Tesla Motors: High-end differentiation for low-end gain

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The birth of the electric vehicle (EV) was anything but sexy. The first mass-produced hybrid car, the Toyota Prius XW10, was ground-breaking in its technology, but certainly didn’t win any awards for its dull design. The same could be said for another early hybrid, the Honda Insight ZE1. On their arrival on the market in the late 1990s, the first mass-produced hybrids may have appealed to eco-friendly drivers, but those looking for a stylish ride would have quickly looked elsewhere. Until the Tesla Motors Roadster came along that is.

early-hybrids
The Toyota Prius XW10 (top) and the Honda Insight ZE1 (bottom)  (Images courtesy of Wikipedia and IMCDb.org)

When the Roadster launched in 2008, the move to full EVs had already been made, but like their predecessors, they did not excite beyond their environmental benefits; the focus was on economy rather than function. Tesla turned the industry on its head by entering the market at the top end with an electric sports car that had the looks – and the price – to grab the attention of a wider audience.

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Tesla Roadster Sport (Image courtesy of: caranddriver.com)

The Roadster retailed at an astounding US$109,000, while the Roadster Sport came in at US$128,500. As a point of reference, the 2017 Porsche 911 will hit the market from $89,400. Despite this, it was not the price that was the primary point of differentiation for the Roadster, in fact, its differentiating factors allowed it to be sold at such a high price.

Analyst Victor Zhao stated:“Purely on car alone, Tesla has been able to differentiate itself as a premier product. The all-electric aspect of its vehicles adds yet another level of differentiation. The resulting lack of suitable substitutes for Tesla’s cars allows the company to continue charging a premium price.”

This idea is reinforced by Millward Brown’s Chief Global Analyst, Nigel Hollis: “A brand can thrive at a higher price point when it is seen as a well-differentiated, desirable choice – that is when it has a meaningful, relevant, and valuable point of difference”.

When one considers this statement in the context in Keller’s assertion that brand differentiation happens when a product or service matches superior performance with an important customer benefit, it is clear that through the Roadster, Tesla were able to differentiate themselves from their competition by producing a sports car, and this allowed them to position themselves at the top end of the EV market.

Through effective differentiation and positioning, Tesla quickly established themselves as the premium EV brand, and it is the strength of the brand rather than simple sales that have been key to Tesla’s continued development.

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However, Tesla’s differentiation from its competitors is twofold; style and price set the Roadster aside from other EVs, and that they are electric sets them apart from fuel-guzzling sports cars. It’s the second point of differentiation that is key to the Tesla brand as a whole.

In 2006, Elon Musk, co-founder and CEO of Tesla, laid out the company’s strategy, making it quite clear that the Roadster was a means to an end: in order to fund the development of EV technology, a high price point was required, but the end goal is a car more accessible to the average consumer.

Musk wrote: “As you know, the initial product of Tesla Motors is a high performance electric sports car called the Tesla Roadster. However, some readers may not be aware of the fact that our long term plan is to build a wide range of models, including affordably priced family cars. This is because the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution…

“…Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model”

While the Model 3, Tesla’s EV for the Average Joe, has yet to be released to the public, the pre-order statistics are incredible: there was $3 billion worth of orders in the first 36 hours, with 253,000 people having placed orders at an average price of $42,000, yielding a retail value of approximately $10.6 billion.

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Tesla Model 3 (Image courtesy of: Teslarati.com)

Such figures have seen Musk predict that Tesla will be worth $700 billion, more than Apple, by 2025. This despite the company having sold just (125,000 cars) since the Roadster was launched eight years ago; it’s the promise of what is to come that is driving the company forward.

Should the predicted surge in sales occur when the Model 3 hits the market, one can thank the Roadster for its success. By positioning itself at the top end of the EV market from the start with a product that clearly differentiated itself from the competition, Tesla were able to build a powerful brand that gave them room to develop towards their end goal, affordable EVs for all.

Bibliography
Cohan, P., 2016. Will Tesla be worth more than Apple?. [Online]
Available at: http://www.forbes.com/sites/petercohan/2016/04/04/will-tesla-be-worth-more-than-apple/#43350a3a7fc0
[Accessed 14 November 2016].

Hollis, N., 2011. It’s not a choice: Brands should seek differentiation and distinctiveness. Millward Brown: Point of View.

Keller, K. L., 2008. Strategic Brand Management: Building, Measuring, and Managing Brand. New Jersey: Pearson Education.

Musk, E., 2006. The Secret Tesla Motors Master Plan (just between you and me). [Online]
Available at: https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me
[Accessed 14 November 2016].

Reuters, 2016. Tesla Says Model 3 Orders Top $10 Billion in First 36 Hours. [Online]
Available at: http://fortune.com/2016/04/03/tesla-model3-orders-top-10-billion/
[Accessed 14 November 2016].

Tesla Motors, 2010. Tesla Showroom. [Online]
Available at: https://www.tesla.com/models
[Accessed 14 November 2016].

Young, A., 2016. Tesla Motors (TSLA) 1Q 2016 Sales: 14,820 Model S, Model X Cars Were Delivered In First Three Months; Model S Sales Jumped 45%. [Online]
Available at: http://www.ibtimes.com/tesla-motors-tsla-1q-2016-sales-14820-model-s-model-x-cars-were-delivered-first-three-2348000
[Accessed 15 November 2016].

Zhao, V., 2016. Tesla, a lesson in product differentiation. [Online]
Available at: http://www.overtcollusion.com/pricing/2016/2/22/tesla-a-lesson-in-product-differentiation.html
[Accessed 14 November 2016].

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