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Case study: Tesla Model S

Strategic Marketing & technology commercialization

December 2013

Teacher: Dr. Ajay Sirsi

Ha-Phong Nguyen Hamza Sehaqui Ilias Nafa Khalfa Anyss Yann Rambeau-Bysath

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Index Brief description of the company ............................................................................................................ 3

How did the company identify the opportunities to develop the model S............................................... 3

The target customers ............................................................................................................................... 5

The success secrets of the model S.......................................................................................................... 6

The competitive cars ........................................................................................................................... 6

The market place conditions ................................................................................................................ 8

Tesla Market strategies ........................................................................................................................ 8

The success of the Model S ................................................................................................................... 10

What marketing lessons does this case offer in terms of successful commercialization of an

opportunity?........................................................................................................................................... 12

Appendix ............................................................................................................................................... 14

Endnotes ................................................................................................................................................ 20

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Brief description of the company

Tesla Motors is a company that designs, develops, manufactures and sells high performance electric

vehicles and advanced electric vehicle powertrain components. Tesla cars are produced with an

advanced technology allowing them to have unique features in term of design and acceleration.

It was in 2003 that Elon Musk, Marc Tarpenning and Martin Eberhard established Tesla Motors. This

company earned great public attention through the production of its first vehicle Tesla Roadster.

This sportive car with a lotus design was the first highway-capable all-electric vehicle in serial

production and the first vehicle to use lithium-ion battery cells. The Tesla Roadster was specially

known by its high acceleration (0 to 100km/h in only 3.7 seconds) and its energetic efficiency.

Thanks to a strong marketing plan, Tesla motors knew a larger success in 2008 with his second

vehicle, the luxury model S (Exhibit 1). This vehicle was the first premium sedan electric car and

provides an unprecedented driving range of up to 500 km and can accelerate from 0 to 100 km/h in

only 6 seconds. The car combines superior vehicle engineering with Teslas advanced electric

powertrain technology. Due to all these properties and to an incredible marketing strategy, the Model

S reached a record number of sales and became the top selling plug-in electric car in many countries.

The purpose of this report is to provide a historical analysis to understand the main strategies that

Tesla follows to achieve success with the model S.

How did the company identify the opportunities to develop the model S

Tesla Motors identify the opportunity to develop the model S by profiting from 5 main key points:

1. The current energy context

2. Technological progress in vehicle elements

3. The use of open innovation

4. The development of charging stations of electric cars in the advanced countries.

5. Profiting from the success of the first developed car.

Today, many natural resources are decreasing rapidly. According to the estimations of the World

Energy Council, the oil reserves in the world have a potential of 56 years. In front of this situation,

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environmental concerns are at the forefront of our daily lives. Tesla Motors benefits from this current

energy context to develop fully electric vehicles that do not produce greenhouse emissions.

Besides the fact that people are more concerned to protect the environment which push them to

acquire an electric cars. There are strong government incentives for electric vehicle development,

production and sale that have been established by several national and local governments around the

world. Actually, the primary incentives to encourage people to buy electric cars are tax reductions and

exemptions, as well as bonus payments.

In Europe, 15 of the 27 European Union member states including all Western European countries,

Romania and Czech Republic provide tax incentives. In Austria for example, electric vehicles are

exempt from the fuel consumption tax, levied upon the first registration and from the monthly vehicles

tax.

Concerning the electric vehicle producers, the most challenging point relies in the development of the

battery. Tesla has then develop the idea that the same lithium-ion technology used in laptops would be

used to create a fully electric vehicle that is not only eco-friendly but also attractive and pleasant to

drive.

In order to save time, Tesla took the opportunity of making a partnership with Panasonic that already

developed this type of battery; this process is called Open Innovation (Exhibit 2). This agreement

allows Tesla to develop the model S which competes with the largest gasoline car brands and which

comes with great change in terms of results for safety, range and durability.

Finally, Tesla Motors smartly profits from the success and the benefits generated from the Model S

predecessor to continue developing luxury electric vehicles and attract more consumers.

However, the identification of the opportunities to develop a product is not the only step to achieve

success. There are important marketing processes to build a strong brand. Let us discover how Tesla

used these processes to achieve success.

