Survival Tesla depends on attracting ‘early majority’ customers — and that requires change

Tesla may finally fail to outrun the financial realities of normal companies. The company reported negative results over the first quarter of 2019, and it’s share price has dropped to a level not seen in years.

By any measure it has been a remarkable run for the company that was founded in 2003 by Martin Eberhard and Mark Tarpanning. It has singlehandedly transformed one of the biggest industries in the world. Estimates are that the car industry has invested around $300 billion in the development of electric cars (EVs). An astounding number of new EV models will be entering the market in the coming years. None of this would have happened without Tesla.

However, the company has created this transformation in ways that are not sustainable for itself. I’ll be writing a few articles to look at some of it’s issues. And at the end of each article I’ll do suggestions on how the company might solve its problems. In this one I’ll write about the challenge for Tesla to sell its cars to ‘normal customers’. In a second piece I’ll look at the management practices of Tesla.

Crossing the chasm

If we look at Tesla’s path to market, it’s easy to see the approach the company has followed (consciously or unconsciously) in the past years. It has had a radical focus on Innovators and Early Adopters. It has convinced a small group of very dedicated customers to pay a lot of money for the dream of green high tech mobility. In the Innovation Diffusion model of Rogers, that’s about 16% of the potential buyers.

Source: Wikipedia

The problem for Tesla is that in order to become a profitable company, it has to convince the next group of customers, the early majority, to buy Teslas too. This transition from early adopter to early majority is described as ‘crossing the chasm’ in the book by Geoffrey Moore. It’s hard to move from one group to the next, and it is in this transition where most new products fail.

A first indication that Tesla has trouble with attracting early majority buyers is that the sales of the older Model S and X have tanked in the last quarter. This suggests that the competition from more traditional car makers is really hurting the company. Think Jaguar (i-Pace in 2018), Audi (e-Tron in 2019, production capacity around 70.000 per year), Mercedes (EQC in 2019, production capacity 50.000 per year), Porsche Taycan (2019, production goal40.000 per year) and BMW (X3 in 2020). It may also be cannibalizing its top, high margin models through the Model 3 and Y. Because those are fine alternatives, for half the price. Probably it’s both.

The Model 3 is still in a category of its own. There are no comparable high end small EV sedans on the market from other car makers. And it doesn’t look like there are any real competitors coming soon, apart from the Polestar 2. Given the lack of competition and the pent up demand for the Model 3 it will sell fine for at least another year, maybe even two. But then Tesla has to also convince early majority buyers to buy the Model 3.

Here I’m going to focus on competition from traditional car companies, and why they seem to attract a lot of customers that could have bought a Model S or X instead (for reference, due to pent up demand the Jaguar i-Pace was the best selling car of the Netherlands in December).

Barriers for normal buyers

The key why people are buying non-Tesla high end EVs for me is in the fact that they are a more traditional type of customer. They represent the early majority in the market, and they could be looking for other things than what Tesla has to offer. That’s why they buy a Jaguar i-Pace (my car), the Audi e-Tron or the Mercedes EQC (sold out for 2019).

1 Quality issues

Tesla builds great cars. The Model S, X and 3 are really great cars. But there have been an incredible amount of quality issues. Like a Tesla-owning friend of mine told me: ‘Never buy a new Tesla model, wait for it to be on the market for at least a year or two.’ For the Model S and X the quality issues seem to be mostly under control by now. But people expect to drive around in their cars 5–6 years, and a bad reputation in quality hurts any company. Especially when the alternative is to buy a car from a big old car company with a good reputation for reliability.

2 Unique interior

But never mind the quality issues, over time the company should be able to get that under control. What may really hurt Tesla’s chances in attracting a ‘normal car buyers’ audience is the interior design. It’s very different from existing car designs. Teslas are like the old Citroen cars: they had really different interior design in the 1960–70–80ies. Loved and revered by a small group of dedicated fans, but not appealing to the large majority of buyers.

The Tesla interiors are a radical departure from what you will find in a Toyota, Peugeot or Audi. The screen dominates, and almost all controls are via the screen interface. No buttons, no dials. The problem with all this tech is that it’s not really clear what problem it is solving. Yes its cool, but there are not many people that have a problem with the current solution in their Hyundai or BMW. One could argue the opposite: they are really happy with their current car interiors.

Touch screens are not that great in cars, because when you drive through even a small bump, you easily touch the screen in the wrong location. Also, you need to take your eyes of the road for a much longer time and look at the screen to figure out where you need to push, whereas in the traditional setup the controls are much easier to use.

