CASE STUDY

CHALLENGE

"CARFAX was built for the Internet," says VP Marketing
Scott Fredericks.

Back when the Company was founded in Missouri in 1986, it's
initial business model was to gather and sell used vehicle
data on a subscription basis to car dealerships. However, CARFAX
always had its eye on expanding to the consumer market because
while there are about 40,000 used car dealerships in the US,
almost 43 million used cars are sold to consumers every year.
The opportunity was huge.

"We tried direct mail, 800 call centers, all this stuff," says
Fredericks. "But until the Internet came along, because of the
low price point, acquisition and fulfillment costs far exceeded
revenues from consumers."

In December of 1996, CARFAX.com launched specifically to sell
used car reports to consumers. This does not mean things were
suddenly easy.

Throughout the 1990s, the average e-retailer had new customer
acquisition costs often exceeding $40, and counted on returning
customer sales to create any profit. However, the average used
car buyer only purchases every three or four years.

So CARFAX had to make a profit on that initial acquisition
because chances were that average consumers were not going to
return to buy more at any time in the near future.

CAMPAIGN

CARFAX does not use the Internet to market business
subscriptions to dealerships because, with the exception of a few
savvy areas such as DC and New York, dealers "mostly aren't
clicking." The Company still uses offline tactics including
direct mail, fax blasts, telemarketing and space ads to sell to
dealers.

However, CARFAX uses three key offline marketing tactics to drive
consumers online:

1. POP Materials: All dealers who are business subscribers
are encouraged to impress their customers by flaunting the
relationship via POP (Point Of Purchase) materials, including
real-world banners, window stickers, brochures, flyers, even
things to dangle from car mirrors.

2. Radio ads: "We talk to them when they're in their car,
staring at their odometer, wondering if it's accurate," says
Fredericks. In addition to drive-time radio, CARFAX also buys
radio time on weekends hoping to catch consumers who are
driving about visiting dealerships.

3. PR: CARFAX has two in-house PR specialists working full
time to prepare and feed "all kinds of content to make
reporters' lives easier" including story ideas, article
content, video feeds, photographs, audio feeds, etc.

The best thing about these three tactics is that costs can be
split between two budgets: Strengthening dealer relationships
and selling online content.

When it comes to online where costs could not be shared as easily,
Fredericks reduces his acquisition budget risk by focusing on the
now classic tactic of giving partners and affiliates a percent of
sales instead of a flat CPM (cost per thousand) for advertising.

He has learned four key lessons in making these relationships
successful:

Lesson #1. Test your commission structure: Although most
sites' affiliate programs offer less than a 10% commission on
sales, Fredericks has tested offering up to 35% to top
affiliates (an additional 5% goes to affiliate account
management vendor BeFree).

Fredericks has also tested partner commissions ranging from
20-40%. He says, "It seems like a lot of money for our
relatively low price point. We made a tough call." The
higher the commission, the more prominence CARFAX expected its
partners and affiliates would give it on their sites. Could
the site make up in volume sales what it lost in commissions?

Lesson #2. Build strong personal relations with top performers: Just because you have a contractual agreement, does not
mean you will get great performance from the deal. Fredericks
hired several full-time partner and affiliate managers to
schmooze big sites. His top three tips:

a. Do not rely on email alone. Use the phone. A lot.

b. Schmooze multiple contacts at larger sites,
especially at AOL where people are moved in and out of
specific jobs frequently.

c. Proactively ask your affiliate management vendor (if
you use one) if they can recommend any potential new
affiliates. They know who is performing for other sites
like yours. Then pursue those potential "super
affiliates" as you would any other top partner.

Lesson #3. "Placement is King:" Do whatever you can to get
links to your site moved up to the most frequently trafficked
pages in that site for your target. Then keep on schmoozing
to get that link put in the best possible place on that page
for clicking. Frederick's sweet spot is being placed in the
navigation bar, just as though his link is part of the site's
regular content.

