Magazine Article | July 18, 2014

Win Market Share Via The Cloud

By Matt Pillar, editor-in-chief, Integrated Solutions For Retailers

By moving its software to the cloud and offering subscription-based pricing, this ISV was able to take market share from its competition.

Back in 2001, a little-known start-up software company called Dealertrack Technologies set off on a mission that some might have called impossible. The company developed financial software, most notably the first Internet-based credit application tool for auto dealers, which migrated the financing approval business from a fax-to-bank proposition to the Internet. Gradually, through acquisition, the company began to build an ERP (enterprise resource planning) system-like footprint for car dealerships, offering a core DMS (dealer management system) that includes accounting, payroll, parts and vehicle inventory, sales, and repair and maintenance management features. Dealertrack also offers software that manages finance and insurance, transportation and shipping, registration and titling, digital retailing, used vehicle inventory, and more for auto dealers large and small. In its early days, there were just two challenges standing in the way of instant success for Dealertrack. Namely, the two long-standing and big-name competitors in the space who collectively owned the vast majority of the market. Enter the impossible mission.

As if their market share wasn’t daunting enough, both of the anchors that Dealertrack was trying to displace had their customers locked into industry-standard five-year contracts. That made for a slow sales cycle.

New Delivery Model Piques Customer, Competitive Interest
While Dealertrack fully recognized the uphill battle it faced, it also had confidence that its business model—which looked nothing like its competitors’—would be well received. “We’ve been in the cloud since our inception, and that’s enabled us to do some things differently,” says Chris Low, senior director for product management at Dealertrack. “For one, as an ASP-modeled business, it’s allowed us to focus on ROI, rather than hardware, servers, consultants, wiring, and installation,” he says. “We’re able to provide the same business benefits without all that overhead.”

Low and Kurt Olnhausen, senior director of marketing and strategy, joined Dealertrack in 2010 after the acquisition of their DMS, which serves as the hub of the software suite the company sells to auto dealers. “The term ‘cloud computing’ is relatively new, but the technology behind it really isn’t,” says Low. “We run on the IBM iSeries 770, the same system that’s been running multinational banks and airlines all around the world for a long, long time. All of our dealers log into the same machine, and all they need is an Internet connection and a computer to log in,” adds Olnhausen.Subscribe to Business Solutions magazine

Which brings us to competitive advantage number one in this reminiscent-of-David-and-Goliath story. The hardware and software investment required for on-site delivery of its competitors’ software was more than twice the investment Dealertrack asked its customers to make. This caught the attention of the market — and the competition. “We definitely saw some ‘me too’ activity on the part of our competitors, who hastily developed SaaS delivery models,” says Olnhausen. “But it was financially difficult for our competitors to let go of the big hardware sale they had grown accustomed to, so cloud delivery hasn’t really stuck for them. Their revenue is too dependent on server sales.”

Meanwhile, Low says the demand for cloud solutions has grown wildly over the past four years. “Early on, we were challenged to convince customers that taking their data offsite and going Internet-based was the way to go,” he says. “Now, with an established foothold among large dealers, word’s getting around that we’re not a victim of breaches, we’re not having hiccups, and our customers are getting more flexibility and functionality for half the cost. That begins to snowball,” he says.

Short Contracts, Simple Bills Create Customer Satisfaction
Getting the snowball to roll admittedly took some doing on Dealertrack’s part. The competition’s standard five-year contracts made it tough for Dealertrack sales reps to get a foot in the door unless the timing was right. It was equally difficult to manage the long-tail, pre-sales activity that took place with potential customers who were still years out from the termination of an existing contract. “If you’re not engaging consistently for years before the dealer’s renewal, the incumbent is often going to win,” says Low. To ensure that didn’t always happen, Dealertrack developed a system using its Salesforce sales automation tool. “We have roughly 110 salespeople on the street, and part of their job is to collect contract end-date intelligence by pounding the pavement,” explains Olnhausen.

The company also gathers this information through telemarketing and cold calls. Any contract end-date intelligence gleaned is entered into Salesforce. “We know when the dealers on our radar should be looking for new systems, so we stagger our automated marketing outreach strategically,” he says. That strategy involves testimonialand reference-based email, direct mail, and microsite activity that increases in tempo depending on whether the dealer is five years, three years, or 18 months out from renewal. “We had very little awareness early on, which made it difficult to get past the gatekeeper. But with persistence, we’ve achieved a high degree of market awareness, which helps create a lot of opportunity,” says Low.

