It’s the Product, Stupid

Not many companies in the past several years have generated the amount of attention and controversy as Tesla has. Tesla’s CEO, Elon Musk, is without question one of the more uneven and mercurial company heads to have come along in quite some time. He has generated an almost unprecedented amount of attention for himself and his company, some good, some not-so-good. He’s been described as egotistical, charismatic, stubborn, deceptive, brilliant, pioneering, erratic, and unrealistic. But one thing he’s not is boring.

When Tesla announced the Model 3 sedan back in 2016, it was heralded as a game-changer for the electric vehicle (EV) market. Finally, here was an EV that looked like a sleek, expensive sport-luxury sedan, had enough range -- around 300 miles -- to be practical as an everyday car, and, best of all, would be affordable. Musk boasted at the Model 3’s introduction that the 3’s pricing would start in the mid-upper $30k range. A high-end Honda Accord or Toyota Camry cost about the same as the entry-level Model 3. With large-scale deliveries of the Model 3 due in late 2017, this was to be the turning point for the emergence of the non-internal combustion engine (ICE) market.

Brilliant promoter that he is, Musk took full advantage of what he knew would be the frenzied interest generated by the 3’s introduction by offering a delivery “reservation” to customers for a $1000 deposit. Although an exact number has never been published, reportedly over 300,000 customers sent in something like 300 million dollars to Tesla for the privilege of waiting over a year for their Model 3 to be delivered.

Predictably, the Model 3 was late. Significant numbers were not delivered until late in 2018, a full year behind the initial promise. And the much-ballyhooed “upper $30k’s pricing” never really materialized either. The vast majority of Model 3 deliveries thus far have been upper-end versions with the longer-lasting batteries and upper trim/option levels. Production complications at Tesla’s Gigafactory battery production facility and an inability early on for Tesla to make a profit on the lower-priced version were given as the reasons for the delay of the promised “affordable” variant.

Nonetheless, when Tesla delivered over 50,000 Model 3’s in the 4th quarter of 2018, it became the largest-selling individual luxury nameplate in the U.S. market, outselling every other individual luxury nameplate from Mercedes, BMW, Lexus, Cadillac, and Acura. Newly profitable and delivering significant numbers of their hottest model, Tesla appeared to be silencing their many critics and fulfilling their promises.

Not so fast.

Tesla is far from out of the woods and is still not solidly profitable. Sales and deliveries of the Model 3 are weakening in 2019, as the sedan segment in the U.S. slips farther behind the SUV market. In recent years, SUVs have overtaken sedans and become the predominant vehicle category, outselling traditional cars. Consumers are gravitating towards the SUV, with their higher more commanding driving position and perceived greater utility and people-carrying capacity compared to the sedan. Whether those advantages are meaningful or illusory is a discussion that is outside the scope of this article. What is indisputable, however, is the market shift away from cars and towards SUVs.

Which brings us to Tesla and their current conundrum. If sales -- and therefore top-line revenues -- slip in 2019 as demand for the Model 3 weakens, then Tesla could find itself in a domino death-spiral of lessening sales income, leading to creditors and investors shying away from the company, leading in turn to Tesla being unable to meet its financial obligations. One thing leads to another. This is how companies fold, especially cash-strapped startup companies in an established field competing against solidly-situated rivals many times their size. They make one wrong move and the unapologetic nature of the open competitive market takes them down, without mercy or fanfare.

What was Tesla’s one wrong move? They misread the market and came out with the Model 3 sporty sedan, instead of a compact near-luxury SUV. The automotive market is being led by the SUV. It has been heading in that direction for quite some time. A purported marketing visionary like Musk should have seen that. Their new Model 3-based compact SUV -- the Model Y -- isn’t due until sometime in late 2020, and 2020 is “Musk” time. That means, realistically, that the Model Y won’t be delivered in meaningful numbers for another two years -- if Tesla survives that long.

In the 1992 Presidential campaign, James Carville coined the memorable phrase, “It’s the economy, stupid.” He wanted to get across to his candidate, Bill Clinton, that he needed to concentrate on driving home a positive, forceful economic message to the voters, that if they voted for Clinton, their personal financial situation would improve.

There is a strong corollary in marketing: “It’s the product, stupid.” Marketing is known for the four P’s: Product, Place, Promotion, and Pricing. Place is where and how you sell your product or service (through brick-and-mortar retailers, online, direct to the consumer from the company, etc.), Promotion is how you advertise, publicize, and inform your target buyers about your product and Price is self-explanatory.

But it all starts with the Product. No amount of fancy advertising, a clever name, the most prestigious spokesperson, the backing of the most oft-visited website, the most attractive price, none of that will rescue a product that misses the sweet spot of its target market. Place, Promotion and Pricing may delay the inevitable, but the inevitable is, well, inevitable.

“It’s the product, stupid.” If Tesla goes out of business because it came out with the Model 3 sedan instead of the Model Y SUV, that word could very easily apply to Tesla’s founder.

