How Does Vroom Work And Make Money? Vroom Business Model

Vroom runs a peer-to-peer e-commerce platform selling used vehicles. The company makes money through the sales of used vehicles that passed the quality standards to be sold on the platform; Wholesale auction revenues for vehicles that didn’t meet quality standards to be sold directly on the platform; and fees from value-added products (insurance and financing).

Vroom vision and mission

Vroom’s vision is to “build the world’s premier platform to research, discover, buy, and sell vehicles.”

More precisely, Vroom built an end-to-end e-commerce platform to buy and sell used vehicles.

Vroom value proposition

What makes Voom interesting? As a two-sided e-commerce platform Vroom has two key players: buyers and sellers. Each of those get a different value from the platform.

Vroom value proposition for buyers

Vroom offers a “differentiated buying experience” compared to traditional auto dealers and the peer-to-peer market.

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Customers can easily browse the Vroom’s inventory, look for financing alternatives, and also look for additional value-added products. The end-to-end experience also enables buyers to schedule and coordinate the delivery of the purchased vehicle to a location of their choice.

Therefore Vroom streamlines the entire buying process, from discovery through financing to delivery:

  • Wide inventory selection.
  • Enriched with higher-quality inventory (the Vroom-reconditioned vehicles).
  • Comprehensive and transparent vehicle information.
  • Customized vehicle search and discovery.
  • Competitive, market-based pricing.
  • Customer support.
  • On-demand shopping and contact-free delivery.
  • Value-added products.  
  • Vroom 7-Day Return Policy.

Vroom value proposition for sellers

Sellers can, through the platform:

  • Submit basic vehicle information to also get on-demand appraisals.
  • A guaranteed, real-time price on every vehicle.
  • Contact-free at-home vehicle pick-ups.
  • Hassle-free loan pay-offs.

How does the platform work?

Vroom two-sided (peer-to-peer) e-commerce platform is made of three main parts:

Ecommerce

This offers to buyers a personalized and intuitive e-commerce interface to research and select from thousands of fully reconditioned vehicles and to sellers market-based pricing, real-time, purchase offers, and convenient, contact-free at-home vehicle pick-up.

Vehicle Operations

The Vroom business model is vertically integrated as the company sources inventory from auctions, consumers, rental car companies, and dealers. After sourcing, those vehicles get reconditioned to meet quality standards and sold on the platform.

Vroom’s overall operational strategy is a hybrid between ownership and third-party partnership to balance the overall capital requirements to run the business.

Data Science and Experimentation 

Vroom leverages data science on all its process, from sourcing to marketing on the platform, to optimize its processes as much as possible.

As a platform in a fragmented market, mostly operated by old business models, Vroom end-to-end contact-less experience between buyers and sellers make it much easier for those players to transact on the platform.

Vroom Flywheel

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The Vroom flywheel starts from:

  • The growth and quality of its inventory.
  • This inventory is marketed with a multi-channel strategy, where the company runs both national marketing campaigns, and digital marketing campaigns, based on performance. This combination of branding and performance makes helps improve brand awareness while improving the conversions of its targeted ads.
  • Once users are brought back on the platform, they can easily discover and find the vehicles they need, together with the financing, and for sellers, to have a quick evaluation and contact-free selling of the vehicle. This customer experience makes those buyers and sellers use the platform to finalize the transaction.
  • Throughout the journey, Vroom runs multiple tests to optimize the conversion of customers on the platform.

How does Vroom drive profitability?

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There are a few main levers the company uses to move toward profitability(as of 2020, the company runs at a net loss):

  • Optimize Vehicle Acquisition and Pricing.
  • Increase Reconditioning Capacity.
  • Expand Value-Added Products to add multiple revenue streams (training, merchandising and technology enhancements, auto insurance, complimentary services such as entertainment and location-based services).
  • Develop Logistics Network third-party carriers for inbound and outbound vehicle transport will also be coupled with strategic and proprietary logistics.
  • Expansion to Additional Products and Markets: expansion into additional areas of technology-enabled commerce, such as adjacent transportation and vehicle markets, global geographic markets, and B2B business models.

How does Vroom make money?

