How Does Carvana Make Money? Business Model of Carvana


How Does Carvana Make Money

Carvana is a popular online used car company that simplifies and shortens the process of buying a car. The company primarily makes money from used car sales. They also have some other creative monetization strategies.

Carvana primarily makes money via retail used car sales. The company also makes money from wholesale sales to dealers, in-house financing, extended warranties, and GAP waivers.

Founded in 2012 by Ernest Garcia III, Carvana was initially financially backed by DriveTime but was later spun off as a separate company, which is one of the largest used car retailers in America. DriveTime itself is owned by Ernest Garcia II, who is Ernest Garcia III’s father.[1]

Carvana aims to disrupt the used car market by changing how customers buy their cars. Users can place their orders via a desktop or mobile app and pick up their vehicles the next day from a completely automated car vending machine.

What Is Carvana & How Does It Work?

Carvana is an online used car marketplace with integrated financing and extended warranty options. Customers like Carvana because of their streamlined purchase process that involves minimal documentation and zero haggling. In 2021, Carvana sold 425,237 cars to retail buyers.[2]

With Carvana, customers can expect transparent pricing and a quick buying process. The company offers a huge inventory of used cars sourced from across the country. Users can buy used cars that were originally sourced from an entirely different state.

Local car dealerships don’t have the scope or reach of Carvana and are a lot more limited with their vehicle options. On Carvana, users can browse through a wide selection of vehicles of every make and model. The platform sells sedans, hatchbacks, minivans, sport coupes, exotics, and more.

Pricing doesn’t change from the app to the local Carvana market. This transparency is valued by buyers who don’t want to haggle or get into lengthy negotiations regarding hidden prices. Each vehicle on the desktop or mobile app is accompanied by a 360° fully interactive virtual tour where users can inspect the car before they buy it.

Both the exterior and interior of a vehicle can be viewed in this interactive virtual tour. This allows buyers to get a better look at what they’re buying without ever stepping inside a showroom. Once a buyer decides to buy a car, they are provided with flexible delivery options.

Cars can be delivered directly to a buyer’s home. Depending on the buyer’s distance from Carvana’s local hub, they might even get free same-day delivery. If the vehicle is being transferred from a more distant hub, they might have to pay delivery charges up to $149.

If a customer isn’t satisfied with their purchase, they can make use of Carvana’s 7-day return policy and get a complete refund. Carvana’s refunds even include delivery charges. This level of convenience and transparency encourages buyers to choose Carvana over traditional used car dealerships. Carvana also has proprietary car vending machines. These are, essentially, automated garage towers where cars are stored on multiple levels.

Users who live near one of these vending machines can walk up and insert a custom token that’s shaped like a coin. Then, they can watch their car being lowered by mechanized systems in real-time. Upon receiving the keys, they can take the car for a test drive and decide if it’s right for them.

If a user has already purchased a car, it can be delivered to one of several vending machine locations near them. All they have to do is arrive at the location and pick up their car from the vending machine. Currently, Carvana has 34 of these machines distributed across several states.

 

Business Model of Carvana

Carvana’s business model is centered around providing used car buyers with more options, increased convenience, and greater transparency in their purchases. Their online platform disrupts the traditional car sale model by making it easier and more convenient.

Carvana buys cars from individuals looking to sell them. Before a vehicle is sourced, its accident history is researched to make sure that there are no prior incidents. Then, Carvana inspects each vehicle for defects. Their unique 150-point inspection checks for defects in the frame, brake lines, wheels, drivetrain, and other systems.

Carvana repairs and replaces essential components through its reconditioning process. In addition to parts replacements, Carvana makes sure each car looks as good as new before it gets to a buyer. Trained technicians wash, buff, paint, wax, and seal each car before it arrives at the local Carvana market or vending machine.

Carvana operates very differently from typical used car dealerships. It packages sales, financing, extended warranties, and delivery into one seamless process. All of this can easily be managed from a customer’s phone, without having to set foot in an actual dealership until they are ready to pick up their car.

By deploying cutting-edge algorithms and proprietary logistics, Carvana is able to significantly cut down on the cost of acquiring a vehicle and transporting it to local hubs. The reduced overhead allows Carvana to pass these savings onto their customers who enjoy better prices on higher quality cars.

A local used car dealership doesn’t have the scale or technology necessary to ensure consistent quality in their reconditioned vehicles.

With Carvana, users can expect good prices with a low risk of purchasing a defective car or one that will have a major mechanical issue soon after purchase. Carvana also lets users buy and pickup their vehicle on a flexible schedule based on the user’s own timeline.

Minimal documentation and zero negotiation further streamlines the process. Carvana’s convenient and customer-centered process has resulted in excellent user satisfaction ratings.