That opportunity is bolstered by Dealertrack’s contract model, which is refreshingly short. When a dealer selects its subscription-based cloud services, it enters into a 12-month contract. At the end of the 12-month period, the dealer is on a month-to-month contract and can opt to leave Dealertrack with 90 days notice. “This short contract term ensures we’re working for our dealers and repeatedly earning their business,” says Low. Part of earning their business, he says, is transparently pricing the service. “We keep our invoices simple by charging flat fees every month and keeping the actual bill down to around five lines,” says Low. “It’s a one-page invoice. Some of our competitors have 25-page invoices that are very difficult to understand.” Even as the dealer expands its business, the invoice remains simple. “We charge an up-front fee to install the system, which is based on employee numbers and includes training. Once the customer buys, it can add users at no additional cost,” says Low.

Building Trust = Long-Term Customers
Dealertrack has also won new and repeat business simply by playing nice with other technology providers in the dealer ecosystem — even when they sell hardware or software that competes with specific Dealertrack offerings or modules. “We provide Hardware-as-a-Service if the customer wants it, but we don’t require them to buy hardware from us,” says Olnhausen. “The PCs and printers we sell are tested with our system and work well with it, we’re there to install it and ensure it works, and we price it so there’s no cost advantage to buying it elsewhere. We’re not after big hardware margins, so most clients source their hardware through us anyway.”

“The term ‘cloud computing’ is relatively new, but the technology behind it really isn’t. We run on the IBM iSeries 770, the same system that’s been running multinational banks and airlines all around the world for a long, long time.”

Chris Low and Kurt Olnhausen, Dealertrack

Low says his company has an equally liberal attitude about customers who run point software applications that compete with Dealertrack modules. “When you operate on a wholly subscription-based revenue model, you want the customer for the long haul. That requires building trust, because if they trust us, they’ll stick with us,” he says. Establishing mutual trust means knowing when to back off when a customer is pleased with a preexisting application, and choosing to stick with an application rather than displace it. “We build our systems in an unrestricted, open-API (application programming interface) manner,” says Low. “We sell CRM, but we’ll allow a third-party CRM application to integrate to our DMS. The same goes for inventory management, desking, and so on. If customers feel their existing solution is best of breed but they want our DMS, we simply connect and move forward together,” he says.

Quick Go-Live Wins Minds

The ASP model that’s core to Dealertrack’s success is helping it achieve some impressive post-sale implementation metrics, too. On average, the install process takes four weeks, despite the auto dealer’s abnormally high dependence on technology. “Our average customer does several million dollars in sales annually, and those dollars don’t all come from new car sales,” says Low. “There are actually several different businesses under an auto dealer’s roof, including new car sales, financing, repair, parts, and used car sales. They’re all quite different, and the technology and interfaces needed to run them all are massive,” he says. In addition to the core POS, HR, inventory, and finance systems any retailer operates, at auto dealerships tech integration is requisite to automating inventory management interaction with manufacturers and OEMs, facilitating financing documentation with banks, and handling registration compliance subsequent to individual state laws.

When Dealertrack installs a new customer, it spends a week in analysis mode with the dealership developing detailed workbooks by department. These workbooks drive the system set-up. Prior to starting the implementation, the dealership data is converted. During the first week the Dealertrack team works with the dealer, insuring that the data conversion was successful. During the weekend between the first and second week the system is cut over. When the dealership arrives on Monday the Dealertrack DMS system is live, and dealership employees with the Dealertrack team onsite begin their training in earnest. Because the system is intuitive, most of the dealership employees are running on their own by week’s end. Dealertrack stays on-site the following week to answer addition questions. Finally, the Dealertrack implementation team reaches out to the dealership three to six weeks after the install to ensure that end-of-month reports are meeting the dealerships needs.

“The product is intuitive to the user, but with so many modules, it’s extremely complex on the back end,” says Olnhausen. And yet, despite that complexity, Low and Olnhausen say that with Dealertrack in the cloud, the entire enterprise can run on an iPad or any tablet, for that matter. “Cloud-based lends to mobility, and we can turn it on with the flip of a switch, for a nominal cost,” he says. “Mobility is the trend, it’s the direction the industry is headed in, and we’re right there at the forefront.”

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