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The target customers

Targeting a specific group in a market allows every company to have a market campaign well suited to

its specific segments, this latter constitute an important part of the roadmap to success.

Anita Grling distinguishes four profiles of people opinions about electric vehicles:

1. A segment characterized by a skepticisms to the EVs usefulness for shorter trips;

2. A segment characterized by a technical uninterest;

3. A segment characterized by a technical interest;

4. A segment characterized by an enthusiasm about the EVs usefulness for shorter trips.

These results provided to Tesla a better understanding and allow them to draw a first portrait of the

target audience for Model S:

Wealthy and trendy early adopter;

Successful professionals or entrepreneurs;

Upper middle class city-dwellers;

Tech-savvy and green friendly (eco-hipsters), stylish lives, car enthusiast who follow trends.

Recall that the Roadster was targeting an upper class thrill seeker, which means a customer who is

looking for a high performance EV. The Model S targets a slightly different kind of customer.

Model S was designed to target a demographic population with an annual income of $100000 and

higher, which means businessmen and successful professionals. This is reflected in the selling price of

the Model S starting from $49900 to $85900. Based on the income, the social target customer would

be the upper economic class. We intentionally used the term businessmen because the Model S

target mainly male gender as it is a sport car. Moreover, the consumer should have a garage where he

can plug the battery for recharging. The main difference with the Roadster is that the Model S is a

family car. Therefore, it is not a niche market anymore. Indeed, Model S offers a third row seating

adapted for children. It is looking for a parent with a professional occupation and who want to drive a

luxury sedan car. Concerning the behaviour of consumer, it must be someone who is going green

and show some interest for EV. Another demographic segmentation targeted by Model S is people

between 30 and 50 years old with a certain level of maturity which allow them to understand the issues

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of EVs. However, Model S is such a high-tech and classy car that it can attract all ages. According to

the VALS framework (Exhibit 3) for a psychographic segmentation, the lifestyle appeals and

personality of the target market for Model S is innovators trendy people. Indeed, people buying

Model S should be interested in high innovation and have an upper social class.

The success secrets of the model S

Now that we the know Tesla company and its iconic Model S, let us understand its success

The competitive cars

Recall that Model S is a pure electric vehicle targeting a luxury market, it has to face many

competitors in the premium market such Audi or BMW. But one of the biggest competitors to Tesla

Model S is probably Toyota Motors. Indeed, full EV Model S was the response from Tesla to the

longstanding hybrid technology of Toyota. In our analysis, we decided to focus not only on full EVs

competitors but mainly on products that can represent a threat to Model S even if they used a different

technology like hybrids or plus-in hybrids. The reason is that the market of full EVs is relatively new

and there are plenty of EV start-up trying to enter but they does not constitute a real threat at that time

for Model S. Larger competitors of Tesla are probably the ones we have mentioned and those are the

ones who can probably take market share away from Model S

We start our analysis with luxury car sales of Audi and BMW. These brands are the first and second

choice in the popularity of some luxury car brands in America. Exhibit 4 shows the ranking of

consumers who plan to buy a luxury vehicle in the next six months.

Audi slogan "Advancement Through Technology is a promise that has motivated them to create

unique models with a driving experience that has made Audi increase their volume of sales by 100%

in the last 10 years. Its strong brand allows them to attract attention easily. With the release of the E-

Tron product, Audi will launch a clear competitive product to the Model S. We intentionally use the

future because when Tesla came out with the Model S in 2012, E-Tron was still a concept. Audi will

commercialize its Audi A3 E-tron in 2014. It is a plug-in hybrid vehicle which combines an electric

and gasoline motor. In 100% electric mode, the A3 Sportback E-tron will be capable of 0-60km/h in

4.9 seconds with a maximum speed of 130km/h. Autonomy will be about 50km. In hybrid mode, it

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will be possible to go from 0 to 100km/h in 7.6 second with a top speed at 222km/h and a total

autonomy to 940km. Its price will be approximately $55000. Compare to the basic Model S which is

capable of 0-100km/h in 6.2 seconds, a top speed of 190km/h, an autonomy of 400km for a starting

price of $62500. Audi A3 E-tron will probably be a serious competitive product to the Model S, but at

the time Model S was commercialize, Audi was in stand-by concerning its EVs.

