Despite some skepticism, Tesla's new plan should increase sales and revenue.
Elon Musk recently announced that Tesla will be shutting down 10% of its retail stores and is reviewing another 20% of its stores for potential closure. These store closures will allow Tesla to achieve its goal of reducing the Model 3’s price to $35,000. While some shareholders are skeptical Tesla will achieve its revenue goals without retail stores, others have renewed optimism regarding Tesla’s future. Musk believes closing retail stores is the best solution to remaining profitable while lowering the price of the Model 3. Tesla’s radical move to shut down many of its stores and shift its focus online will not only lead to decreased costs but also an expansion of the target market. Selling online will improve the Tesla customer experience, making it a more convenient purchase process for a broader population and allowing for customization. This also allows Tesla to lower its prices, making its cars attractive to more prospective buyers.
Price Cuts will Increase Tesla’s Target Market
Tesla’s elimination of 10% of its retail stores will cut its overhead costs dramatically, enabling a Model 3 price cut of almost 20%, down to $35,000. This price reduction will increase Tesla’s target market size, as the Model 3 will now appeal to a wider range of potential customers. A $35,000 price point will create an entirely new market segment for Tesla, appealing to more of the mass market.
$35,000 is Still an Expensive Car
The average price of a new compact car is $20,000 and the average price of a mid-size sedan is $25,000 (Kelley Blue Book 2018). The Toyota Prius, for example, is priced significantly lower than the Model 3 at $23,475 (US News 2018). There are concerns that a $35,000 Model 3 won’t appeal to the masses and drive the increase in sales Tesla is hoping for.
Looking at New Car Price Averages
The average price of a new vehicle in the U.S., however, is $35,742, so Tesla’s Model 3 price may not be so expensive after all. With a base price of $35,000, the Model 3 will be competitive with the all-electric Chevy Bolt, that has an MSRP of $36,600. Tesla has done its homework and knows it doesn’t need to appeal to the economy car segment. In fact, Musk predicts there’s enough pent-up demand to sell 500,000 Model 3s annually at a base price of $35,000.
Tapping into Online Shopping Trend
Closing 10% of its retail stores and focusing on online sales won’t have a negative impact on Tesla’s ability to sell cars, as online shopping is increasing. People buy just about everything online today, and car shopping shouldn’t be any different. As with anything you buy online, you can do your research and make purchases at anytime from anywhere. Online shopping is convenient and especially appealing to young, technologically savvy consumers. A 2018 survey of consumers between the ages of 25 and 34 found that the majority of millennials prefer to find product information online rather than talk to retail store staff (McDonald 2018). This consumer segment would rather avoid shops altogether when they need information and prefer to chat online with retail staff than in person (McDonald 2018). The majority of people who partake in online shopping are the younger generations, like the millennials. Tesla is banking on a trend of increased online shopping by millennials.
A Fluent LLC survey concluded that 52% of people shop online with convenience as the primary reason (King 2018). E-Commerce has been a growing trend over the last decade. Online sales are estimated to be $504,582 in 2019 and are projected to increase steadily at an annual average rate of 7.6% through 2023 (Statista 2019). Tesla has made a smart move by enabling the customer to make their car purchase entirely online (Vincent 2016).
Can Online Shopping Provide Everything?
Purchasing a car online may seem appealing at first, but it doesn’t allow the customer the opportunity to test drive. Test driving has always been a key element of a new car purchase decision. Test driving a car allows customers to see for themselves how cars drive and how they would feel driving it on a daily basis. Individuals may not be as willing to purchase a car they haven’t test driven. Because Tesla is eliminating 10% of its retail stores, fewer people will be able to test drive the car.
Tesla’s Betting Test Drives Aren’t Necessary...and there’s a Silver Lining
The 2016 Beepi Consumer Automotive Index reported 42% of buyers would be comfortable purchasing their car without a test drive. In addition, Tesla has reported that a very high percentage of its buyers have already been purchasing cars without a test drive. Following the purchase of a Tesla, a customer has seven days to test it out and if they feel they made the wrong decision, they may return the car for a full refund (Marshall & Davies 2018). In essence, these seven days take the place of a test drive and allow consumers to make a risk-free purchase. With Tesla’s return policy, there’s no need to be concerned about the lack of test drives. If a customer is adamant about a test drive, Tesla is also launching new “Service Plus” locations that include sales personnel and facilities, along with the opportunity for test drives (Tesla, Inc. 2018).