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Vroom’s revenues come through:

  • E-commerce: The sale of used vehicles and value-added products. Vehicles are sold directly to consumers primarily through the E-commerce segment. Indeed, the e-commerce represented 49.3% of the revenues in 2019, it keeps growing at fast speed.
  • Wholesale: At the same time Vroom makes money by selling vehicles that do not meet its sales criteria to wholesale auctions.
  • TDA: this comprises the retail sales of used vehicles and fees earned on sales of value-added products associated with those vehicle sales. In 2015, Vroom acquired Houston-based Texas Direct Auto (“TDA”), which included the proprietary vehicle reconditioning center (“Vroom VRC”), and the sole physical retail location and the Vroom’s Sell Us Your Car centers. Together they make up the TDA segment.

Breaking down the Vroom unit economics

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Vroom’s gross profit per unit is given by:

The Vehicle selling price

– The acquisition cost of the vehicle

+ The fees earned from the buyer

– The costs related to shipping to reconditioning center and the spending on mechanical and cosmetic reconditioning on the vehicle.

+ How Vroom’s fees on the financing arrangement

+ The the value-added product sold

That is how the gross profit per unit is computed.

The Vroom system explained

Vroom’s whole system moves around four key pillars:

  • Inventory sourcing (hybrid model): Vroom sources vehicle inventories from a variety of channels, including auctions, consumers, rental car companies and dealers. Vroom evaluates by time to time the optimal mix of sourcing channels to generate the highest sales margins and shortest inventory turns.
  • Vehicle Reconditioning (hybrid model): Before a vehicle is listed for retail sale, it undergoes a reconditioning process in order to meet Vroom’s retail sales criteria. The vehicles that do not pass this successfully get sold to wholesale auctions. To recondition vehicles, Vroom relies on a combination of Vroom VRC (its reconditioning center) along with a network of VRCs owned and operated by third parties. 
  • Logistics Network (third-party): Vroom primarily uses third-party carriers. Going forward Vroom is also developing a hybrid strategy to build out its proprietary logistics network.
  • Value-Added Products (third-party): earning fees for selling value-added products to customers in connection with vehicle sales. Third-party value-added product offering consists of finance and insurance products, including financing from third-party lenders on vehicle purchases, as well as sales of extended warranty contracts, GAP insurance policies, and tire and wheel insurance policies.

Across the whole chain, Vroom runs a hybrid model, mixing proprietary operations with third-party partnerships to keep and balance out its business model and reduce the capital requirements needed to run it.

As it moves forward Vroom will increase the proprietary part on strategic operations (inventory, reconditioning, and logistics) while increasing the third-party approach on less strategic parts, which though enhance its revenue streams (wholesale auctions, value-added products).

Vroom multi-channel marketing strategy

Vroom multi-channel marketing strategy includes both national brand and digital performance, marketing. Vroom also leverages digital performance channels, including automotive aggregator sites, to generate demand for Vroom inventory.

Vroom also runs a national brand campaign through TV and online media, which more than doubled total brand leads to Vroom website, with direct access of customers to the Vroom’s website.

Thus brand advertising helps create direct access of consumers to the brand, and digital marketing campaigns, enhance the bottom of the funnel.

Key takeaways

  • Vroom is an end-to-end e-commerce platform where customers can buy and sell used vehicles. The company makes money by selling used vehicles that meet the quality standards to be sold on the platform.
  • It also makes money by selling vehicles at wholesale auctions for those vehicles that do not meet quality standards to be sold on its platform. In addition, Vroom makes money by selling vale added products provided by third-party partners for which Vroom earns a fee and commission.
  • Vroom is a digital platform, but it also runs physical operations, as it sources and purchases used vehicles to be sold on the platform. At the same time, Vroom balances part o its processes with third-party partnerships to lower the capital requirements to run the business (especially on logistics and value-added products).
  • Vroom runs a multi-channel marketing strategy where it leverages both on TV, brand advertising, and digital marketing activities focused on performance and conversion rate optimization.

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Related Business Model Types

Platform Business Model

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A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

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A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

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A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

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In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

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In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

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The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

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A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

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A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

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The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

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While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

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Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

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The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

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A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

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In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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