Shift founder Toby Russell on the digital transformation of used car sales – Part 1

Some Questions I Ask:

• Was there a personal experience that made you want to start Shift? (05:10)
• What are the secrets and pitfalls behind new car buying and selling? (09:45)
• Have you ever rejected a car because it didn’t meet Shift standards? (20:00)
• What do you mean by “working back from the customer”? (27:16)
• What in Shift shows the customer forward approach? (30:34)

What You’ll Learn in this Episode:

• The ideal used car qualities (13:30)
• Qualities of cars that can be classified under Shift Value and Shift Certified (15:01)
• The optimal used car that gives the best value for money (17:45)
• What inspired Shift to introduce car financing (24:35)
• What it took to create a great car buying experience (32:06)

Connect with Toby: 

• LinkedIn
• Shift

Connect with Ed Bernardon:

• LinkedIn
• Future Car: Driving a Lifestyle Revolution
• Motorsports is speeding the way to safer urban mobility
• Siemens Digital Industries Software

Ed Bernardon: So, Toby, have you ever heard of this thought experiment in ethics, it’s called the trolley problem. Have you ever heard of the trolley problem?

Toby Russell: I haven’t. That sounds interesting. What is it?

Ed Bernardon: So, the trolley problem is: This trolley is heading down these tracks, and it’s about to have an accident where it potentially could severely injure four or five people. However, the operator can take it off that track and send it onto another track. But the problem is, when he sends it off in the other track, it might injure just a single person. So, it’s sort of a thought experiment ethics thing. Here’s my question. So, MIT is taking this to the next level. So, it’s supposed to help with the programming of autonomous cars, they have this thing called the Moral Machine Experiment. And what they do is they pair up different types of characters, and then people can say, “Oh, well, if a pregnant woman was against an old person, which character would you spare?” And this has been going on for a while. So, at the top of this list is a stroller, then there are children, and it works its way through doctors, athletes, all that. Now, at the very bottom of the list is, third from the bottom is dog, then second from the bottom is criminal, and at the very bottom, unfortunately, is cat. So, my question to you is, where would a used car salesman come in on this list, do you think?

Toby Russell: Yeah, it’s a funny question. I think most people, based on the surveys, would put “used car salesman” probably below the cat, right up there with Congressman. I think those two would be vying for least trusted in the country. And that’s a perennial problem and an issue that we wanted to tackle at Shift, given that there’s just a tremendous amount of distrust for the auto buying and selling experience.

Ed Bernardon: Well, if there’s ever a need for business, then it’s to elevate the experience so that you’re not dealing with a character that’s pretty much at the bottom of that list.

Toby Russell: That’s exactly right. It’s funny, Shift is the second company that I co-founded; the first one was called Taxi Magic. And when I was getting into that, people said to me, “Whoa! You want to become a taxi operator? That is a reviled space. That’s some of the worst reputation and whatnot.” And then the same thing happened when we were looking at doing used cars; “Hey, that’s like used car salesman. It’s like a meme, like a reviled space.” And my take on it was this: It’s not a reviled space because it is something to run away from; that means it’s a huge opportunity to transform and improve. Uber, Lyft, all those come out. And amazingly, it’s ground travel, it’s mobility, it’s rideshare, it’s a sexy, really cool space. And it’s the same thing that’s happening with used car sales. It’s a bad experience for customers but that doesn’t mean you shouldn’t touch it, it means you should transform it because it’s got huge opportunity. The space that is at the bottom of the trolley experiment tends to be the one that says, “It’s not because people don’t need cars, it’s not because people don’t need taxis, or Congress, or cats, or dogs; It’s because that needs to be transformed and made good.”

Ed Bernardon: Maybe that’s a new use for the Moral Machine Experiment, right? To help you target businesses. A business that turns things that you hate into something that you like. There you go. No one is going to disagree with that kind of a business, I don’t think.

Toby Russell: That’s the deal.

-intro music-

Ed Bernardon: Buying a new car should be an exciting and fun experience, but more often than not it turns into an uncomfortable back and forth with a sale person. You have little confidence that you are getting good value for your money, nor do you feel like the salesperson has your best interests in mind. All of this gets even worse when you are buying a used or pre-owned car.

