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Update With ZAG's Scott Painter

Santa Monica-based ZAG (www.zag.com) is a venture-funded firm focused on applying technology to the automotive buying industry. Founded by Scott Painter, former CEO of CarsDirect.com, the company recently bought and sold Autoland, purchased a number of automotive buying programs, and has started to scale out its operations. We caught up with Scott to talk about the progress the firm has made since its launch, and the idea behind the acquisitions the firm has done. He also showed us the firm's full online configuration capability and interface, which is far more advanced than the simple lead generation forms most auto buying sites provide. The interview was conducted by Ben Kuo.

We spoke quite a while ago about Zag, before you launched--tell us a little bit about where Zag is now?

Scott Painter: The strategy for what we're building, really, is quite simple. We're an auto buying program operator. What that means is, we help large brands, affinity groups, organizations, and other offer to their members a complete auto buying experience. Primarily, there are two platforms, a technology platform--which allows those member organizations to offer to their audience, a private-labeled, auto buying experience over the web. You can go online, research, shop for a car, configure it, and get up front pricing. The second part of the platform is a dealer network. We have 1500 dealers across the country, who have agreed to provide upfront pricing and a better experience at the dealership. It's a bit more streamlined than traditional dealer relationships. In terms of that relationship, with those dealers we require not just an upfront price, but also full technology integration into their back end, so that we can see when a prospect becomes a sale. Our entire revenue model is cost-per-action. We do not charge dealers for leads, but we do charge dealers when a car sells. If a prospect buys a car within 90 days, we then charge the dealer $300 -- it doesn't matter if that is a Porsche or a Hyundai.

In many ways, you can think of it as an all those auto information sites out there, coupled with an auto buying/brokerage/sales situation, coupled with actual dealers that fulfill. We have three constituents -- one is the consumer, the person buying the car. We have to make the web and offline experience compelling enough, that they won't go through the traditional routes. So we have complete and accurate data, our web sites look great, they are streamlined, they answer all questions, and have good upfront pricing--or they will go elsewhere. The second is the affinity group. Since we launched, we have had three primary affinity groups. Capital One is one of them, they were also an investor. They're the largest direct automotive lender in the country--meaning, you apply for a car loan and auto financing from them and you can buy a car with a blank check. Our second constituent affinity group is USAA. USAA is the military credit union, and they offer banking, home mortgage, credit cards, auto finance, and insurance. They have over 5 million households. Capital One, by the way, has 45 million. We are the exclusive auto buying program for both organizations. For these affinity groups we give them a turn key solution. We've invested nearly $30 million in the technology platform. We manage and give it to you for no charge, and the bargain we make with them in exchange for them avoiding risk and cost and resources, and time to market, is we expect them to present it powerfully to their members.

Our third group is the American Automobile Club. You had mentioned our acquisition of AIS. AIS has been for many, many years the AAA auto buying club. However, they haven't used any technology to do it. These programs basically ask that you walk into a list of dealers, and flash your AAA or Costco card, and ask for a discount--that's the full extent of the program. What we found was with these programs, from Dealer A to Dealer B, even within the same brand you'd get different pricing, and who says that is good at all. Those programs transferred the good will in the AAA or Costco directly into the dealer, which is a good way to sell cars--but not necessarily a good customer experience. What we did when we acquired AIS is flipped it to a different model. They had ten AAA contracts--you have to understand, there are actually 70 different AAA chapters nationwide, and you have to sell to each individually--with AIS we were able to tap into 6 million out of 42 million members nationwide. Since then, we've signed up an additional three AAA clubs. The acquisition of AIS was really about one thing, and one thing only--more volume through our platform. More volume through our platform, equals better pricing leverage and a better return for our dealer partners. The more volume, the more reward they saw; the more value, we can extract better pricing and better pricing over time.

How about your other acquisitions?

Scott Painter: The other two acquisitions were in the credit union space--Autoland, and CU Auto Sales. Certainly, they had the volume driver and were currently serving credit unions and members--another area there is a loyal following. But the primary reason behind Autoland and CU Auto Sales were technology-based. Autoland has been around for 35 years. As you probably know, when starting CarsDirect we actually incubated at Autoland. They operate as an auto-broker, and do a lot more than a traditional auto service online, because they integrate more deeply and provide services over the web. By acquiring Autoland we could connect the back end systems at the dealership level, and provide a much broader experience. We bought Autoland in October of 2005, and sold it in December of 2006. Part of that, is that Autoland is a much different business--it's lower tech, higher touch, and although it has a much higher margin of profit, it's not as scalable as a business as applying technology and a dealer network across a national audience. Autoland will do 10,000 to 11,000 in sales, while Zag will do ten times to 12 times that amount through our affiliate groups.

You've just shown us a complete auto configuring interface, with all the accessories and pricing calculations--how does this typically look like to consumers?

Scott Painter: If you are a USAA member, it looks like you USAA, and you're in a USAA environment--but that's a Zag operated web site where they can configure and price their car. They will then get a call back from USAA auto buying, understand how the program works, get an appointment with the dealership, or the dealership will call. From the dealer point of view, someone who has gone through the process as a USAA member is pretty likely to follow through.

A customer who has gone through a site like Automotive.com today is what is being sold at $20 per name. That average Internet lead closes two to 2.5% of the time. Dealers are spending $400 to $700 per car in terms of marketing, not to mention having to call back twenty to thirty people. What we do for dealers is we don't sell them a lead, we send them a customer which went through what you and I just went through. We're closing at about 15% to 25% depending on the program. That's a dramatically higher percentages of customers who are buying a car. That's less work for the dealership, and is a $300 fixed cost--only when the sale happens. Its performance based marketing. Our business at this point is about scale. We have built out our dealer network, we have built out technology as quickly and as large as we can, and we have a robust pipeline of affinity groups, who are serving 1.5 million unique visitors a month.

Where is the company in terms of financing, and how many people do you have now?

Scott Painter: To date, we've raised about $40M, and we should have positive cash flow before the end of the year. We're now generating revenue. We have 65 people, all in Santa Monica, with some dealer reps in the field.

Thanks for the interview and update!


 

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