carvana-business-model

Carvana Business Model In A Nutshell

Carvana is online-based used car retailer known for its collection of  24 used car vending machines.  Carvana makes money when the company can sell a car for more than it paid, thus making a profit. Carvana also makes money by charging interest on their car finance options.

Origin story

Carvana is an online-based used car retailer. The service allows customers to browse a range of used cars through the Carvana website. Those who want to sell, trade-in, or finance a car are also well catered for.

The company is perhaps most well-known for its collection of 24 used car vending machines. Using one of these vending machines, the customer can easily collect their new car while dropping off the old one. Alternatively, Carvana will deliver purchased vehicles to the consumer directly. Each vehicle comes with a seven-day return policy.

In the wake of the COVID-19 pandemic, the company is well placed to use its contactless system to take advantage of the $840 billion used car market.

Carvana revenue model

Carvana makes money in much the same way that a traditional car dealership does. When the company can sell a car for more than it paid, it makes a profit.

While the used car industry is unpredictable and prone to very small margins, Carvana executives believe the company does have an advantage over a bricks-and-mortar dealership. Management believes they can offer an average cost saving of $1,000 per car to the consumer.

Carvana hopes to be able to leverage its online platform and economies of scale to become cash-flow positive soon.

Here are some of the ways Carvana aims to reduce costs and in the process, increase profits:

  1. Price transparency. Customers can easily compare the price and mileage of a range of Carvana vehicles from the comfort of their homes. Free from the hassle of dealing with pushy salespeople, consumers are more likely to make a purchase. Carvana also saves money on having to employ sales and finance managers.
  2. Inventory centralization. By concentrating its inventory in low-cost areas, the company can reduce costs further. Occupancy costs are estimated at $150 per vehicle – significantly lower than the cost traditional retailers incur.
  3. Dealership costs. Without established dealerships, Carvana saves money on associated dealership infrastructure and maintenance.
  4. Streamlined buying process. Regardless of which location the consumer uses, the purchasing experience is the same. Again, this creates extra confidence for the buyer while minimizing transaction costs for the company.

Carvana also makes money by charging interest on their car finance options. But to make this revenue stream more significant, the company needs to focus on selling more cars. Carvana is the third-largest used car retailer in the United States with only 1.8% of the total market share.

Source: Carvana 10K

Key takeaways:

  • Carvana is an online used-car retailer. The company allows consumers to buy, sell, trade-in, or finance a car with a minimum of hassle.
  • Carvana makes money by buying low and selling high. Although the company operates in an industry with notoriously small margins, executives believe the online business model delivers important cost savings in several areas.
  • Collecting interest from consumer car loans is also an important revenue stream for Carvana. However, the company must focus on increasing its very small market share before this stream becomes a significant money maker.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"