Carvana’s biggest rival is CarMax. The popular automobile marketplace offers similar services, including a streamlined online buying process with minimal documentation and zero haggling. However, CarMax lacks some features that make Carvana distinctive. For example, Carvana’s patented 360-degree view helps buyers feel more comfortable making a purchase before seeing and driving the vehicle.

While a version of this technology was developed in-house, Carvana later acquired a company called CAR360 that specializes in interactive visualizations of cars through 3D computer vision, machine learning, and augmented reality.

The acquisition of CAR360 allowed Carvana to improve their high-definition 3D augmented reality viewing system.[3] Each car sourced by Carvana goes into a photo booth where a 360° interactive image of both the interior and exterior are generated.

Customers can take a complete, personalized tour of each car within Carvana’s inventory and view annotations on defects like scratches or paint chips that are written by vehicle technicians.

This 360 degree interactive viewing system gives customers the feeling of walking around a car dealership while sitting on the couch with a laptop. Because of their superior technology, Carvana attracts the growing demographic of users who want to examine and buy cars online without visiting a physical dealership.

Customers wishing for a more traditional car-buying experience might prefer CarMax since it has actual car lots. CarMax also requires customers to do more paperwork which takes up more time. Purchasing a car is usually faster and more convenient through Carvana.

Carvana’s business model is leaner due to the lack of car lots. They don’t have the same significant leasing and property costs that competitors have.

Carvana’s proprietary car vending machines also set it apart. Customers who live near one of these automated mechanical towers appreciate the convenience and novelty of dropping a coin into the machine and getting their car within minutes. The ability to purchase cars from out-of-state, without having to go out-of-state, also gives buyers more options.

Carvana’s transparent and seamless financing process also make customers feel more confident in their purchase and reduces the amount of time needed to purchase a car.

Carvana has significant expenses associated with acquiring, inspecting, reconditioning, logistics, and property expenses. The company generated $12.8 billion in net revenue in 2021, but their sales, general and administrative expenses for 2021 added up to over $2 billion.[4]

How Does Carvana Make Money?

Carvana makes money from five different revenue streams. These are retail used car sales, wholesale vehicle sales, financing, vehicle service contracts, and GAP waivers.

While Carvana breaks down their revenue for their retail and wholesale vehicle sales, the remainder of Carvana’s revenue is put in one bucket. These revenue sources are automotive finance receivables, sales commissions on vehicle service contracts (VSCs), and GAP waiver coverage. In 2021, Carvana made $1 billion from these three revenue sources combined.

Retail Used Car Sales

Retail car sales constitute Carvana’s primary revenue stream, accounting for 77.3% of the company’s total revenue in 2021.[5] Carvana made $9.9 billion from used car sales to retail buyers that year.

Whenever a customer buys a car on the platform, Carvana makes a profit based on the cost difference between its selling and purchase price. Carvana also pays for inspections and maintenance on each used car after it’s picked up from the original seller.

Shipping and logistics fees are also paid for by Carvana since each vehicle must be transported from a central hub to its local delivery station. It also generates expenses if customers choose touchless home delivery rather than picking up their car from a local Carvana market. However, Carvana doesn’t pay for transportation to customer who aren’t near a local market. They pay shipping fees themselves up to $1,490.

The company is careful to buy cars that they know they can get the right margin on when reselling them after they’ve covered their expenses.

 

Wholesale sales

Wholesale sales to auto dealers are Carvana’s next largest revenue source. Carvana sells excess stock or cars that don’t pass their inspections to other dealerships. The company made $1.9 billion from this in 2021.[6]

Carvana acquires vehicles from a wide range of sources. Sometimes they will get a vehicle from an auction or another used car dealership that doesn’t pass their quality standards for retail sales. Through CarvanaACCESS, this vehicle is then sold off to wholesale dealers who are willing to sell these lower quality cars.

As wholesale buyers often purchase hundreds of vehicles in batches, Carvana spends less money doing inspection and maintenance on these vehicles. That results in higher profit margins.

 

Financing

When buying a car from Carvana, customers have three different payment options. They can get one of Carvana’s auto loans, pay with cash, or get a third party loan. Carvana helps its users get prequalified for an auto loan via a simple online process that involves minimum documentation and paperwork.

The company performs a soft credit check that doesn’t impact users’ credit scores and provides them with loan terms that are valid for 45 days.

Carvana makes money from the interest rates on its auto loans. It provides customers with lucrative finance options on their desired vehicle purchase, so they don’t have to spend time negotiating auto loans with third party vendors. Through financing, Carvana generates more value for customers while also adding an extra revenue stream to its business model.

 

Vehicle Service Contracts

Carvana’s vehicle service contract (VSC) takes care of damages that are not covered by manufacturer warranties. It covers all basic systems within the car and lets users choose how much coverage they want. There are contracts covering basic wear and tear as well as roadside assistance and routine maintenance.