On this episode of Future Car podcast, my guest has taken the whole used car buying process virtual to radically improve the entire buying experience. Today we’ll talk to Toby Russell, co-founder of Shift, and he will explain the nature of the used car buy/sell business as it currently stands, and all the processes behind online car sales, and why his motto is “Friends don’t let friends buy new cars.”

Ed Bernardon: Welcome to the Future Car podcast. I’m your host Ed Bernardon, and today we’re going to look at another side of mobility and transportation, which is the buying and selling of a car. For many people, buying a car is probably the second largest, maybe even the largest investment they’ll ever make, but almost always it’s not the most enjoyable experience. Our guest Toby Russell, former CEO and founder for Shift, knows how to transform an experience you don’t like into something you like. His company, Shift, is leveraging digitalization to transform how we buy and sell cars. He’s going to tell us what it took to really make Shift happen and why it was so sorely needed. Toby, welcome to The Future Car podcast.

Toby Russell: Thanks for having me, Ed, really appreciate it.

Ed Bernardon: Well, let’s start off. You can tell us a little bit about what Shift is all about. And really, as I was saying, buying and selling a used car isn’t the most pleasant experience, and that was a big motivator for you to try and change this business. Was that something you saw generally? Or was there some personal experience that drove you to this?

Toby Russell: So, it definitely started with personal experience. Buying or selling a car is a big deal. Like you said, Ed, it could be one of the biggest purchases you make in your life, and it’s something that I found to be terrible. I would look at going and buying a car, and frankly, I found it terrifying. The idea that a dealer would know a ton more about the thing, it’s a complex machine, that there’s a market with all kinds of dynamics and I’d have no ability to understand it and the only person that could tell me whether or not I was getting a good deal was the person who had all kinds of incentives to make sure that I didn’t get a good deal, it just terrified me. I was like, “This scares me like crazy.” A lot of my personal experience started with actually selling a car. I’d bought a car from a dealer, and I went back to that same dealer to trade in the car and look to work with him some more and get another car. And I bought the thing for something like $25,000. For me, that was a lot of money at the time. And I came back to trade it back, and they’re like, “Yeah, I’ll give you $13k for it.” And I said, “Wait a minute, that seems like a big gap. Like, really?”

Ed Bernardon: How much time between the $25K and $13K?

Toby Russell: I think a few years – so that’s legit. I’m like, “Okay, there’s some depreciation and some change on that. But let me look at what you’re selling my car for – same make, model, year – online.” And they were listing, essentially, my car for $18,000 to $19,000. And I looked at that, and I said, “Well, hang on. I get that my car is depreciated, but you’re going to list this thing for $19,000.” And they said, “Yeah, well, we’re not so sure.” I’m like, “I’m pretty sure. I’m seeing dozens and dozens of my —” This wasn’t an uncommon vehicle. This was a very common car. It was actually a BMW 328i. And there was a big splurge for me to go out and get that thing, and it was when I was early in my career. And I thought, “Hey, this would be like a really great car to have.” And you guys are selling dozens of them, and they’re all listed within like an $800 spread. And I was like, “I’m pretty sure you’re gonna sell this for $18,000 to $19,000, and you’re offering me $13,000. That’s a big gap.” And they said, “Well, we can’t be sure that it will sell for that. We don’t know if the car is good or not.” And I’m like, “Well, I’m pretty sure. How about we do this: You guarantee me $13,000, and if it sells for more, we’ll split the difference. We’ll share on the upside.” And they’re like, “We don’t do that.” And I said, “Okay, then we will.” And that was the first product that we offered at Shift was a consignment structure where we would actually allow people to get a guarantee, and then we would split the upside. Now, for a bunch of reasons, we moved away from that. People wanted full money upfront, and I understand that. And so we moved over to a more traditional “push a button and get the money right away” everything upfront. But we wanted to align ourselves with the seller and with the buyer. And the way we did that was we looked for not new cars — it turns out new cars are a trap; we can talk about that in a moment, Ed. It’s like one of the grand conspiracies in auto retail. I jokingly say, “Friends don’t let friends buy new cars.” But used cars, and we really look to align with the used cars that someone else has been driving. Ideally, one owner and no accident, strong options package but older – three to eight years old. That’s your dream car, that’s like your gem. It’s a sweet spot that I never even knew existed or that you needed to have, and we built an entire company around that. And the reason is because that’s the curated vehicle; those are the vehicles that you really want. And we realized we could create a great deal for the seller of the vehicle and a great deal for the buyer of the vehicle and cut out the middleman. And that’s where the magic happened.

