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Learning From Tesla to “Plug In” to Direct Sales Models

Aside from its sleek electric vehicles and new Gigafactory to produce lithium-ion battery cells, Tesla Motors has made headlines recently over disputes with car dealerships. Because of its direct-to-consumer sales model, Tesla has faced a slew of recent challenges from automotive dealer groups in various states that argue that Tesla is violating dealership franchise laws. In New Jersey, officials passed a regulation that prevents automakers such as Tesla from selling direct to consumers.

Since the rise of the automobile at the beginning of 20th century, manufacturers have relied on dealerships to sell cars. Initially, it made sense for the manufacturers to leverage the local knowledge and expertise offered by a franchised dealer. However, over time, dealerships have enjoyed increasingly favorable legislation that protects their business model due to strong contributions to employment and local sales tax revenue. Auto manufacturers have found it incredibly difficult to bypass the channel. For the automotive industry (and countless others), dealers have provided an effective sales channel for manufacturers to get to market, but the experience of Tesla is proving to be a valuable case study that is worth following.

Instead of relying on independent dealerships, Tesla sells its high-end electric vehicles online and through company-owned stores in major markets. Tesla chose this nontraditional sales model ostensibly to partially alleviate its high price to the consumer, and of course to improve its own profit margin. Despite the recent legal challenges, Tesla has experienced success using this model. Investors think highly of Tesla’s potential for future profitability—its stock price has charged up more than six-fold in the past year.

What has enabled Tesla to sell direct to customers when other manufacturers have not?

1.) Tesla is a very young company founded in the past 10 years, so it lacks the legacy of a vast existing dealership network of a company such as Toyota or Ford. It can pursue a new sales model without any channel conflict. Because of the difficulty of moving or closing dealer locations, an existing network can pose a burden to established car makers. Conversely, Tesla faces no such burden and can open new points of sale in a calculated and efficient fashion.

2.) Tesla has a limited product portfolio. Tesla currently offers consumers a single model. This makes online purchasing a much more manageable process, minimizing the value of selling through an independent dealership that typically carries multiple models. Inventory management—a role traditionally shared by the manufacturer and the dealer—is more straightforward for a manufacturer such as Tesla.

3.) Tesla carved out a unique position in the high-end auto market space: Tesla is essentially the sole luxury electric car option. Consumers who are interested in purchasing a Tesla rarely consider a wide variety of competitors. A visit to the dealership to test drive and compare cars is unlikely to be part of the buying process. It is not a question of BMW, Mercedes or Audi. Rather, it is a question of Tesla or no Tesla. A unique product can drive a unique distribution model.

Many manufacturers have long dreamed of broadening their channel to sell direct to consumers either online or otherwise. The initial lessons from the Tesla experience illustrate that it is truly in a special position, and its unique circumstances have allowed some early success implementing this model.

Nevertheless, in most situations, intermediaries such as dealers continue to offer significant value—both to manufacturers and end customers. Manufacturers with complex customer chains need to understand fully the roles and responsibilities of their channel, and how they can be properly addressed in a new model. As Tesla expands its product offering to multiple car models appealing to a wider variety of customer segments, its direct sales model may begin to face challenges. While following Tesla’s experience will continue to offer insights into direct sales model implementation, one question remains—is it the exception rather than the rule?

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