Concerning BMW, they are very committed in the electric and hybrid systems. From 2011, BMW hire

nearly 2600 new employees to develop the future electric vehicles. Their efforts leads to BMW i.

BMW is planning to launch two EVs, the i3 for the end of 2013 and the i8 for 2014. Lets start our

analysis with the BMW i3. With a starting price of $40000, an autonomy of 160km with the full

electric motor, a 0 to 100km/h in 8 seconds and a maximum speed of 150km/h, the BMW i3 is not a

direct competitor to the Tesla Model S. It will definitely compete against Tesla Gen III for the small

premium vehicle market. Concerning the BMW i8, it will be commercialize in 2014 for a price of

$130000. Like the electric hybrid supercar Porsche 918 Spyder ($845000), the BMW i8 is very

different from Model S. Indeed, Porsche 918 and BMW i8 are sports car body with only 2+2 seats and

autonomy of 30km on power electric alone. These cars will not be able to substitute the sport or family

sedan spot represent by Model S

What about Toyota? With its Prius, it was the first mass produced hybrid car. In 2012, Toyota

launched its first plug-in hybrid Prius for $30000. The main difference with the classic Prius is that it

can be plugged to recharge the battery. Compared to the model S, the plug-in Prius has poor

performance and autonomy. It is not comparable to Model S which gives a delightful driving

experience in addition to a maximum fuel efficiency.

Concerning 100% electric vehicles like the Nissan Leaf, Mitsubishi i-MiEV, the Ford Focus electric,

etc., they cannot compete against Model S. Indeed, these cars are not luxury vehicles and target very

different customers.

At that time when Model S was launched until now, we noted that no car manufacturer has a clear

direct competitive product to the Model S. As the Toyota Prius in the hybrid market, Tesla has a clear

advantage in the electric car market. Tesla should profit from this position to solidify its presence by

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improving their technological advantage and build a prevalent brand in the all-electric vehicles market

before others enter the niche market.

The market place conditions

Being better than competitors is not enough to succeed; a real demand for EVs must exist. It is really

an important point to understand. In the last decade, the greenhouse effect was acknowledged by the

mass, eco-friendly products became the new trend, and our impact on the planet became the new hot

topic. Therefore, everybody is seeking a solution to reduce our oil-dependency, and a market definitely

exists for product that takes an ecological-approach to old problems as car emissions. Governments

are funding such initiatives, or giving incentive for industries or consumers to buy such products, by

the mean of taxes against the emission of CO2 for example. To do what Tesla did would not have been

possible earlier: the consumer was not educated to pay attention to environmental issues, and would

not have had the motivation and interest to support such initiatives.

But these social trends do not explain alone the Tesla success. If the demand was there, it was the

technological advances of recent years that made key part of the car possible. For example, the huge

range of the Model S would definitely not have been possible without advances made in Lithium-Ion

technology.

A final point is that today, the price of oil is getting higher and higher, as the reserves are becoming

depleted. It is clear for everybody that the use of gasoline powered cars will find its end in the future,

opening a boulevard for EVs and Tesla.

Tesla Market strategies

We must now understand the marketing mix used by Tesla. We will discuss its four areas (the four

Ps) : product, pricing, promotion, and place distribution.

Product

Tesla Model S is a premium electric sedan car. The energy is stored in a state of the art Lithium-Ion

battery, which can be charged in half an hour. The car is rear-powered by an induction motor, and is

using a single speed gear-box because the range of electric motor is much larger than the one of a

thermal motor. Given Tesla electronic and high-tech philosophy, it is not surprising to see that the

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Model S is benefiting from all the classical electronic driving and safety features, plus some special

items, as customizable steering, suspension and brakes. The Model S is also the most secure car ever

made: it achieved 5 stars on all tests of National Highway Traffic Safety Administration (NHTSA) [6].