Ed Bernardon: I have so many questions I want to ask you about what you were just saying. But what happened on your “Hey, we’re offering you a $13,000.” And then you went back. What happened in the end on that deal?

Toby Russell: It’s a great question. I didn’t sell the car. I held on to that car for many, many years. Until a point, where – I was in San Francisco at the time – a friend of mine and I were going to go take a trip up to do a visit to Wine Country up in Napa. And she was like, “Uh, how about we take my car not yours?” And I was like, “Why?” She’s like, “I don’t trust your car anymore. It’s gotten pretty old.” And I was like, “Okay, fine.” And so I bought a new car and I sold that car on Shift.

Ed Bernardon: It’s a sure sign it’s time to sell your car when your friends won’t go in it.

Toby Russell: When your friends are like, “Uh, how about we take my car?” Part of the thing was I held on to the car and I was like, “I’m gonna keep this thing.” But I eventually I wanted us to mature the Shift product enough, and I said, “Fair enough.” I bought a car through Shift and I traded in my BMW.

Ed Bernardon: Let’s start with the new car because a car is new before it can be used, and maybe you can reveal, peel back the onion here on what are some of the secrets, pitfalls about new car buying and selling.

Toby Russell: Here’s the thing. I’m going to go on my mini-rant on this, Ed, and this isn’t maybe true everywhere across the board but it’s surprisingly true today. And that is, when you go to buy a new car, disproportionately, you haggle to buy that car. Like, have you ever walked into an Apple Store and haggled to buy an Apple computer?

Ed Bernardon: No, but we take it for granted. We accept that. But we try and arm ourselves with information by Blue Book price or percent under the dealer list or whatever it is, all this info you can get on the internet.

Toby Russell: And the thing is, this is a brand new vehicle; it’s just come off the line, there’s an MSRP (Manufacturer Standard Recommended Price), and yet you’re going to go in and haggle. You’re going to go back and forth and argue and fight. And the reality is, what’s going on there is price discrimination – that’s the term in economics that’s used. The seller of the thing is saying, “How do I maximize how much I can get for this thing from this person?” It’s not standard curves. It’s not average costing. It’s individual, point-by-point maximization known as price discrimination. Now, here’s the thing, the nature of discrimination is that it discriminates. Guess who loses in that equation? Disproportionately – wait for it – women, people of color, and people who are new to car buying. It is an actively discriminatory system in the largest retail sector in the country. And that is auto sales.

Ed Bernardon: Second largest thing you might ever buy. And it’s discriminatory pricing.

Toby Russell: That’s crazy. The fact that we allow that active discrimination for this huge purchase, I find to be just unthinkable. It’s crazy. Especially in the internet age, when you theoretically could run auctions if you really wanted to do a fair bid-ask system, you name it. But the net of it is, I found that to be a scary and incredibly discriminatory system. But – and here’s the real secret, and this is why it’s a trap – even if you win in that negotiation, let’s say you “win”, and most consumers walk in believing that it’s a zero-sum game – that is one person wins, one person loses – and that they’re either going to win or lose or be taken advantage of. Let’s say you go and you buy that new car and you win, you get the bottom price the dealer is possibly able to part with that vehicle for. The second you drive that thing off the lot – and there’s the trap – it depreciates by thousands of dollars, because it just went from being a new car to a used car. So, it’s a trap because you think you can win the negotiation. But even if you “win” – and most people don’t – you still lose thousands of dollars just driving it off the lot. That’s why I say, “Friends don’t let friends buy new cars.” It’s a terrible value.

Ed Bernardon: Oh, that’s interesting because, basically, the price of that vehicle, you’ve driven it 10 yards, a few feet, and it’s like you’ve thrown thousands of dollars out of the window.