For most people, the controls of the Tesla Model 3 are really cumbersome compared to the low tech solution that they are familiar with. It’s really nice to have a switch on the steering column that allows you to turn on the shield wipers. It’s great to instantly change get cold airflow to your face by aiming an air outlet. It’s will be hard for Tesla to convince customers that searching for that feature through a menu on a touchscreen is better.

But the screen is like a huge smartphone in your car! The tech crowd loves it, it’s so cool. And they can send out software updates, so over time you can get new features and small improvements! Just like your smartphone! Again, this may appeal to the early adopters. But it’s hard to be a profitable company selling only to them.

Software updates are nice-to-have, but in all honesty much overhyped by the tech loving crowd. It’s like your phone: after an update it has gained a little more functionality, but not a lot. It’s still the same car or phone. Your car still has four wheels and it gets you from A to B. Four years from now, your new smartphone will actually have great new features. Your old Tesla won’t, never mind the software updates.

3 Bare bones

On top of that, the interior of a Tesla is really bare bones compared to traditional cars. When I drive people around in my Jaguar i-Pace the first remark of people that have driven in a Tesla is always: ‘Oh, this actually looks like a real car on the inside’. I would be very worried if I was in Tesla’s sales department and hear that feedback.

It’s quite painful that there is an after market for accessories for Tesla owners, because the company still doesn’t allow for enough customization. Not even for the Model S, which has been on the market since 2012.

(4 Bad seats)

(One particular issue I have with all Teslas is the quality of the seats. It’s the reason why I never bought one: 20 minutes in a Tesla seat is enough to make my back hurt. The company stubbornly builds its own seats, whereas most competitors source their seats from specialized suppliers. The Tesla seats are mediocre at best, and inferior to the high end sport & comfort seats (you have to pay extra for them) that BMW, Jaguar, Audi and Volvo offer. But this is not an issue for the ‘normal customer’. It’s an issue for people with back issues.)

The result

As a result of its poor build quality and design choices, Tesla sells it’s cars mostly to high income, tech loving men that are inspired by the bold vision of the future that Tesla cars represent. They are willing to suffer through the quality issues because they see themselves as part of a visionary movement. Never mind that they paid handsomely for the privilege.

We’ve seen this before

That’s a problem for the company. My argument boils down to this: technology sells to early adopters that love tech, but to sell to the early majority you need to sell a solutions to a problem. Early majority buyers buy for pragmatic reasons, not for inspirational reasons.

It’s a trap that many tech companies fall into. If you look at the history of technology, we’ve seen this many times before: new technology that doesn’t get traction because there is no real customer pain.

Take for the example of the Dvorak keyboard. Patented in 1936 by August Dvorak, the Dvorak keyboard layout allows much faster touch typing, with speed increases of around 30%. Dvorak did it in a way that is less strenuous on your fingers and hands. Sounds great, but as it turned out, there were not many customers experiencing a problem with their typing. Few were willing to try out the new technology because it’s not compatible with the existing keyboard layout, and because it takes a lot of training to switch from one to the other.

New tech often fails because of that: it’s a great new solution looking for a problem, instead of a solution to a real problem. It’s not clear what problems Tesla is solving for its customers with its unique interior design. Instead, it has created a barrier for new, non-tech loving customers to buy their cars.

Competitive advantages

But the story is not only bad. Tesla has a few real competitive advantages. Let’s look at them, see how relevant they are for early majority customers, and see how sustainable they are.

1 (Semi-)Autonomous driving

First of all, there is Tesla’s claimed superiority in autonomous driving. The only problem here is that Tesla is the only one that believes it has a competitive advantage in this area. Industry insiders rank the company at the bottom of the ladder.

Where Tesla is running ahead of the competition is deploying their semi-autonomous driving tech. The company loves to brag about how great it is, deceivingly naming it Autopilot. Sometimes it gives very impressive results, possibly saving lives. Unfortunately, sometimes Autopilot leads to preventable deadly accidents, that has landed the company in legal trouble. Consumer Reports recently reviewed Autopilot and called it ‘far less competent than a human driver’.

The rest of the industry simply thinks that the tech is not ready for deployment in consumer cars, and that Tesla is bèta testing an immature technology on its customers. It could be that all these companies got it wrong. On the other hand, it could be Tesla that is wrong. Time will tell.

