Published on March 3rd, 2019 | by Dr. Maximilian Holland
March 3rd, 2019 by Dr. Maximilian Holland
An email sent to Tesla employees by Elon Musk on Thursday explains some of the reasons for Tesla’s shift in sales strategy from brick-and-mortar stores to an online focus. Notably, 78% of all Model 3 sales in 2018 were already conducted online. Further, 82% of buyers didn’t even take a test drive before buying. Added to this, awareness of the Tesla brand is as strong as it has ever been, and prospective customers are forward-looking and tech-savvy, comfortable with online purchases. Transitioning from store-based sales to online sales, along with other efficiencies, reduces vehicle costs by an average 6%. That made this a priority area for overall savings and cost reductions.
The net effect of the shift is that Tesla’s vehicles are now being sold at more affordable price points, increasing demand and accelerating Tesla’s core mission.
Understanding the Change in Tesla’s Sales Strategy
Any loss of jobs is never good news for those affected. It remains to be seen what proportion of store sales staff can be transitioned to roles in the galleries, showcases, and information centres that will be maintained in high traffic locations. There will be increasing positions in service and in manufacturing as well, but how many can transition to such jobs is unclear.
Tesla went from 899 employees in 2010 to an estimated 45,000 in Q4 last year, but with several periodic cutbacks to the workforce along the way. The cutbacks are unfortunate, but not unexpected in a fast evolving company seeking to ramp up the number of vehicles sold, learn on its feet, and seek cost efficiencies in every area of its operations.
In a phone-in session for journalists on Thursday, Musk called the move to online sales a “hard decision” which “unfortunately will entail a reduction” in the sales staff, but also called it an “extremely important strategic decision.”
Whilst the phone call did not go deep into the reasoning for the shift in sales strategy (instead focusing on the announcement of the $35,000 Model 3 and details about the car), the employee email on the same day did shed more light. I have attached the full text of the email at the end of this article. Obviously, reducing internal costs enough to enable the sale of the $35,000 Model 3 was a key proximate motivation for the strategy shift. But there’s also more context to understand the overall change in strategy. Amongst other points, the email noted that, in 2018:
“78% of all Model 3 orders were placed online, rather than in a store, and 82% of customers bought their Model 3 without ever having taken a test drive.”
Given that 140,000 Tesla Model 3s were sold in 2018, 78% online sales corresponds to almost 110,000 vehicles, of the 240,000 total 2018 vehicle sales (when we include Models S and X). That’s some 46% of the total. In 2019, the Model 3 will likely sell close to 300,000 units or more, and the S and X 80,000–100,000 (combined). This means that — assuming the same 78% online sales proportion of 2018 Model 3 sales — at least some 62% of overall sales would likely have come from online anyway, even without the recent changes.
The key question is: does Tesla actually need brick-and-mortar sales outlets to maintain brand awareness, drive demand, and create sales?
The EV Transition & Tesla’s Brand Awareness
Consider that, in the comments section of Zach’s recent article, one of our UK readers pointed out that the release of the $35,000 Model 3 was the #2 news story on the BBC. Given that the Tesla Model 3 won’t even begin delivery in the UK until sometime in the second half of 2019, that’s pretty healthy brand awareness right there.
There has been dramatic growth in awareness of EVs in general over the past couple of years. The vast majority of people who are considering transitioning to an EV are without doubt aware of Tesla. With the availability of the $35,000 variant of the Model 3, and low running costs, a Tesla EV is now within reach of a greater proportion of aspirational new car buyers in the key markets in which the company operates. Of the folks in these markets that are considering buying a new premium car anyway, many if not most of them are already aware of the Tesla brand. All in, it’s not hard to conceive that — even without brick-and-mortar sales stores — there’s enough demand to keep Tesla running at full production potential for at least the medium term. The upcoming Model Y reveal (and likely many more reservations) will only boost brand awareness and demand.