Lesson #4. Test your creative: Many sites offer affiliates
and partners little more than a selection of banners. CARFAX
has tested every type of creative you can imagine from
banners, to graphical links to text links. The site has also
tested the actual wording of all copy.

Once traffic arrives at the site, the challenge is to get as much
of it to convert to actual sales. Fredericks continually employs
both qualitative and quantitative research methods to improve
performance.

The marketing team collects qualitative data by running regular
focus groups 4-5 times per month in an in-house facility.

They give consumers who are in the marketplace for a new car $50
and some pizza in exchange for an hour of their time. Then the
team gathers behind a two-way mirror to watch how each consumer
actually interacts with CARFAX.com as well as competing sites.

Fredericks notes that because CARFAX.com has been online for
seven years these sessions are more important than ever. "We
look at those pages every day until we're stick of looking at
them, so it's hard to consider looking at them for the very first
time, cold. New visitors don't know the intent of the page.
Everyone in-house knows how to blast through the site, knows
where to go. You blast through because you've done it eight
million times. But consumers have done it zero times. You have
to look at it as if you're coming in cold."

Using data gathered from these sessions and site metrics reports
including clickstream analysis, Fredericks' team constantly runs
tests to see where tweaks can improve performance. Almost
nothing about the site is set in stone.

Fredericks says, "We play with the site all the time. At any
given moment I'm running 8-10 a/b split tests." Arriving traffic
is funneled into servers containing different versions of the
site, including a control server.

These tests focus on three key elements

1. Pricing and offer: "We constantly play around with
pricing," says Fredericks, "I can't let it die." He's tested
offering an unlimited number of CARFAX reports for a month,
versus a stated number of reports. He has also tested single
report pricing versus a month package.

2. How much content to give away for free: Consumers
visiting the site have often never seen a CARFAX report
before, so they do not quite know what they will get for their
money. Great sales copy helps, but some people will always
need to see a sample before they buy.

On the other hand, if your sample gives away too much
perceived value, many visitors will decide they got enough for
free and it is not worth anteing up the cash for further
content. Fredericks says repeatedly testing where to draw
that free vs. for-fee line is critical to his success.

3. Page design, copy and graphics: Every element of the
site, from the headline on the home page to the tiniest
graphics at the bottom of order pages has been tested, tweaked
and continues to be tested again. Two key elements:

- Number of visitors who convert based on the path they take
through the site. For example, do people who click to read
customer testimonials convert better or worse than people who
click to get a free report immediately? These results
determine how prominently the entry to each path is displayed
on the site.

- Number of visitors who abandon the site during the
ecommerce process as they are entering their credit card or
other buying information. Can the shopping cart be better
organized to reduce this abandonment rate?



RESULTS

CARFAX has doubled it's business by selling to consumers
online. Dealers' business subscriptions and online consumer
sales are now roughly equal revenue streams for the Company. "It
naturally occurred," notes Fredericks, "It wasn't something we'd
planned."

CARFAX.com's constant tests and tweaks have paid off. Fredericks
says, "Over the last year we improved the conversion rate by 50%.
It's death by a thousand cuts. No one thing has been a big
'tada!' Millions of little things contribute. The next thing you
know, your conversion's moving North."

Although he can not reveal exact revenue figures (CARFAX is an
independent subsidiary of privately-held RL Polk), Fredericks did
tell us about 20,000 used car dealers in America currently pay a
minimum of $50 per month for their business subscriptions. (The
$50 covers 50 CARFAX reports and a wealth of other services.
Dealers pay $4.50 ala cart fee for additional reports during the
month.)

Let us just say it is a healthy multimillion dollar business.

Based on the total sizes of the business and consumer
marketplaces, Fredericks says delightedly, "There's scads of
potential."

More Results Details:

- Last year more than 20 million consumers visited CARFAX.com

- Although we have heard other consumer sites say highly
successful PR did not move the traffic needle, according to
Fredericks it has worked for CARFAX. "Last year, we got an
advertising equivalency of $20 million, that's 750 million PR
impressions. If I get a hit in Albuquerque on their NBC
affiliate, I can go look at visitors and transactions in that
market and see a bump."