The ownership of a Model S is also giving access to Tesla Product Line membership that gives access

to many advantages, advices, and also events. You can keep statistics about your car, connect with

other users, and also manage maintenance. As we can see, Tesla is not fighting on the same ground as

its competitors. The model S, as the Roadster, is a premium car with no compromise on beauty,

efficiency and driving pleasure. According to Tesla, driving an electric car must not be a sacrifice, it

has to be an enjoyable experience!

Pricing

Electric cars in general have an advantage against thermal engine cars: they are now benefiting from

the state support. For example, electric cars buyer can have a Federal Tax Credit up to $7,500.

The basic Model S is available for $49,900. Tesla is at first following a sale oriented one-price

strategy, to achieve a rapid growth and discourage competitors to enter this market segment. On the

long run, Tesla wants to follow a profit oriented strategy: it is counting on the fact that production

costs will decrease to get more profit that will be used to fund the R&D, and for the development of

next Tesla car, the Model X. We can also add that similarly to many of high-tech goods, Model S

follows a skimming price strategy. It means that the model S is available in a high price performance

version, targeted to the customers willing to spend a premium to get the best possible car. This added

price will decrease over time, theoretically ensuring that all customers will pay their maximum

willingness price.

Distribution/Channel

As we said before, Tesla has a direct sale system, a first in the car industry. Instead of selling their cars

through automotive dealership franchise like other manufacturer do in the USA, they decide to sell it

directly to consumers. With their own modern showrooms, customer can test drive the product and can

buy it through a customizer on site. It is a whole new and disruptive customer experience. Like other

high-tech companies such as Apple, the stores are in high foot traffic, high visibility retail venues.

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According to Elon Musk, CEO & Chief Product Architect of Tesla Motors, Our technology is

different, our car is different, and, as a result, our stores are intentionally different. Tesla wants to

control the whole customer experience by educating people and not just selling their EVs.

Promotion

Tesla innovates also in the promotion field. Automotive industry is known to spend more on

advertising. Tesla takes the other way around. It will count on the first place on the quality of the

product: the disruptiveness of the Roadster and the Model S is an attraction by itself. The automotive

press for example was fighting to test the car, giving a huge visibility to their car. Also, the Teslas

store makes a high standard communication with possible customer possible; the explanation of the

product is easier. Tesla has also a strong community and base of enthusiasm that by word of mouth is

spreading Tesla vision and way of living.

The role of Tesla CEO Elon Musk must not be understated. He is the face of Tesla and its best

ambassador. He is representing the core values of Tesla: the Silicon Valley heritage, the high-tech and

no compromise on quality attitude, and a sense of hype and coolness.

The success of the Model S

Quantitative investigation

According to the Company report in Exhibit 5, we note that Tesla outsells most large luxury vehicle in

America. For June 2013, they have approximately 10% of the market share, which place them as the

market share leader for large luxury vehicles. Model S is significantly expanding the market of luxury

cars.

Based on the third quarter 2013 financial results of Tesla, we can draw the following trends:

Record 5,500 Model S deliveries;

Gross margin increased to 21%;

Net income of $16 million;

Major WW expansion of service centers, stores and Superchargers;

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Cash balance nonetheless increased by $49 million to $796 million;

We note that Tesla profitability will continue to rise, because economies of scales and production

efficiencies will increase its gross profit margin.

Mr. Musk comments The demand for the Model S exceeds supply despite no advertising, no

discounts and no paid endorsements.

We note that the success of Tesla is reflected in its soaring revenue and fast improving profitability.

Qualitative investigation

Our interpretation and understanding of the success of the Model S can be classify in four categories:

1) Learn from failure and over-deliver

One of the greatest challenges for EVs is the battery. Thanks to their partnership with Panasonic, Tesla

figured out how to put small laptop batteries together. Instead of trying to create a new kind of battery,

Tesla focus on solving the temperature and environment problems (perpetual motion machines, cold

fusion, super capacitors, hydrogen fuel cells, etc.) when putting batteries together. The result is when

Tesla promise autonomy of 265 miles for their 85kWh battery, it is really what the customer get. With

the Model S, Tesla has proved that you should first develop the product and make sure your

technology is working correctly before over-delivering on customer expectations. One part of the

Model S success is that Tesla did not cheat with the expectations of their customers. Indeed, Model S

promise 265 miles of autonomy, in reality, consumers get more than expected and this strategy will

make people come back in the future. Model S has adopted a new design approach by developing their

batteries and power-train first, then design the car from them.