As a bonus, online sales will enable Tesla to extend its reach and sell cars to people in states that have dealership laws preventing Tesla from selling directly in manufacturer-owned retail stores that aren’t dealerships. Tesla is currently prevented from selling directly in eight states (Michigan, New York, Connecticut, Texas, Utah, New Mexico, Oklahoma, Wisconsin). These dealership laws don’t extend to online sales.
Making Car Shopping a Positive Experience
Eliminating the retail environment will lead to customers feeling better about their purchases and that their individual needs are being addressed on their timeline. Many people feel pressured and uncomfortable around car salesmen as they tend to push customers to make decisions when they are not fully ready.
By eliminating the retail environment, customers will be able to move at their own pace when purchasing their car. They will have more time to do their online research about the different options the car may provide.
Musk’s decision also appears to reside in his favor as 87% of Americans dislike at least one aspect of the car dealership experience (Brown 2016). Some reported they feel uncomfortable, pressured, and anxious at car dealerships and would rather deep-clean their house than negotiate a sale. 54% of people would much rather purchase their car at home than having to go to a dealership (Beepi 2016). There’s also a heavy bias against women, as salesmen often discount women’s knowledge of cars. This too, leads to feelings of unease upon entering a retail store.
Tesla Had Already Changed the Experience
Musk identified and removed much of the discomfort from the equation when Tesla first began selling cars. Tesla retail associates aren’t sales people, they don’t receive sales commissions, and there is no negotiation in the transaction. Customers don’t need to worry about uncomfortable conversations regarding the car’s price or feeling pressured to make a purchase today.
Who Wants to Spend their Weekend at a Car Dealership?
There are other negatives associated with purchasing a car at retail, one of the largest being the amount of time it takes at the retail store. Taking multiple hours out of a day to go car shopping may not be the most opportune way to spend one’s free time. It’s a significant time commitment to go to the store, wait for a sales person, look at the car, test drive it, and talk through the details, not to mention all of the paperwork once a decision has been made. Purchasing a car online allows customers to research and make decisions in smaller segments of time, at their convenience, making for a more manageable buying experience.
Shifting the focus to online purchases enables consumers to customize their Tesla with add-on features, increasing the average price per car sold. Consumers are willing to pay more for customized products, especially high-priced products like a car. A 2019 Deloitte report stated that customers are willing to spend an additional 20% to customize their purchase. With this in mind, Tesla will be able to generate even more revenue by virtually walking customers through all customization options offered.
Customizations are Still Available in Retail Stores
Customers can customize their car in retail stores as well. Salespersons can guide them and tell them how much people like certain options they might not otherwise consider or think they need. Salespersons can also assist them and give them information on what customizations pair well together.
Not All Customizations are Widely Known
Although customizations can be made in the retail store, online customization offers the ultimate experience and ensures that nothing is forgotten. Software programs guide the customer through various options and allow for cross-selling and promotion of upgrades that work well with ones they have already selected, in a non-threatening, no-pressure format. Customers are able to easily see their customized car online and know that they have reviewed all options available. In addition, customers can read reviews and comments from others on various options, leading to a more informed and confident customer.
Looking Toward the Future
Musk’s decision to close 10% of its stores was ultimately what he needed to do to keep the company profitable. If he had kept all stores open, Tesla would have risked moving in the wrong direction. This decision will benefit the company and consumers looking to purchase the Model 3 at a lower price. Ultimately, Tesla needs to remain profitable and shutting down 10% of their retail stores is a sound idea that cuts costs and provides customers a lower priced Model 3.
Elon Musk has been a game changer in the automobile industry from day one. He changed the electric car industry by designing powerful, sleek, luxury cars. He eliminated the dealership middleman, reducing costs. Musk changed the buying experience by addressing many of the negatives associated with the purchase process. He hired retail associates instead of sales people and paid them salaries without commissions. He also boldly sold at list price, with no price negotiations allowed. In sharp contrast to other car manufacturers, Tesla does not advertise, but relies on word of mouth and referrals. Tesla’s product is different and the way it is sold is different. Now Musk is encouraging customers to buy cars online. He is leading the way in how we purchase cars. Musk is an innovator and industry disruptor. What Musk is doing will drive Tesla sales and could ultimately lead to a longer-term change in the industry.
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