TrueCar CEO: Disrupting the Car-Buying Process Nearly Drove It Out of Business (Video)

Many companies believe they can disrupt an existing offline business by offering consumers lower prices over the Internet.

It’s a playbook that Amazon has used for years, and more recently, companies like Warby Parker have been getting recognition for offering prescription glasses online for hundreds of dollars less than brick-and-mortar stores.

But Scott Painter, TrueCar’s founder and CEO, says he knows what it’s like to drive prices too low.

The company started off providing leads to dealers that were willing to offer the lowest prices on a car. While great for customers, it often meant a loss for the dealer. At first, Painter wasn’t terribly concerned, adding that he has always been interested in “sticking it to the man.” But after learning the hard lesson that the dealers were his partners — and there’s actually not that many of them in the U.S. — he altered the business to be more dealership-friendly. Today, it operates more as an intelligent Kelly Blue Book service that provides pricing transparency to customers by tracking all car sales in the U.S. TrueCar collects a flat rate from the dealer when one of its customers buys a car.

Up until last year, the Santa Monica, Calif., company was profitable; revenue was doubling every year for seven straight years. But in late 2011 everything changed. A nationwide advertising campaign, highlighting customers who saved thousands of dollars on their car purchases, got car dealerships to wake up to the fact that TrueCar’s service was resulting in cars being sold at a loss.

What happened next nearly buried the company.

Within 90 days, TrueCar’s dealer network had shrunk by one-third to about 3,200 dealers, and it went from making a profit to losing $40 million in the first six months of 2012. Due to requests by industry trade associations, regulators started looking into whether TrueCar’s methods violated consumer protection laws, and in many cases it was found guilty, requiring it to tweak its operations in several states. “We were on death’s door,” Painter admits.

While the company’s old model was very profitable, he now says it wasn’t going to pencil out in the long term. It created a situation in which dealers were blindly competing on price. “It wasn’t sustainable,” he said. He’s since restructured the business to focus on providing price transparency by tracking and publishing data based on actual car sales.

As you can see from the video below, Painter can talk about the company’s dreariest days with a sense of detachment, a sign that the worst is already behind him. It helps that, since last year, TrueCar has raised $50 million in additional financing as a buffer while it pulls off the transformation. Painter said dealers are starting to sign up for its services again and he expects the company to be cash flow positive by the end of the year.

Additionally, it is planning a new — much less controversial — advertising campaign that will kick off on Nov. 15.