Unlike warranties, Carvana’s VSC has no mileage limits and doesn’t expire after a set number of years. It covers a customer’s vehicle as long as they keep paying. VSCs also have the added benefit of ensuring a continued relationship between Carvana and its customers well after they’ve purchased the car.

Depending on the terms of the extended warranty or VSC, the service agreement can be transferred from one user to the next. That potentially adds resale value to a Carvana purchase should a user decide to sell it in the future. By offering CarvanaCare protection plans, the company ensures customers service their vehicles at maintenance facilities of Carvana’s choosing.

Carvana develops and maintains its own network of over 5000 auto service shops which helps them better control the costs involved in servicing vehicles. These savings are then passed on to customers who enjoy affordable extended warranties that cover a broad spectrum of issues with their vehicles.

Currently, Carvana has three extended warranty plans.

  • CarvanaCare Essential: Covers the powertrain, including the engine and transmission.
  • CarvanaCare Plus: Provides coverage for all mechanical and electrical components, including air conditioning, power steering, fuel systems, and other components.
  • CarvanaCare Premium: Gives users all the benefits of Essential and Plus in addition to free oil and tire changes for one year. The Premium plan also covers minor dents and scratches to certain body parts.

 

GAP Waivers

Apart from auto financing and extended warranties, Carvana also provides GAP coverage. If a customer’s car is stolen or totaled before they have paid off their auto loan, GAP coverage will cover the remaining expenses after insurance payouts.

This coverage is completely optional but adds an additional layer of security and peace of mind for customers. Since Carvana provides this service within its own platform, it ensures greater customer satisfaction and transparency. This increases the chance of a customer making another purchase from Carvana in the future.

 

Carvana Funding, Valuation & Revenue

Carvana (CVNA) is currently a public company trading on the New York Stock Exchange. The company launched its IPO in April of 2017 at a price of $15 per share. That raised a total of $225 million for the company.[7] As of August 2022, the company’s stock traded for just over $35 at a valuation of $6.71 billion.

Prior to going public, Carvana raised $960.12 million from four funding rounds.[8] The company raised a further $3.9 billion through two post-IPO funding rounds in 2020, and 2022 respectively. Notable investors include JPMorgan Chase & Co., Citi, and Ally Financial.[9]

Carvana has increased its revenue significantly in recent years. They went from $3.9 billion in 2019 to $12.8 billion in 2021.[10] This increase of 228% in revenue was likely because the pandemic motivated more customers to order their cars online. There also was increased demand for used vehicles due to vehicle shortages.

Despite this impressive revenue growth, the company was not profitable in 2021 as it is focused on growth instead of improving profitability. Carvana’s net losses amounted to $287 million in 2021, after deducting general and administrative expenses from their gross profit.[11] However, gross profit per car sold is steadily increasing.

Carvana’s gross profit per unit (GPU) was $4,537 in 2021. This is up 59% from 2019, when the company’s retail car sales GPU was $2,852.[12] Their 2021 fiscal year also saw a year-over-year increase in the total number of markets they cater to and the number of cars they sell.

DateTotal RevenueNet Income
2019$3.9 billion($365 million)
2020$5.5 billion($462 million)
2021$12.8 billion($287 million)

 

Is Carvana Profitable?

Carvana is not profitable. While the company generated $12.8 billion in revenue for the fiscal year of 2021, Carvana was still operating at a loss. The company reported a $286 million loss in 2021. Those results are likely because Carvana is in the process of expanding into key markets and innovating their e-commerce technology.

However, there is still much to celebrate about the company’s growth. Their 2021 financial results were a 132% increase over the $5.5 billion they made in 2020 and a 228% increase over the $3.9 billion they made in 2019.[13]

As the company is also optimizing its logistics network and broadening the variety of vehicles available, that should increase sales while reducing costs in the future. All this is evidence that Carvana will likely be profitable in the future.

 

Conclusion

We hope that you’ve enjoyed this in-depth look at how Carvana makes money.

In conclusion, Carvana is a company that seems to be doing pretty well. They’re up against a lot of competition, but they seem to be taking advantage of their position as an online used car retailer. People want to buy used cars, and they want to buy them online. Carvana is the perfect solution for this need.

The used car market is massive and ripe for disruption, and it’s clear that Carvana is positioned to take advantage of that opportunity. They have shown that they are capable of disrupting an industry with their unique business model, and they continue to make strides forward in the face of competition from other used car dealerships.

We can only imagine what the future holds for Carvana and its competitors. Will they continue to grow? Will they face challenges along the way? Will they be able to adapt to changing customer needs? Only time will tell!

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Sources

  1. Forbes
  2. Carvana Annual Report
  3. Techcrunch
  4. Carvana
  5. Carvana
  6. Carvana
  7. Carvana News Release
  8. Crunchbase
  9. Crunchbase
  10. Carvana
  11. Carvana
  12. Carvana
  13. Carvana