On August 29, 2020, Alex Voigt posted an article, “Tesla Introduced A Business Model The World Has Not Seen Before.” This post will discuss the key points from this article.
When Tesla started designing cars, it was fortunate not to deal with an existing customer base. It could begin designing without worrying about backward compatibility or making buying a vehicle car easy for current customers. They took full advantage of the situation and made cars that create so much customer value that Tesla recently became the most valuable automotive company in the world – topping even Toyota.
Tesla’s business model is based on their product architecture of “vehicles built around a computer.” They included numerous sensors and connected actuators in designing the car’s hardware. This approach allows Tesla to “improve” the hardware with only software updates. The outcome of this approach is that adding features and upgrades can be done by over-the-air software upgrades at no incremental cost to Tesla. And Tesla does not charge the owners, either!
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Think about every car you ever owned other than a Tesla. Every 3 to 5 years, there was a significant body upgrade and the accompanying hardware additions or improvements. For example, if you own a 2015 model car and want a new infotainment system with Waze, Apple CarPlay, and other built-in apps, you must buy a 2019 or newer car. So, your current manufacturer spends tons of money advertising to you so that you return to the dealer you purchased from in 2015, take a massive drop in value on your trade-in, and take out a new loan. Tesla does nothing like this. And here are the results. This graph is from the previously quoted article.
Within the first three years of ownership, a Tesla Model 3 loses 10.2% of its value, while other similarly priced cars lose between 39.7% and 53.4%. That means that the 3-year depreciation of most entry-level luxury cars is about 1/3 more than for the Model 3 – at least $13,000. So, Tesla can charge up to $13,000 more than anyone else and still not lose sales based on value. If you usually keep a car for three years, Tesla has about a $40,000 advantage over other manufacturers.
There are two other differentiation factors between Tesla and the other cars on the table:
- How long will your internal combustion engine or transmission last? The Tesla battery pack will last about 1 million miles, and the electric motors are highly reliable. Major items like these each cost about $3,000 to $5,000 to replace.
- Routine maintenance on a Tesla consists of wiper blades, tires, and brakes. There are also oil changes, timing belt adjustments or replacements, cooling system issues, and exhaust system issues on internal combustion engines.
The replacement market for gas/diesel cars is about 70-90 million cars per year. In 2019, Tesla delivered 367,000 vehicles worldwide. Even as they increase volume with new factories, it will take a long time for all cars on the road to be Tesla, which will not happen.
At this time, the market for Tesla appears to be infinite, and its business model will keep them growing into the foreseeable future. And while this is happening, Tesla is also selling solar roofs to generate electricity for the chargers it sells. All this from a new business model.
Of course, when an innovative technology impacts significant parts, like new battery materials, an upgrade will require exchanging details, but the software can be enhanced and again just downloaded. The cost for this upgrade should be passed on to the owner. However, in gas/diesel vehicles, getting such a significant upgrade will require purchasing a new car and taking the loss in value.
Can your business step back and enjoy exceptional growth by creating outstanding value for your customers? Coming out of COVID-19 is the perfect time to rethink your business model and make a new way to create value for all your stakeholders.
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