Carsala Guns For CarMax in Used Car Wars

Last Updated Feb 19, 2010 11:40 AM EST

A lot of us don't like buying used cars. The cliché of the sharpie salesman in his cheap suit looking to make a monkey out of easy marks has just enough truth to scare some of us into buying new. Carsala, a Berkeley, California start-up launched in 2008 with $850,000 in seed money, says it will take the hassle out of it for you. And it has companies like CarMax--which sells used cars at a fixed price--squarely in its sights.

"If you consider haggling with used-car salesmen a nightmare, then Carsala...wants to be your comforting glass of warm milk," wrote the New York Times.

The start-up was backed by Labrador Ventures, Launch Capital, Band of Angels and some individual investors.

Tyler Elliston is Carsala's CEO, and he commissioned a perhaps self-serving survey that concludes that consumers can save an average of more than 25 percent off CarMax prices by using his national service.

Carsala's business model is different than CarMax's. Carsala contracts with professional negotiators who will, over the phone, negotiate the best possible deal for its customers. Carsala's fee is 20 percent of the difference between what you paid and the car's price in the Kelley Blue Book used vehicle guide. Part of what Carsala offers is a research service. The customer can choose a local search (most do) or a national one. If the customer chooses the latter, Carsala goes through four million online listings looking for deals, then starts negotiating.

Haggling may be second nature to the average shopper in the souks of the Arab world, but it is not a well-honed skill for many Americans. "As much as people hate negotiating, it can save you a lot of money," Elliston said. Carsala claims that on average, it saves customers $4,000 off of Kelley Blue Book suggested retail prices (or 20 to 25 percent on the deal).

Women are believed to dislike buying used cars even more than men, and Elliston said, "We see a slight tilt towards women, but not as much as we had thought we'd see."

According to Elliston, "The results of the study were profound in that not only could car buyers achieve a better sales price by negotiating with non-CarMax dealers, but they could also save money with simple research and comparison."

The survey concluded that, with research alone, consumers could save nine percent over CarMax's fixed prices, and with negotiating added in the savings were 25 percent. It said that CarMax's prices were just .55 percent lower than Kelley Blue Book.

In fairness, CarMax is an experienced car vendor that has sold two million vehicles and appraised five million. It is Fortune 500 company, and has 100 stores around the country. And there are other considerations besides price. Buyers walk away with a five-day money-back guarantee, a 30-day warranty (60 days in Connecticut) and a vehicle history report. Cars go through what CarMax describes as a 125-point inspection.

George Hoffer, a professor of economics specializing in the auto industry at Virginia Commonwealth University (near CarMax's homebase in Richmond) says that he once believed the company's prices were too high, but has since come to differentiate "explicit" and "implicit" prices. CarMax's explicit prices may be higher, he said, but shopping elsewhere involves implicit costs, such as "having to go to a bunch of dealers and haggling with them." He said the CarMax service appeals most to two groups: high-income people and women.

Trina Lee, a spokeswoman for CarMax, said she had not reviewed the Carsala survey, but offered a statement. "CarMax is proud to offer a low, no-haggle price on every car," it said. "Our prices are transparent and clearly marked on every car, both online and on the lot. We offer peace of mind, exceptional value and ease of shopping. ...CarMax provides a wealth of information to customers both online and in the store and encourages and assists consumers with making a fully informed car buying decision. Used cars are individually unique, are not a commodity, and as such are nearly impossible to compare to one another."