Toby Russell: The fact that that went from zero owners to one owner, the fact that it just went from being a new car to a used car, and in the distribution from the original equipment manufacturer or the OEM to the retailer, to the consumer; there’s effectively tremendous value destruction there. What’s happening is there’s a lot of depreciation through that chain, and we just kind of say, “Hey, look, it’s okay to have depreciation, let someone else have that, buy that car.” Three years later, you’re going to buy that car for 30-40% discount, maybe not that much but thousands and thousands of dollars less for functionally the same vehicle, and you can come out ahead, if you can find that car, it’s a hard car to find. And that’s why we built Shift to be the machine that finds that car and gets it to people.

Ed Bernardon: Well, let’s talk about that sweet spot because it sounds like if you wait three years, the depreciation continues. But you don’t want to wait too long, I imagine, because then the car is getting old, and it might have problems. So, is that like a good crossover point between depreciation and still functioning not exactly new but much like a new car?

Toby Russell: That’s right. So, what you want to look for is a vehicle, ideally, that has three to four years because that would be the steepest part of the depreciation curve, that is the rate at which it loses money or loses value has kind of leveled off. And you also want to look for 10,000 to 12,000 miles per year on the vehicle. Because if a car is being driven 20,000, 30,000 miles a year, it’s getting overused and it’s getting burnt out. That’s like if you’re buying a former rental car. You’re gonna see a rental car come off be defleeted from a rental fleet, you’ll see it’ll be a year or two old and it’s going to have like 30,000, 40,000 miles in a year or two. That’s crazy. You don’t want that, because that means that car has been overworked. By the way, rental cars will have slim options, like not good packages on them anyway. So, you’re going to get kind of a bad deal. That’s a newer car that has a lot of miles, so the price hasn’t come down but you’re paying a lot for a car that’s not strong options, etc. What you want is the opposite. What you want is a car that’s like three, four, maybe up to eight years old, that has 10,000 to 12,000 miles per year; ideally, one owner, no accidents — but there can be a couple of owners and not have any major frame damage or anything along those lines. That’s what you really want to look for in a vehicle.

Ed Bernardon: Now, let’s say you’re towards the back end of that seven, eight years, 10,000 miles per year, starting to get up to 70,000 – 80,000 miles. You can still get a good car with 70,000 – 80,000 miles on it, you think? It’s worth an investment?

Toby Russell: Definitely. At Shift, we even created an entire branded program. The core Shift vehicle, the vast majority are what we call Shift Certified. We do 150-point inspection because we want to be able to say, “Hey, this car is used but it’s quality.” Because that’s the problem, everybody would buy used cars because people figure out the new car trap, and they’d say, “I’ll just buy used.” But the issue is, you’re like, “I don’t know what I’m gonna get. Am I gonna get a lemon? How can I know this car is good?” And it’s hard. It’s hard to find that trust because the “used car salesman fly by night” kind of a meme. So, that was the “break the revile practice.” Just as like Uber, Lyft, I would think, Taxi Magic started transforming the taxi space, we’re seeing that transformation in the used car space because you see folks that will actually do a certification and have a brand and stand behind it. So, you do want to have like — we have the concept of a Shift Certified car. There’s a separate concept that we created, and it was called the Shift Value car. Many cars, even when older, can still be great. What does that mean? If you’ve got like a Toyota or a Honda, those things are going to run 100,000-150,000 miles. So, over eight years old and 80,000 miles, right around that time is when maintenance problems start happening. So, you want to be careful about buying more finicky or luxury cars, disproportionately European imports is going to be a little bit your more danger zone in those older vehicles. But if you’re getting something like a Toyota, Honda, disproportionately Asian makes that tend to run for a very long time and be very reliable, you can get a great deal in that space. And they’re gems, what we call value vehicles in that zone. If you select for them and find the right car, you can get a great vehicle. I personally am right now driving a car that I bought from Shift. It’s a Honda CRV, that thing’s got 130,000 miles on it, still driving it. It’s like a 2008, and it’s good, still works. There’s goodness there you can find.

Ed Bernardon: How many miles when you bought it?

