer?
Product marketers are going to hate me for saying this, but if you have a job, and you don’t have a butler, you’re my target customer. That’s 80% of America.

We have expanded slowly. But once you cover 70% of the U.S., your national TV rates are cheaper than if you bought it market by market. For a while in LA we were trying to save money and we did no TV advertising. Then when we turned on TV, it drove a 30% sales increase. When the Internet came along, TV became more valuable. And search marketing works great. We tested from 2003 – 2005 because we couldn’t believe that Google was good as it was. There’s a revolution – a REVOLUTION – going on in analytical marketing. It was amazing what we could do.

People buy a car every three to five years, so it’s really important that when they do come, they have a good time. We may never see them again. From the beginning, we’ve done intensive surveying to find out why people who didn’t buy, why not? Half didn’t buy anything. We asked anyway, would you recommend us to a friend? A lot of them said they would. That’s the most important question you can ask.

The single biggest reason people come to us is word of mouth. I wish I could buy word of mouth – just go to a network and ask to buy $10 million in word of mouth — because if I could, we’d buy that and nothing else. The challenge with a lot of our advertising was to be relevant, because most of the time, people aren’t in the market for a car. We don’t want to bombard people with stuff at a time when they’re not interested in a car right now.

Whew! That’s it! Thanks to everyone at Redfin and beyond who came, and thanks to Austin for a fireball of a talk. Any more questions for Austin, please leave a comment below and we’ll try to get him back online to respond…

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