All I can say is that it will only take a few more deadly accidents with Autopilot for it to become a liability that will deter early majority buyers. On top of legal cases, it’s not hard to foresee a member of parliament asking questions about the safety of Teslas. It’s all down from there.

2 Drivetrain

The second competitive advantage is the combination of superior technology of the drivetrain. The energy efficiency of Tesla’s cars is great, the traction the motors give is amazing. However, from the perspective of an average customer (that early majority we were talking about), this really is not a very big deal. Gas consumption doesn’t play a very big role in people’s buying decision, and the same will be true for EVs. Range is important, efficiency much less so.

In terms of power and acceleration, the competition has already caught up with Tesla. And above a certain minimum level, power is not an important element of the buying decision for early majority buyers. It’s similar too the endless discussions between techies about the specs of computers or smartphones. They don’t really matter to consumers, only to insiders.

3 Batteries

Where Tesla has a clear lead over the competition is its batteries. They perform really well, over long periods of time & kilometers. The estimate is that Tesla has reduced the cost of its batteries to around $100 per kWh, which could be 10% below the rest of the industry. That’s great, but not dramatic.

Where the company truly shines is the durability of the battery packs. No other company has a track record that comes anywhere near. The durability of the battery pack is the equivalent of the engine durability of ICE cars, and it’s a major element in the buying decision of pragmatic buyers.

We’ll have to see how Tesla’s competition will fare here. It will take several years before traditional car companies like Renault, Nissan, VW, BMW, Jaguar or Mercedes can make any claim to fame in this are. Tesla is the company with the best track record. The certainty of the durability of the battery pack can be a big plus for convincing early majority buyers, because it translates into the resale value when they are ready for their next car.

4 Fast Charging Network

Fourth is the charging infrastructure. Tesla has done an amazing job with its superchargers network. No other company has developed a charging infrastructure that comes anywhere near in terms of quality and convenience.

Unfortunately for Tesla, this is not a very strong competitive advantage. Developing a fast charger infrastructure is not that complicated, nor expensive. At least not for large corporations. It’s a rather mature technology, and there are several large players with ample cash to invest that have moved into the space in just the past 12 months. At best Tesla can hang on to its lead for a year or two, maybe three.

And even though fast chargers are cool, they are not crucial in the buying decision of most EV drivers. Most of us charge at home. Fast charging on the road is convenient, but if the experience is a little less great than Tesla’s that’s not a deal breaker. For most customers it’s a nice-to-have, not a need-to-have.

Plateau

In short, Tesla have done an amazing job in convincing early adopters to buy its cars. But early adopters are a very small part of the market. Tesla’s focus on exotic tech (Ludicrous mode anyone?) is actually hurting them with selling their cars to the next market segment.

For normal car buyers, the company does have a few competitive advantages, especially the durability of the battery pack and the fast charger network. Semi-autonomous driving and the drivetrain are mostly gimmicks that are attractive to the early adopters.

Overall, there are enough reasons to think that Tesla is getting close to it’s plateau in markets where its cars have been on sale for a few years. If the company wants to sell its cars to the early majority, it needs to adapt its products for that market segment. It also needs a compelling story of what makes their cars so great compared to EVs from other brands from the perspective of pragmatic buyers. With $300 billion in investments and counting, the competition will be fierce. It better hurry up figuring out how do adapt its products, and what story it tells to sell its cars. Otherwise, the most likely path for Tesla is that it will be acquired by one of the big players, just like Citroen was acquired by Peugeot in 1976.

The road to average customers

There are many things Tesla can do to become a brand that is capable of crossing the chasm, and attract average car buyers. It’s not rocket science, but it does require a big effort. Let me suggest a few bridges to cross the chasm.

1 Comfort Line

The company could easily offer a Sport line and a Comfort Line of all its models. This type of differentiation is a common approach in car industry. Peugeot offert a GT line for many of its cars, BMW has the M-branding for high performance cars, Mercedes has the AMG brand, Audi the S-series.

The current Tesla cars are all basically ‘Sport Line’. No normal customer needs a 0–100 time under 5 seconds. Under 10 seconds is just fine. Allows for cheaper motors, lighter weight, even better efficiency and more range. Alternatively, Tesla can create a side brand, like Volvo’s Polestar, Toyota’s Lexus, etc.

2 Comfort Interior

On top of that, the interior of the Comfort Line should be very different from the current line. More traditional, with plenty of practical little spaces where people can store sunglasses, lipstick and make up, tissues. Have lighting options for the cabine, etc.