Toby Russell: I want to say I bought it at something like 70,000 or 80,000 probably, must have been four or five years ago. So, we put a decent amount of miles on the thing in the last few years. But the point is, it’s reliable, still running, will do well. Now, it’s a more expensive vehicle, but the lore in the industry, of course, is something like Toyota Land Cruiser; people are still driving those things from the 1970s and the ‘80s, like 200,000 to 300,000 miles, if properly maintained. And there are certain European cars you can do that with if properly maintained. But it doesn’t mean you can’t find an older car, it just gets harder and harder to find the gems in that case. And so you need to have a good eye and selection for that.

Ed Bernardon: And there’s not one-size-fits-all. If you think about some of the things you just said is, “All right, let somebody else buy that new one and take all the depreciation and find that sweet spot,” which can vary depending on the kind of car is. Like you said, if it’s an Asian car maybe can last a lot longer. But you do have to find it. And by the way, I want a blue one, and I want it with these features and this and that. So, the finding of this car in the sweet spot with all the options you want – it’s not so easy. And it sounds like that’s a big piece of what you’re trying to do here as well.

Toby Russell: That’s exactly right. It’s that finding of the car that came from a person that’s not new. It’s a quality used that fits into those buckets of either older but still good quality – so, it has cosmetic issues, but that brings down the price a bunch — so you’re going to, in absolute terms, get a cheaper vehicle — or a little bit newer, but not new, that is what we call Shift Certified. Or a quality vehicle that you can trust but that depreciation curves come off of so you can get a great value. And in both of those cases, those are kind of the, as they say in economics, that Pareto optimal. Those are the spots where you want to play and get a vehicle because you’re going to get a great vehicle for a good price, and you’re not going to get taken advantage of. That comes back to your earlier point of the meme “car salesman or used car salesman” – the definition is you feel like you’re getting taken advantage of. We built Shift around those two different sweet spots where you don’t get taken advantage of. The whole concept is that this time I win as a buyer or a seller. And the reason was, we had had bad experiences in the industry, being like, “This thing’s terrible. It’s rigged for failure.” And so we wanted to build a machine, so to speak, a company that could do that finding and make it really easy to access those sweet spot vehicles. Now, as a result, something like 60% of the cars that Shift buys don’t go to consumer; only about 40% of the cars that are bought are selected for being those high-quality, retail-ready vehicles. That’s part of the reality of what it takes to be able to curate the sweet spot cars for people is that most cars actually are not sweet spot cars, 60% of those are not going to make it to a consumer or meet the Shift standards.

Ed Bernardon: When you’re doing these inspections, did you ever inspect a car and say, “Hey, this isn’t gonna cut it. It doesn’t meet our standards.” And then you say, “Sorry, we’re not going to take it. We’re not selling this on our system.”?

Toby Russell: That does happen. And we can find that out at one of two stages. So, in the very beginning, we have certain retail guidelines and cut-offs. It depends, as we were talking about earlier: make, model, year. So, for a Toyota Civic, we’ll accept a car that has higher miles on it. For an older Jaguar, we’re not going to take those older Jaguars, those tend to have trouble. So, that’s the first cut, is the retail guidelines. There’s a second cut, where we actually do the inspection. If the car doesn’t make the cut, what we do either right away on the website or if there’s an issue, we’ll work with the consumer on it; we flag it and we say, “Hey, this car is not going to be retail-ready, so what we can do is we can take it directly to auction for you and sell it for you. So, we’re not going to be able to retail it. You will get a lower price for it because we’re going to take and sell it at auction because that way we’ll wholesale it. It doesn’t make the Shift gems list, but we still will take it and we’ll give you cash for it. And we can help you get out of that vehicle if you want.” And people make that choice every day. That is part of building the machine, the system to curate for vehicles that people want. At the same time, is getting a seller, any seller, a price for their vehicle, that is a good price that Shift can stand behind.

Ed Bernardon: If I’m the seller, I suppose once it’s sold, you take a percentage.

Toby Russell: Well, as a seller, you’re paid cash upfront.

Ed Bernardon: Oh, so you’ll buy the car from me?

Toby Russell: We just buy the car, yeah. I mentioned that earlier, when Shift first got started, we did kind of a consignment structure. We did away with that because most people, like 80% of folks selling their car were like, “Look, I just want cash upfront. I just want to be done because I’m going to go and buy another car.” And so we moved over that. So, Shift buys the car outright, forward money.

