Carvana is an online used automobile reseller that is most known for its 24 used car vending machines.
Carvana earns money when it can sell a vehicle for more than purchased, so it is profiting. Additionally, Carvana earns money by charging interest on its auto financing alternatives.
Carvana’s business model offers a more convenient method to buy a car by allowing you to explore used automobiles online and finance your purchase.
Carvana generates revenue through profiting from used car sales and reducing infrastructural costs.
It is accomplished by consolidating inventory in low-cost locations, eliminating the need for physical dealers, lowering their fixed costs, and passing the savings on to the end consumer.
Carvana entices customers with seven-day money-back guarantees, real-time financing, and delivery.
In my opinion, Carvana is the ideal business model for the coronavirus era because it eliminates the need to visit a car dealership.
What is Carvana?
Carvana is an online marketplace for the purchase and sale of secondhand automobiles. The entire purchasing process is conducted online, and buyers can have their vehicles delivered to their homes or pick them up at one of the company’s renowned auto vending machines.
Carvana’s business model centers on reselling the vehicles it acquires for a profit. Additionally, the corporation earns money by financing users’ vehicles and collecting interest on the loans given.
The company, founded in 2012 and headquartered in Phoenix, Arizona, has been a major success thus far.
In 2017, Carvana became a publicly traded company and raised $225 million in addition to the $1.6 billion it raised as a private company. Carvana has a market value of more than $21 billion but has not yet generated a profit.
|Ernest Garcia III, Ben Huston, Ryan Keeton
|Tempe, Arizona, United States
How Does Carvana Work?
Carvana is an online marketplace for used automobiles. Buyers can browse various vehicle alternatives on Carvana’s website or through the company’s mobile apps.
Cars can be purchased in cash or through a company’s various financing options. The company provides a free loan calculator that estimates the customer’s monthly payment rate based on the criteria.
Cars can be delivered to the customer’s location or picked up at one of Carvana’s so-called car vending machines.
If a customer lives too far from one of the possible delivery locations, Carvana would reimburse up to $200 for a trip and pick them up from the airport for free.
The company claims that its used automobiles are accident-free, have no damage to the vehicle’s frame, and undergo a 150-point check before being sold.
Additionally, automobiles may be returned up to seven days following delivery, allowing buyers to evaluate the vehicle.
Carvana offers a comparable level of sales freedom. Sellers have the option of selling their vehicle or trading it in.
All that is required of the customer is to enter their license plate or vehicle identification number (VIN).
Within two minutes of submitting some additional information, an offer is generated. Carvana arranges for pick-up and funds transfer following a fast on-site check.
Carvana is now only offered in the United States, with over 30 states and 100 sites. The site now has over 25,000 automobiles available for purchase.
How Does Carvana Make Money?
Like any traditional car dealership, Carvana earns money by selling the vehicles listed on its marketplace.
Carvana earns money anytime the company can sell a used car for more than the price it purchased, including costs such as marketing, inspection, transportation, etc.
The company is currently extremely unprofitable (later on), but the theory is that it will become a viable business once it has reached a sufficient size.
Carvana provides some advantages over a typical auto dealership since it is an online platform. These include the following:
- Price transparency: customers can compare vehicle prices based on age, mileage, and brand.
- Users can conduct car searches from the comfort of their homes (or any other location), saving extra time.
- Buyers may not always have to deal with a pushy salesperson.
- Cars are available (nearly) nationwide, and the network is expanding.
- Users should have a consistent shopping experience throughout all Carvana stores, which may (!) add to the purchasing process’s comfort.
- 7-day return policy, allowing purchasers to evaluate vehicles before making a final decision.
Several of the abovementioned characteristics may also be included in the traditional auto dealership experience. However, what distinguishes Carvana is that it incorporates all of the above into its purchasing experience.
According to Rich Barton (creator of Expedia, Glassdoor, and Zillow), consumers expect a frictionless and quick purchasing experience.
He refers to this as the rubberized consumer. Therefore, Carvana must maintain its growth trajectory by adding additional cars and pick-up locations to its platform.
With expansion comes the possibility of cross-selling more services. Carvana now generates revenue through its financing solutions, which charge interest on the monthly cost. In the future, the company may diversify its offerings by selling spare parts or providing repair services.
How does Carvana acquire its cars?
