When pre-orders for Tesla’s Model 3 electric vehicles topped $10 Billion within 36 hours of release, it was clear Tesla had hit a very sweet spot in the market.
As queues of people camped out to place $1,500 deposits for a product they had never seen before, you have to think wow, how have the other auto manufactures missed this market? A better question to ask would be, have they missed it, or strategically avoided it?
The sweet spot in the market appears to be consumers seeking sustainable transport at affordable prices. What sets the Model 3 and its only real competition, the Chevy Bolt, apart from the rest of the electric vehicle (EV) market is their driving range (215 and 200 miles respectively). This is double that of typical EV ‘s on the market, that boast a range of approximately 100 miles, an obvious advantage for the Tesla and Bolt.
So it’s all looking great right? There is a growing market segment being fully serviced by only two products, both of which are positioned differently. The Tesla as a luxury, premium product with beautiful design at an affordable price (starting at US$35,000) and the Bolt as an electric car for the masses also at an affordable price (Approx. US$30,000).
The problem is, will the segment be profitable and can Tesla service it?
Is the segment profitable?
Profitability and business capabilities are key aspects companies must consider when assessing which segments of the market to target. Using Kotler’s price – quality strategy model I could argue that Tesla’s positioning of the Model 3, as a ‘premium sedan that only Tesla can build’ is at odds with their pricing strategy and entry into the mass market.
While a premium product at a low price generally means great value for consumers, it could also spell low profit margins for the company.
Further raising the question of Tesla’s ability to profitably serve a mass market segment is the fact that Tesla does not yet have the global scale and infrastructure other players such as General Motors enjoy. In particular, developing Tesla’s distribution model and re-fueling stations will pose significant challenges for the company.
This lack of global infrastructure also brings into doubt the strategic fit and wisdom in chasing this market.
Oh yeah… now we have to make it?
This will be Tesla’s ‘can we pull it off moment’. For a company that delivered a mere total of 50,580 cars in 2015, this is a massive gamble.
Adding to the significant doubt in the industry of Tesla’s ability to deliver on its promises was CEO Elon Musk when he tweeted ‘Definitely going to need to rethink production planning’ once orders had tallied just 198,000 (orders hit 325,000 1 a week after launch).
Also just days after the pre-orders for the Model 3 exceeded all expectations; the company released a statement detailing continued problems with the production of existing models. In the statement Tesla blamed their-own ‘hubris in adding far too much new technology to the Model X’ resulting in only 14,820 of a targeted 16,000 models being delivered in Q1 2016.
Investors are obviously worried about Tesla’s ability to deliver as after this statement was released Tesla shares dropped by approximately 3% in after-hours US trading. In a further assertion that Tesla have taken a huge bet, JP Morgan analysts warned that Tesla’s “expansion into higher volume segments with lower price points seems fraught with greater risk”
So, great marketing or bad business?
With shipping scheduled to commence in late 2017 there is still plenty of time to pass before Tesla’s strategy will go down in History as a bold and visionary example of marketing and innovation at it’s best, or a future College case study on how business can turn sour if you fail to ensure that your target segment is profitable and fits within your business capabilities.
Either way it will be fascinating to see how it all plays out…
Image source: teslamotors.com
Blog by Chris Noonan, WordPress Username: cnoona, email: email@example.com