Tesla has obviously crunched the numbers and decided that encouraging an online sales process — whilst keeping vehicles visible and curated by a few personnel in high-traffic areas in galleries (and similar locations) — will result in more than sufficient demand going forwards. Whilst being a calculated guesstimate, there’s surely a positive feedback between removing the significant cost of sales locations, thus allowing Tesla “to lower all vehicle prices by about 6% on average” (Musk email), thus bootstrapping relatively more demand and resulting in more customers overall.
As quoted above, that “82% of customers bought their Model 3 without ever having taken a test drive” shows that test drives are not needed for most prospective buyers to pull the trigger on a purchase — at least, they haven’t been. Tesla’s tweaked sales contract now allows customers who have not previously test driven the vehicle to return it within 7 days (or 1,000 miles) for a fast, full refund if they are not happy with the purchase. (This was also was part of the reasoning given in the employee email). Since driving a Tesla for the 1st time is invariably a revelation, the percentage of returns will likely be negligible. And there will likely still be some opportunities for test drives in key locations, even if that’s arranged via a service centre location (or even a mobile service/test drive) rather than a sales location per se. Our own Kyle Field got a home test drive from Tesla before purchasing his Model 3.
Finally, there are additional demand levers that Tesla can still pull if necessary. The company could readily re-introduce a referral program (albeit a more cost efficient and capped one). And leasing is not even offered yet on the Model 3. That’s a huge demand lever right there.
In short, with three Model 3 choices at price points between $35,000 and $40,000 — themselves to a large extent enabled by the move to an online sales focus — Tesla calculates that this reconfigured approach to sales and costs will generate more than enough demand going forwards, and further the company’s mission.
Whilst we can all agree that the loss of store sales jobs is sad, do you agree or disagree with Tesla’s reconfigured sales approach from the point of view of the business case? Please provide your own thoughts in the comments.
Here’s Elon Musk’s email to employees (Thursday, February 28):
Last month, I noted in my email that the fundamental issue Tesla must overcome is that our products remain too expensive for most people. We know there are many people who want to buy Model 3, but simply can’t afford to do so.
That is why we’re excited to announce today that we are now offering the standard Model 3 at $35,000. This is a significant milestone for Tesla, the culmination of years of hard work by employees across the company, and something of which you should all be very proud. You can read the details of the announcement on our blog: https://www.tesla.com/blog/35000-tesla-model-3-available-now
In addition, we are also making the decision to shift all sales worldwide to online only.
Last year, 78% of all Model 3 orders were placed online, rather than in a store, and 82% of customers bought their Model 3 without ever having taken a test drive. Customers can now buy a Tesla in North America via their phone in about 1 minute, and that capability will soon be extended worldwide. We are also making it much easier to try out and return a Tesla without a test drive. You can now return a car within 7 days or 1,000 miles for a full refund. Customers are becoming increasingly comfortable making purchases online, and that is especially true for Tesla — which is a testament to the products we make.
As a result, over the next few months, we will be winding down many of our stores and significantly reducing our spend on sales and marketing, which will help make the price changes we’ve announced today possible. Shifting all sales online combined with other ongoing cost efficiency will enable us to lower all vehicle prices by about 6% on average, allowing us to achieve the $35,000 Model 3 price point.
A small number of stores in high-traffic locations will remain as galleries, showcases and Tesla information centers. At the same time, we will be increasing our investment in the Tesla service system and manufacturing, and I expect that headcount to grow next year.
Unfortunately, this means that some jobs will be impacted or transitioned to other areas of the business. This is a hard decision, but it necessary to make our cars more affordable. Our sales team has fought on the front lines of advancing our mission and has been our connection to hundreds of thousands of customers along the way. I want to express my sincere gratitude for all that you’ve done.
In the coming weeks, we will be evaluating all of our sales and marketing organization to understand where there are operational efficiencies, and how best to support the transition to online sales while also continuing to deliver a truly awesome and educational Tesla buying experience.
We’ll be sharing more information on this transition soon.
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