Ed Bernardon: So, then if it turns out it doesn’t cut it from a mechanical standpoint, then you say, “Hey, look, we can only give you this much because we’re going to take it to auction.”

Toby Russell: We usually detect that right away when you get a quote. Occasionally – and this is pretty rare, but theoretically, it can happen – we’ll take the car in and we’ll discover that it has significant frame damage or some other issue. If a buyer didn’t know, or knew and didn’t represent that they had significant frame damage or massive engine problems, we’ll say, “Hey, look, the thing’s got significant frame damage or massive engine problems. We can bring the car back to you or we’ll take it to auction for you, whichever way you want, your call.” But part of the deal is you have to actually represent anything that’s major. If it’s minor, things like cosmetic issues, etc. That happens a lot —

Ed Bernardon: More scratches than they said it had.

Toby Russell: Scratches and issues, minor stuff. We have a whole reconditioning team, ASE-certified mechanics. They’ll work on the cars and they do a great job in all of our hubs across the country, bringing those cars up to our retail guidelines. So, there’s a tremendous amount of work that goes into each car to do that because there are going to be things with a car, it might need brake replacements, new tires. In my case, I sold an Audi to Shift, it needed the turbo replaced. These things happen, that’s required, and we want to get certified. But if it’s something major, the equivalent of selling a house and you’re like, “Oh, actually, the foundation is completely destroyed, and it has been for many years.” We’re like, “Well, that’s kind of a problem.” You either have to know that or represent it, otherwise, that gets to be the point up into the zone of “I’m going to sell you a car. But it’s not really a car, it’s actually a bike.” And you’re like, “Well, it’s got to actually be a car.” So, it can’t be, fundamentally, not what one said it was, but short of that. And that, again, would be a very rare case. The vast majority of the time, what we call our retail guidelines, handle that online.

Ed Bernardon: Well, it’s good to hear that it is rare, that most people are honest in how they represent the cars that they’re selling.

Toby Russell: About two things happen. One, it’s hard to do something like damage the frame of a car. And it’s pretty hard to not know that you’ve been in a major accident. You find out when you’re in a major accident, to bend the frame of a vehicle, as an example. And there are reporting structure services, things like CARFAX, AutoCheck, that when major work is done, usually or generally, the repair shops will report that as related to the vehicle, so you can then look and check, “Hey, has this car been in any major accidents, had major damage to it?” And that tends to correlate with anything really significant like, again, frame damage is a big one.

Ed Bernardon: So, you find me a good car, you make sure that it’s working well. And then now there’s the whole back end: financing, warranties, delivery. So, that’s a whole other piece of that business.

Toby Russell: When we first got going with Shift, buyers were like, “This is amazing. We love it.” We would do this thing, where we bring the car to the customer’s home to test drive and people are like, “This is awesome. I want to buy the car. This is great. But do you have financing with that?” And we were like, “Nope, but we’re gonna figure out how to do that.” That was the number one buyer request is “How do we get financing?”

Ed Bernardon: ‘Cause you can get that at the dealer now when you’re buying a car, that makes it very, very convenient.

Toby Russell: Definitely. There’s a bunch of stuff that dealers do to look for what is the best deal for the dealer and not for the consumer. That’s a problem. And so what we did was we built out what was just a really transformative thing for, I think, the industry and certainly for Shift, and that was the first mobile point of sale for an automobile, where a consumer could apply for and get financing and warranty – that’s another thing people like is warranty protection or extended warranty in real-time — and do all of that with transparency, knowing what their APR is going to be, what their monthly payment is going to be. And doing all of the contracting electronically; they’re being able to sign everything on an iPad and have everything be done in real-time with e-contracting. We built that out in 2016 timeframe, and that was like a major focus of our product development at that phase. And it was really transformative for Shift as well as for consumers because it went from “I love this car, this is great, but do you have financing for that?” And we used to say, “No, you gotta go get a credit union or a bank, or go find outside financing, and then you can come back and you can pay for it if you need to finance it.” And I believe that was just a terrible customer experience. And now it’s a really great customer experience.

Ed Bernardon: You probably lose some sales with that, too.