2) Take chances right time and innovate

Another part of the success of Model S is that it came at the right time with the right technology. In a

word where sustainable development becomes an increasingly important aspect, the Model S offers to

customer the possibility to satisfy their green preoccupation without sacrificing the luxury sedan

side.

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3) A direct to consumer approach avoiding dealership system

Having a futuristic and innovative product is not enough to have success if your business depends on

the present. Teslas EV are not the only thing which is cool, but the way they sell it is a new approach

for the automobile sales business. Diarmuid O'Connell, Tesla's vice president of business and

corporate development, says: "We believe we're best suited to doing this (selling EVs directly to

consumer) because, in a traditional dealer environment, the bread and butter of an auto dealer is

selling traditional technology. Here, you have to help people to compare and understand the benefits

of electric drive versus gasoline power. OConnell emphasizes the conflict of interest that dealership

will face if they have to sell EVs and gasoline cars. Tesla wants to control the whole customer

experience by educating people and just not selling their EVs. Tesla comes with a disruptive new

product that needs to be implement in the market. Knowing that dealerships seek first to maximize

their profit, this does not match with the Teslas initial goal, which is to build a strong brand.

4) Better vision

With the Supercharger Network (Exhibit 6), Tesla has anticipated the solution to one of the main

critical aspect of EVs. It allows customer to not worry about the autonomy of their EVs.

What marketing lessons does this case offer in terms of successful commercialization of

an opportunity?

Tesla is currently a very successful company, which has passed all its crucial stages with ease. So it is

a very instructive case, which enables us to isolate some good marketing practises.

A perfect marketing plan is nothing if the world is not ready for the product. For electric vehicle,

success was not possible before social and technical settings were in place. Tesla would have died

30 years ago, because the concept of eco-friendliness did not even exist. Furthermore, the

technology of battery was not mature enough.

Think about the product with the help of the Total Product Experience. As we can see in Exhibit

7, there are four levels in any product. The core product, the functional product, the augmented

product, and the potential product. If the core product is what the company is actually producing,

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what the customer is buying is the potential product, leading to a misunderstanding of customer

needs. In Tesla case, we can see that the company is trying as hard as possible to match customer

desire, by putting emphasis for example on the design, beauty, and quality of the car rather than

just advertise and sell the core product, an electric vehicle.

Think in term of customer needs and not only in term of business innovation. What does the

customer want? He wants an eco-friendly electric car, but only if it is comparable or even better

than a normal car. The brand loyalty, or more precisely the technology loyalty here, is preventing

him to change before the proof has been made to him that Tesla is indeed much better than

everything he has experienced before. Try to sell electric car that are less beautiful, have less

driving performance and are less practical than the average car is meant to be a failure, even for

electric cars.

Have a clear marketing plan and identity. Crystal clear is the word: the easier a brand identity is

to understand, the better will customers identify to it. Senior management and more precisely

Elon Musk are making a very good job of being very involved in the company innovation and

vision, adding a lot of visibility to it. Also, this clarity and involvement is making Tesla goals and

objectives real to the employee, which are then implementing the marketing strategy much more

efficiently.

Follow the steps to build a strong brand. Exhibit 8 presents the development of this point.

To choose which customer segment to target, find the most profitable customer segment. High

volume is not always the best strategy, it is a very common mistake to take big sales as a target in

itself. It is the final profit margin and gain that must decide of which customer to serve. Tesla

could not achieve enough profit with high volume of sells. It therefore tailor fitted the Roadster,

and then the Model S to the people that could afford such a car.

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Appendix

Exhibit 1 : The Model S

Source : http://www.macplus.net/depeche-73003-uber-paris-un-taxi-sous-forme-de-tesla-model-s

Exhibit 2 : Open innovation Theory

Source : http://www.eidon-lab.eu/index/index.php?option=com_content&view=article&id=66&lang=en

Chesbrough defines the Open Innovation as a paradigm that assumes that firms can and should use

external ideas as well as internal ideas, and internal and external paths to market, as the firms look to

advance their technology.