3 Customization options

For a 90 k€ car like the Model S the lack of customization is truly ridiculous. Right now the company offers only 5 colors for the Model S, a car that’s been on the market for seven years. That is really weird. My i-Pace is available for less than a year and customers can choose from 12 colors.

And it is painful that there is a website like Tesland.com where you can buy basic things like LED lighting for the central console and for different spaces in the car. There is no option to upgrade the seats, whereas the high end brands will typically offer you a sport seat option and a comfort seat option. Customers pay handsomely for those premium seats. (NB: if Tesla would have had better seats on offer, I would have bought one six years ago).

4 Customizable controls

The minimalistic controls of Teslas has been praised by the fans. Unfortunately, the company still has to prove that ‘normal’ customers agree that they are great. But more importantly, there is no clear reason why the company should not create an option package that gives more traditional controls.

This can be done in a very simple way. Since almost all functions are computer controlled, the only thing Tesla has to do is to create a wireless-in-car protocol (or simply use Bluetooth) and glue on wireless buttons for things like windshield wipers, temperature control, direction of ventilation, speed of ventilator, etc. There could also be customizable buttons for ordering milk, navigate home, anything you can think of. It would really make Tesla stand out.

Of course it should also have the option for a driver console slash second screen behind the steering wheel in the Model 3, and charge the customer handsomely in the process.

5 Take it to the next level

For a company who’s claim to fame is that it is completely rethinking the car it would be great if it would take the inside of the car to the next level. Why is there no Nespresso coffee maker in the car, integrated with Starbucks coffee cups that are automatically delivered to your home when you run out? Why no massage seats? Why is Tesla not the first car that has a small waste bin? And what cool things can you come up with for the space in the frunk that nobody really uses?

6 Kill childish boy nerd features

I rarely see women drive a Tesla in Europe. That’s a direct result of the brand identity that the company has built and the design choices it has made. Ludicrous mode got lots of attention, but it will not get any customers from the early majority segment.

And did you know there is a fart feature? I really can’t get my head around how something that 10 year old boys find funny ends up in a premium car of €90.000. It’s a perfect example of Silicon Valley male nerdism. If Tesla wants to sell cars to average customers (including women), it’s a good idea to switch from toilet humor to something a little more sophisticated. Apple would NEVER allow anything like that make it from the lab to a product.

7 Extend the range

To grow the market potential of EVs beyond the ‘green believers’ category, the range of EVs will have to be closer to an ICE car. Tesla has the technology to lead here, and it has the cost/price advantage. It should offer customers the option of battery packs that give a range close to an ICE car, at real life speeds.

Right now Teslas have a good range compared to other EVs, but not a lot better. People like to take their cars on holidays, and that is still a pretty poor experience compared to a ICE car. For Europe, my best guess is that the sweet spot is one charge session on a full day drive, at a speed of 130 kmph. People drive around 1000 km a day max, so that translates into a range of 600 km. Nothing on the EV market comes even close to this right now. My guesstimate is that it would require a battery around 150–200 kWh. For a super efficient car like the BMW i3 120 kWh probably would have been enough. Imagine an BMW i3 with a 100 kWh battery! I would have gotten one instantly.

8 Marketing

For its marketing, Tesla is relying on word of mouth and the Twitter feed of the CEO. The result is that the company is getting even more engrained in the existing customer base: early adopters, tech loving men in their 50-ies that aspire to live green. It’s a wonderful first market, but the company has to attract new customers. For that it has to tell a different story and it has to start spending real money on marketing to tell that story.

What should the story be? Keywords are quietness, comfort, reliability of batteries, customizable interiors, customizable controls, ease of use and the navigation features. As a ‘by the way’: cost savings, cars with the longest range and a superior fast charger network.

The TV add could be a lady that takes her friends on a trip to Paris for the weekend in her new Tesla. We see the ladies talking in the super quiet, a new comfort interior, having lunch while fast charging halfway (maybe she accidentally drove up to the gas pump and then on to the charger), and zipping through the city thanks to the clear navigation. It should look surprisingly normal, like a normal weekend to a city with a car. Which is the whole point: EVs have to become normal if we want normal customers to buy them. At the end it could show the energy costs compared to gas, and how that paid for the upgraded hotel room.

What do you think?

OK, that was it. This article turned out way too long, as I’m still trying to get my head around this.

I’m rooting for Tesla, I hope the company makes it. I don’t think it will if it doesn’t succeed in selling cars to the next market segment. IMHO that requires a strategic change of course. I’m curious to learn what you think.