Toby Russell: We were definitely. There was just friction. It was just a mess. In fact, that Honda CRV I mentioned that I bought from Shift, we didn’t have that financing thing at that point, and I had to go and find an outside credit union to buy it and whatnot because I wanted to finance it. I actually think it’s a good financial decision to finance a car, believe it or not. We can talk about that in terms of personal financial management and wealth. But by and large, you get relatively good options and it’s a fairly liquid market. And so the idea of financing was a big deal. And now we’ve set up a platform, essentially, where customers can choose from a number of financing options. I mean, everything from Bank of America, Wells Fargo, Capital One, Chase – major financing operations – and get great rates and do the whole thing in real-time with e-contracting. It’s a pretty spectacular experience.

Ed Bernardon: So, an enjoyable, frictionless, seamless experience from A to Z with that sweet spot greatest value, but you have to wrap a business around this. And one of the things you said, which I think is very interesting – you said, “You have to work back from the customer, not forward from the business.” The interest of the customer, and then there’s the interest of the business, but they have to be in sync. So, what exactly do you mean by that?

Toby Russell: This is a very common Silicon Valley concept. A lot of businesses get built, saying, “Hey, let’s provide what’s easy for us to provide.” The alternative view is, “Let’s figure out what our customers want and need, and let’s come up with a creative, novel technical solution to enable that. And then, by creating value and meeting customer needs, we’ll find a way to monetize or make that go round.” And disproportionately, it actually does work that way, is understanding what consumers really need and working back. Now, I’m not saying that I’ve always done that. I made a massive mistake at Taxi Magic. The reason you’ve heard of Uber and probably not Taxi Magic is we did the opposite. At Taxi Magic, we said, “Hey, what would be really interesting to build?” And we went out and built something that was really interesting that we thought people would want. And there was goodness there, no doubt. And there are pieces of that, that survived to this day. Verifone bought the thing for the payments technology. And if you’ve taken a cab in New York or Las Vegas, under the brand Curb – Taxi Magic has been rebranded Curb – you’re probably using the payments technology we built. So, there were useful things there. But what we didn’t do was really understand the user need. And the user need was not just, “Let me get access to a taxi easier.” That’s what we created. We said, “Hey, how might I push a button and have a taxi come pick me up?” It turned out, oftentimes, what would happen is people would say, “Hey, let me get that taxi.” And they loved it. Especially, in places like San Francisco, because people are like, “I need a taxi –” of which there are three – “And I’m gonna be able to push a button and skip the line, and the car will come can pick me up.” When it worked, it was awesome. But the problem was, periodically, the taxi operator, the driver would see somebody on the street with a bag, that meant an airport ride, and so they choose to not pick up the Taxi Magic person who’d reserved the car, and instead pick up that person off the street and take off. And that really destroyed the value prop. Turns out no taxi, no magic. And so what we realized is we couldn’t control the user experience. We built a thing that plugged into the existing taxi system, people love the ability to reserve and do the whole thing electronically. But what they really wanted was a reliable taxi, not just an iPhone app.

Ed Bernardon: And that’s the keyword, I think, is reliable. It sounds like I could book it, and then, “Hey, where’s my taxi?”

Toby Russell: Turns out. And so we needed to continue iterating and innovating and realizing it wasn’t just the accessing of the taxi, it was actually the taxi itself was the problem. And so Uber, Lyft, others; by creating their own network, and then curating that thing, holding drivers to service standards, actually created a better taxi experience working back from the user. That’s a big deal. That’s something that we reflected on a lot after Taxi Magic and brought to the concept of building Shift, saying, “We’re going to work back from that user, and keep figuring out what is it that someone needs and wants, and we’ll build for that.”

Ed Bernardon: What was the biggest thing that you incorporated into your business at Shift that shows this customer-forward approach?

Toby Russell: When we set out, we were like, “Hey, we’re just going to build a technology company.” Today, Shift employs hundreds of people and a tremendous variety of skill sets, including, as I mentioned, certified mechanics. We realized that in order to create that great experience, we would actually have to take physical possession of the vehicle and do work on it; auto repair and maintenance on the vehicle to improve the car. Why? People didn’t just want a great shopping experience, they didn’t just want a great buying and financing experience; they want a great car. And to deliver a great car, we had to go way deeper into the operational and physical improvement of that thing they may originally expected. But we did that because we believe in delivering a great product. And the great product was amazing shopping, discovery, and purchase experience in addition to a great underlying vehicle. Hence the 40% of the cars that are bought by Shift make it to the frontline, 60% don’t. And most, if not all, of those cars, receive significant refurbishment whilst in Shift’s hands; that’s not something we expected to get into by any means at the outset. But that’s something that delivered a great customer experience, and that is a great car. So, that was the deal, and different than what we would have originally anticipated.