However, Fredericks cautions against two things - bring PR in-
house if you can to save money and focus efforts ("Outside
firms just charge a bunch of money and don't get anything
done.") Do not depend on "hocus pocus" impressions
numbers based on things like pass-along readership which may
or may not be completely accurate. Fredericks bases his
numbers on guaranteed impressions only.

- While CARFAX.com's partner and affiliate schmoozing has
worked wonders for the site's prominence on other sites,
Fredericks admits the next big challenge is in getting the
best placement and creative in email communications.

He says, "Typically what happens if they send us an email 'Oh
yeah, you were in our newsletter last week.' It happens after
the fact. We need a higher level of engagement to work with
them in planning, as opposed to getting a courtesy email after
it went out."

- The higher 40% partner/35% top affiliate revenue share deals
have been more profitable for CARFAX.com. Fredericks says,
"If they know they'll get make more money, they'll pay more
attention to you as opposed to the 40 other things they've got
going on their Web site."

- Text links on partner and affiliate sites "always pull
better than graphical links."

- The sweet spot consumer offer currently is $14.95 for one
report or $19.95 for a month's unlimited reports. (Note:
Publishers who price their smaller unit offers, such as a
single month or article, at substantially lower amounts than
their larger unit offers should take note of this!)

The "overwhelming majority" of users take the $19.95 offer.

- Tests on how much content to give away as a sample amply
demonstrated the dangers of giving too much for free. When
CARFAX.com tested showing a large portion of the final report,
conversions dropped dramatically. "They got enough for free
that it was not worth giving us $15-20 to reduce their [car-
buying] risk further down."

- In-person consumer focus groups consistently produce
valuable, especially in terms of helping the design team keep
focused.

Fredericks says, "It humbles you, it really does. Web
producers say, 'we should put Flash in there, or change
colors, or I went to a great new site, let's incorporate stuff
from it into ours.' Whoa tiger, let's slow down! Take a
look at that user session. That brings you right down to
earth."

- Clickstream analysis of visitors' paths through the site has
revealed that people who begin the free CARFAX record check
process are more likely to convert into purchasers than people
who click on anything else on the home page.

- CARFAX's research shows that once people enter the
ecommerce/shopping cart area, it is best to get their credit
card as early as possible before asking them to fill out lots
of other data such as address and opt-in preferences.

- One key design change that helped improve conversions was
removing all 3rd party advertising from appearing on the site
during the conversion process. Now ads do not appear until the
pages after the visitor has purchased.

- The more you can tailor your sales pitch to a particular
consumer, the higher your conversion rate will be. For
example, Fredericks says, "It increases the close rate if I
can tailor to the part of the country the user is coming from.
If you're coming from Louisiana, we'll talk more about flood
damage in cars, whereas [to users from] New England we talk
about cars that rot out because of salt on the roads."

He has also had success tailoring sales pitches based on what
type of car the user is investigating. Copy points that appeal
to an SUV buyer are different than points for someone looking
at Jaguars.

Overall Fredericks is remarkably humble about the site's success.
During our interview he continually talked about how he and his
team needed to try harder; especially at easier-to-navigate site
design.

"Users are telling me they're still confused when they go to the
site. It's not their fault. It's our fault. We're not doing a
strong enough job making it abundantly simple. They have to very
quickly understand without a shred of doubt what's there to
understand, and where to go next, and what to expect when they
get there. We have lots of work to do in that area."

Given how much simpler the CARFAX.com site already is than about
90% of the sites on the Web today, this is a remarkable statement
for all.

USEFUL LINKS:
http://www.carfax.com

WebSideStory - CARFAX uses the HitBox product for site metrics
http://www.websidestory.com

BeFree - CARFAX uses this vendor to run its affiliate program
http://www.befree.com