Open Innovation

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Exhibit 3 : VALS Framework

Source : http://www.docstoc.com/docs/54287099/VALS-Framework

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Exhibit 4 : U.S. Unit Sales

Source : http://en.wikipedia.org/wiki/Electric_car_use_by_country

Exhibit 5 : Tesla stock evolution

Source : http://www.wallstreetoasis.com/blog/valuation-of-the-week-1-a-tesla-test

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Exhibit 6 : Supercharger network

Source : http://www.greentechmedia.com/articles/read/Tesla-Supercharger-Network-Operable-During-Zombie-Apocalypse

Exhibit 7 : The total product concept

High performance electriccar

Easy battery charging, long range, fully customizablevehicle, familly adapted

Design, eco-friendly

Fashionable, state of the art technology

The Model S total product concept

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As we can see in Exhibit 8, Tesla followed the theoretical steps to build a strong brand with great

success.

Exhibit 8 : How Tesla builds a strong brand

First, it stated with clarity in which business it is in: the electric vehicle industry. It is not trying to do

two things at once, as it will only confuse the customer.

Then, it associated itself to powerful emotions, the most efficient tool of the marketer, by using the

potential product and asking itself what wanted the customer. Tesla is fun, eco-friendly and attractive.

To implement this, Tesla used all the elements of the marketing mix, including Pricing and Place,

which are too often neglected in the thinking of the marketing strategy. For Pricing, Tesla is using

skimming strategy for example, and is also using a mix of sale or profit oriented strategies, in order to

adapt over time, because the market is forever changing. For Place, Tesla is differentiating itself from

competitors with company-owned store and direct sale system, whereas the car industry is relying on

dealership to interact with the customers. To get the company message to the customer without the

common huge advertising means of car industry, Tesla is using a low budget promotion strategy, or in

other word it is building its brand without mass media. It is relying on a strong community of

passionate that by word of mouth are building the brand equity. Also, Tesla CEO, Elon Musk, is using

Step 1Ask What business am I in?

Step 2Create brand identity

Step 3Implement brand identity

Step 4Measure brand equity

Step 5Refresh the brand

Step 1They are on the business of EV

Step 2Fun, eco-friendly and attractive

Step 3Product, pricing, promotions, place

Step 4Quantitative reseatch

Step 5Extending the brand to target a

lower social class

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at a maximum his charisma, popularity and media coverage to advertise the Tesla philosophy. As we

are talking about media coverage, it is interesting to see that much of car passionate have heard of

Tesla by the specialized press, who was fighting to test Teslas cars. Of course, this strategy can work

only if the quality of the product is worth it. Here, the disruptiveness of Model S has attracted the

attention, and the quality of the product has produced incredible reviews, including several Car of the

year 2013 nominations.

To measure brand equity, brand image (brand identity in the mind of the customer) and brand identity

(implemented by the company) are compared. Three dimension are used: brand awareness, brand

association, and brand loyalty.

Lastly, using the measure made just before and with the help of the marketing plan, the company must

Refresh the Brand. For Tesla, it means extend the brand to new market by making more and more

affordable cars, in order to capture more and more customers.

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Endnotes

Marketing a roadmap to success AJAY K. SIRSI, 2010

Brief description of the company:

http://fr.wikipedia.org/wiki/Tesla_Motors

The target customers:

[1] http://fr.slideshare.net/Partha_Doc/partha-mitra-marketingplanteslamodels

The success of the model S:

[2] http://marketingtowin.wordpress.com/2012/04/09/teslas-innovationandmarketing-for-success/

[3] http://marketingtowin.wordpress.com/2012/04/09/teslas-innovationandmarketing-for-success/

[4] http://marketingtowin.wordpress.com/2012/04/09/teslas-innovationandmarketing-for-success/

[5] http://fr.slideshare.net/esfandiarkhaleghi/stanford-university-technology-entrepreneurship-

successful-startup-tesla-motor

Tesla Market strategies:

[6] http://www.teslamotors.com/about/press/releases/tesla-model-s-achieves-best-safety-rating-

any-car-ever-tested