Not many companies in the past several years have generated the amount of attention and controversy as Tesla has. Tesla’s CEO, Elon Musk, is without question one of the more uneven and mercurial company heads to have come along in quite some time. He has generated an almost unprecedented amount of attention for himself and his company, some good, some not-so-good. He’s been described as egotistical, charismatic, stubborn, deceptive, brilliant, pioneering, erratic, and unrealistic. But one thing he’s not is boring.

When Tesla announced the Model 3 sedan back in 2016, it was heralded as a game-changer for the electric vehicle (EV) market. Finally, here was an EV that looked like a sleek, expensive sport-luxury sedan, had enough range -- around 300 miles -- to be practical as an everyday car, and, best of all, would be affordable. Musk boasted at the Model 3’s introduction that the 3’s pricing would start in the mid-upper $30k range. A high-end Honda Accord or Toyota Camry cost about the same as the entry-level Model 3. With large-scale deliveries of the Model 3 due in late 2017, this was to be the turning point for the emergence of the non-internal combustion engine (ICE) market.

Brilliant promoter that he is, Musk took full advantage of what he knew would be the frenzied interest generated by the 3’s introduction by offering a delivery “reservation” to customers for a $1000 deposit. Although an exact number has never been published, reportedly over 300,000 customers sent in something like 300 million dollars to Tesla for the privilege of waiting over a year for their Model 3 to be delivered.

Predictably, the Model 3 was late. Significant numbers were not delivered until late in 2018, a full year behind the initial promise. And the much-ballyhooed “upper $30k’s pricing” never really materialized either. The vast majority of Model 3 deliveries thus far have been upper-end versions with the longer-lasting batteries and upper trim/option levels. Production complications at Tesla’s Gigafactory battery production facility and an inability early on for Tesla to make a profit on the lower-priced version were given as the reasons for the delay of the promised “affordable” variant.

Nonetheless, when Tesla delivered over 50,000 Model 3’s in the 4th quarter of 2018, it became the largest-selling individual luxury nameplate in the U.S. market, outselling every other individual luxury nameplate from Mercedes, BMW, Lexus, Cadillac, and Acura. Newly profitable and delivering significant numbers of their hottest model, Tesla appeared to be silencing their many critics and fulfilling their promises.

Not so fast.

Tesla is far from out of the woods and is still not solidly profitable. Sales and deliveries of the Model 3 are weakening in 2019, as the sedan segment in the U.S. slips farther behind the SUV market. In recent years, SUVs have overtaken sedans and become the predominant vehicle category, outselling traditional cars. Consumers are gravitating towards the SUV, with their higher more commanding driving position and perceived greater utility and people-carrying capacity compared to the sedan. Whether those advantages are meaningful or illusory is a discussion that is outside the scope of this article. What is indisputable, however, is the market shift away from cars and towards SUVs.

Which brings us to Tesla and their current conundrum. If sales -- and therefore top-line revenues -- slip in 2019 as demand for the Model 3 weakens, then Tesla could find itself in a domino death-spiral of lessening sales income, leading to creditors and investors shying away from the company, leading in turn to Tesla being unable to meet its financial obligations. One thing leads to another. This is how companies fold, especially cash-strapped startup companies in an established field competing against solidly-situated rivals many times their size. They make one wrong move and the unapologetic nature of the open competitive market takes them down, without mercy or fanfare.

What was Tesla’s one wrong move? They misread the market and came out with the Model 3 sporty sedan, instead of a compact near-luxury SUV. The automotive market is being led by the SUV. It has been heading in that direction for quite some time. A purported marketing visionary like Musk should have seen that. Their new Model 3-based compact SUV -- the Model Y -- isn’t due until sometime in late 2020, and 2020 is “Musk” time. That means, realistically, that the Model Y won’t be delivered in meaningful numbers for another two years -- if Tesla survives that long.

In the 1992 Presidential campaign, James Carville coined the memorable phrase, “It’s the economy, stupid.” He wanted to get across to his candidate, Bill Clinton, that he needed to concentrate on driving home a positive, forceful economic message to the voters, that if they voted for Clinton, their personal financial situation would improve.

There is a strong corollary in marketing: “It’s the product, stupid.” Marketing is known for the four P’s: Product, Place, Promotion, and Pricing. Place is where and how you sell your product or service (through brick-and-mortar retailers, online, direct to the consumer from the company, etc.), Promotion is how you advertise, publicize, and inform your target buyers about your product and Price is self-explanatory.

But it all starts with the Product. No amount of fancy advertising, a clever name, the most prestigious spokesperson, the backing of the most oft-visited website, the most attractive price, none of that will rescue a product that misses the sweet spot of its target market. Place, Promotion and Pricing may delay the inevitable, but the inevitable is, well, inevitable.

“It’s the product, stupid.” If Tesla goes out of business because it came out with the Model 3 sedan instead of the Model Y SUV, that word could very easily apply to Tesla’s founder.