When beginning something new, conventional business logic dictates that you build a ‘Minimal Viable Product,’ or MVP. Essentially, you develop a version of your product that is very low on functionality but just about ‘gets the job done.’ It also means that the first edition of your product will almost always have to be sold at a cheap price to compensate for its lack of features and to build interest in a future launch.
Some businesses (including many software startups) go even farther and give their first version of their product for free, with the intention of later’ monetizing’ once they’ve added more features and are certain that customers would pay money for what they’re giving.
Tesla, on the other hand, took an entirely different approach. Tesla’s long-term aim has long been known: to become the world’s largest automobile manufacturer. They realize that if they want to be the biggest by volume, they’ll have to dominate the lower-end consumer vehicle market, which includes cars that cost less than US$30,000.
Rather than begin with this market and create a low-cost, low-featured version of their electric car in order to achieve scale quickly (and thus benefit from economies of scale in addition to meeting their growth objectives), Tesla instead created the most luxurious, expensive, fully-featured sports car they could muster. The automobile in question was the Tesla Roadster, and the base model of the latest version of the Roadster will cost upwards of US$200,000. And this was their first automobile, despite the fact that they knew they wouldn’t be able to attain the requisite size or efficiency to make a profit (even at such a high price).
Today, Tesla is the most valuable automobile business on the planet, dwarfing the competition. So it appears that their unusual tactic is succeeding, but why?
The first thing to observe is that Tesla has made tremendous progress toward their objective of mass-producing cheap electric vehicles. For the first time in company existence, they’ve generated a true yearly profit. The second point to mention is that much of Tesla’s business plan was imposed on the company. In truth, without economies of scale, they would not have been able to produce a cost-effective mass-market electric vehicle. They weren’t even close to having such economies of scale as a company. Furthermore, they couldn’t rely on outsourcing or partnerships to achieve economies of scale since what they were producing was so unique.
Tesla’s supply chain approach is, in fact, one of their most smart initiatives. They realized early on that batteries would be not just their car’s largest technological challenge, but also its biggest manufacturing constraint. Rather of allowing this to derail them, they seized full control of their supply chain by investing in plants that produced their own batteries. This has the added benefit of allowing them to use the same batteries for other projects, such as their Powerwall.
Of course, all of these tactics necessitated large sums of money and outside fundraising (Elon is wealthy, but not wealthy enough to finance everything himself!). And here is where Tesla’s marketing brilliance comes into play. Except that, for the most part, their marketing efforts aren’t entirely focused on the automobiles themselves. Elon Musk’s personal brand had a greater influence on whether or not they received the funding they need. He’s astute, contentious, rambunctious, and ambitious. However, you’d be hard-pressed to go more than a couple of news cycles without seeing Elon Musk on the top page, regardless of your feelings about him. And that’s a winning formula for attracting investors’ attention.