Ed Bernardon: Taking your Taxi Magic example, if someone were to ask, “Well, what does Taxi Magic do?” Well, we have this software that will schedule a taxi for you. It’s slightly different than saying, “We’re a company that will get you a ride when you need it to where you want to go.” It sounds so simple when you say, “Oh, we’re gonna make the whole car buying experience seamless and easy.” But we’ve talked about a lot of different pieces; you always have to keep that mission in mind is what are we really doing here? And like you said, if we don’t do the financing piece, that’s a big thorn in the side of the buyer. We’ve got to add that. So, looking back, what was the thing that surprised you the most that you had to add to this experience that you didn’t anticipate upfront?

Toby Russell: I think the thing that really struck me – I’m going to take this at a higher meta level – and that was, I didn’t realize that to create a great car buying experience, we’d have to basically build four companies within a company all at once. The four things that we had to do well are, essentially, things that there are entire companies built around just doing this. What’s the first thing? Car buying. There’s a company, I think it’s called Auto One, they do nothing but that. In Europe, it’s a huge multi-billion dollar company do nothing but car buying. So, we had to get really good at buying cars from consumers. Why? Because that’s core to the value prop; being able to create that car that someone else is driving, we talked about that earlier, Ed. Don’t get a new car, don’t get an off-lease, rental car. Get a car that someone else was driving that is a really good vehicle. So, being able to select for and find those cars and buy them properly – hard. First business. Second business – being able to recondition those cars. There are entire businesses – Pep Boys – auto mechanics that run on nothing but auto repair. It’s like the entire business is just that. So, doing large-scale auto inspection and repair, that’s an entire business in of itself. It’s like, “Wow! We’re running a whole second business right there in that vertical.” Third business – eCommerce – being able to merchandise and connect buyers with a product. There are whole companies, Amazon does nothing but that, top to bottom. They’re merchandising and selling, and then all of the logistics of the delivery, and all of the reverse logistics of taking returns, and enabling that whole shopping and sales process is a huge business to run in and of itself. There are entire companies that do nothing. A new car seller essentially is doing just that. They’re not acquiring the car, they’re not repairing the car; they’re just taking the car and they’re selling it. That in and of itself is an entire business that is a challenge.

Toby Russell: And what’s the fourth business? It is the thing we talked about earlier – the financing and warranty. There are whole companies that do nothing but auto finance. And so being able to run and enable an auto finance operation at the same time – tricky, complicated. And so, one of our engineers, early on, said, “Hey, no one of these things is so difficult and complicated. What’s challenging –” and this is the thing that surprised me – “What’s challenging is doing all four simultaneously really well.” And that’s where the real challenge for us was building technology in each of those four to coordinate across them, as well as ensure that each one ran, continually runs and scales out well because we’re running four businesses simultaneously and they’re all interdependent. There’s a ton of complexity to that. So, figuring out how to do that with software was hard because we had to build a lot of software to enable that across the board. And that, frankly, took half a decade. And there’s a huge, in a sense, moat to being able to build that all out, because a lot of that stuff we had to do manually and at a sub-scale. It was challenging and hard, grinding work to do it well at each stage. And that was what this engineer was talking about. He was saying, “Hey, look, theoretically, any one of these things you could build and solve, but it’s getting all four of them built out across the board takes a bunch of time, and then getting them to interoperate is tricky.” That was the big surprising problem that we realized we had to do in order to create that end-to-end great experience for consumers.

Ed Bernardon: That’s part one of our talk with Toby. Join us again for part 2 when we’ll continue our discussion with Toby on new ways to buy and sell used cars. And as always, for more information about Siemens Digital Industries Software, make sure to visit us at plm.automation.siemens.com. And until next time, I’m Ed Bernardon, and this has been The Future Car podcast.