According to Carvana’s most recent earnings report, the company purchases most of its used cars through national auctions and direct sales from customers.
Acquiring directly from consumers provides the organization with two significant advantages: eliminating auction fees and acquiring a more diverse selection of vehicles. This increases client options on their platform.
Most of their car inventory is acquired from rental car companies, vehicle finance and leasing organizations, and other sources.
What is the Carvana Funding and Valuation?
Crunchbase indicates that Carvana has raised 1.6 billion dollars in venture capital over five rounds. Georgiana Ventures, Y Combinator, and Ally Financial serve as notable investors.
When Carvana went public in April 2017, it fetched $2 billion, with another $225 million coming from additional subscriptions.
The company announced a share price of $15. Its share price was around $125 at writing, valuing it at approximately $21.5 billion.
What is the Revenue of Carvana?
Carvana reported the fiscal year 2019 revenue of $3.94 billion, an increase of 101 percent over the fiscal year 2018. The platform’s vehicle sales more than doubled (231 percent YoY).
Nonetheless, Carvana continues to be a loss-making venture. It reported a net loss of $364.6 million in 2019, an increase of 43% over the prior year.
Success Story of Carvana
Ernest Garcia III (CEO), Ryan Keeton, and Ben Huston founded Carvana in Tempe, Arizona 2012.
Ernest Garcia II, the father of Garcia III, was sentenced to three years probation for bank fraud in 1990 when he was 33.
His financial recovery began with establishing Ugly Duckling, a rental vehicle company he acquired for less than $1 million.
A vehicle loan company partnered with Ugly Duckling after it failed to turn the company around.
The company concentrated on selling and financing automobiles to those with a low credit background.
During the dot-com bubble, Garcia’s Ugly Duckling raised $170 million in its initial public offering. Ugly Duckling’s stock price plunged from $25 to $2.5 following the stock market crash.
This enabled Garcia II to regain complete control of the corporation by purchasing the remaining shares he did not own for $18 million.
He renamed the business DriveTime, and it grew to be one of the most valuable automobile resellers in the United States, with annual revenues reaching $2.5 billion.
Ernest Garcia III, Garcia’s son, joined DriveTime in 2007 after graduating from Stanford University and a brief spell at the Royal Bank of Scotland.
Carvana began as a subsidiary of DriveTime in 2012. Initially, the parent firm acquired a portion of Carvana’s automotive lending portfolio.
Additionally, DriveTime assisted the firm in developing its main technological platform by giving financial and human capital support.
The wager quickly paid off. By 2014, Carvana had separated from DriveTime to become a stand-alone corporation.
Garcia III even resigned from the board of directors to avert further controversies from his criminal record.
Carvana continued to expand into other markets in the years to come. Garcia III’s contacts ensured that capital injections for the corporation were always imminent.
For example, billionaire Mark Walter (CEO and owner of Guggenheim Partners, an investment firm with over $300 billion in assets under control) invested millions in the company during its private phase.
Another important selling point is the company’s strategically located automobile vending machines and the pickup process.
Like a traditional vending machine, purchasers inserted a large coin and immediately received their car from the vending machine.
This frequently generated word-of-mouth due to the vending machine’s clever placement (often visibly placed across highways).
The company’s sustained expansion resulted in its initial public offering (IPO) in April 2017. Since then, the company’s share price and financial performance have been encouraging.
Carvana’s shares have risen from $20 to over $100 in the three years since going public, a fivefold increase in three years.
Nonetheless, the Garcia family has not been completely out of difficulties.
According to a recent Delaware lawsuit, the Garcia family investors and company directors purchased Carvana stock at a discount based on fears about COVID – even though the company was unaffected by the pandemic. The lawsuit’s outcome is still pending.
Today, the company employs over 1,000 employees and operates in over 100 sites around the United States. The site now has over 25,000 automobiles available for purchase.
Key Takeaways from the Carvana Business Model
Carvana is an online retailer of pre-owned vehicles. The company makes it simple for people to buy, sell, trade-in, or finance an automobile.
Carvana earns money by purchasing at a discount and selling at a premium. Carvana’s business model is based on online sales, and although the industry is low-margin, management believes the model results in significant cost savings.
Carvana also makes significant revenue from interest on consumer auto loans. The company, however, must make growing its modest market share its top priority before this revenue stream becomes significant.