Four outstanding things about Tesla’s business model

Author- | Posted- | Updated: May 31, 2020 |

Tesla’s rise as an automaker can be attributed to the company’s consistent focus on research and innovation as well as product quality and customer experience. However, there are many outstanding facts worth knowing about its business model. Its focus on research and innovation has earned it the reputation of a technology company and sets it apart from its competition in the automobile industry. Apart from a well-managed supply chain and distribution network, the company’s success in the global market is also attributed to its focus on passenger safety and overall healthier customer experience. This is why several premium automobile brands now consider Tesla a serious challenger and a direct competitor in the automobile industry.

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Tesla is more of a technology company

Tesla develops cars not like they are mobility products but as technology products. The company also provides Tesla buyers regular over the air updates, unlike the other car brands whose products do not receive any significant update over their lifetime. These updates are meant to increase the safety and capability of the product. Tesla cars do not have as many parts as automobiles with internal combustion engines have. This reduces the total cost of ownership for the Tesla owners. Tesla buyers do not need to spend on any oil changes or parts and other things. The company invested around $1.5 billion in research and development. However, the research and development expenses of the company fell to $1.34 billion in 2019. Tesla’s focus on technological innovation is also a  source of competitive advantage for the brand. Its pace of innovation is much better than any other automobile brand. In this regard, Tesla resembles Google or Amazon. Moreover, Tesla’s market cap has grown just so fast that it is also a serious challenge for the other automakers. Tesla’s market cap is now around double that of Volkswagen. In Jan 2020, Herbert Deiss, the CEO of Volkswagen appreciated the way innovation is carried out at Tesla and said it was leading the transition to electric mobility.  Deiss thinks it is awesome to have competitors like Tesla in the market that set standards for other automakers to follow.  

Tesla cars are also among the safest in the industry and this is why the company is being welcomed in various corners of the globe. It is opening a new production plant near Berlin. Not just in the US, but Tesla’s Model 3 has earned the honor of being a very safe car in the European region as well. Tesla’s popularity has also grown faster because of the safety ratings it achieved from agencies like IIHs and Euro NCAP. However, the credit goes to the extraordinary architecture and powertrain design as well as the technological safety features. Tesla’s autopilot is also far more advanced than its competitors.

Achieving sales without marketing

Tesla does not market its products the way the other auto brands do. It does not invest significantly in advertising and promotions as most other automobile companies do. In 2019, the total marketing, promotions, and advertising costs of the company were only $27 million. Instead, the company uses a type of marketing strategy that we know as inbound marketing. It knows its customers well and understands where they can find the company and its products easily. Moreover, the company has differentiated itself through product quality, technological innovation, and customer focus which has helped it achieve a distinct position in the industry. Tesla does not have a very large product mix either. However, each product model still receives a lot of media coverage and publicity. Its focus on customer experience and product innovation has also helped the company achieve superior word of mouth. In some regards, the marketing strategy of Tesla is similar to the one used by Apple. Apple uses its company-owned stores for promoting its product line. Tesla has also established company stores at key locations and uses its stores as well as its supercharger network for promoting its brand and individual products. Buying a Tesla product is also a lot simpler. Tesla simply puts the customer in charge. A customer goes online, selects a model of his choice, picks the customizations of his choice, makes the payment, and then schedules a pickup. Other vehicle brands have also started adopting this model. However, buying a car from traditional dealers has been relatively less trouble-free and there is always a lot of back and forth involved. The buyer experience is relatively a lot well designed at Tesla whether you are visiting a Tesla store or buying a model online. Many times customers share on social media what an outstanding experience was to buy a Model S from Tesla.

A business model with environmental concerns at its core.

Another factor that sets Tesla apart from the competition is its green business model. In terms of marketing too, it is a major source of competitive advantage for the brand. No pollution means no blotch on the company’s brand image. Everybody loves a car that leaves behind no pollution. Even if Tesla cars are not affordable for everyone, the environmental costs are nearly zero. There are already so many automobiles on the roads around the world that add every day to the global pollution level. Tesla’s position is a lot safer. It picked up a very difficult challenge which was to make electric cars for the mass market. After around 16 years only, it has disrupted the electric car market and its competitors have just moved a few steps in the right direction and that too mostly during the last two-three years. Tesla cars are green at the core and that means hardware and software crafted especially for zero environmental pollution. On the other hand, the electric cars its competitors offer are the same traditional cars with an electric engine. Tesla also sells carbon credits to other carmakers. According to news sources, the company has made hundreds of millions of dollars selling carbon credits to other carmakers. 

Tesla cars are not as costly as they appear

Tesla’s expertise in electric battery technology is also a cost-saver for the company as well as its customers. On the one hand, Tesla cars are much simpler compared to cars with internal combustion engines. Compared to competing cars, Tesla cars have fewer parts. Operating and maintaining a Tesla car costs significantly less than the others. So, the total cost of ownership is significantly reduced for Tesla buyers. According to several Tesla buyers who have written about their experience on Quora, Tesla is a supersaver and you can own another car with what you save on maintenance. You do not need to change the oil regularly and the number of moving parts in tesla model S is much lower which leaves pretty little scope for any unwanted costs. You might need to change tires and a few other parts which will not cost you a fortune. So, Tesla is a tension-free ride for Tesla owners. While Tesla cars come with a premium price tag, it is what you pay once upfront and then forget all about hidden costs and expenses that you have to bear when you own a luxury car with an internal combustion engine.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.