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2 Important Benefits of Tesla's Top-Down Disruption Strategy

Data source: InsideEVs. *Estimates since Tesla does not release U.S. monthly sales data.

Since Tesla is starting out at the top end of the performance curve, there is no meaningful Osborne effect. Beyond the fact that Tesla doesn't really pre-announce new models or offerings and just launches them, the types of performance improvements that Tesla delivers are more incremental than what its rivals are hoping to achieve.

Tesla is naturally trying to develop performance improvements as well, but its existing models are already more than sufficient in terms of performance, while the lower-end Leaf has a much greater likelihood of testing a driver's range anxiety and charging patience. That 27% increase in range is worth the wait if you know it's right around the corner.

Tesla is a lifestyle brand

Because of Tesla's premium positioning in the electric car market, the company is more of a luxury lifestyle brand than its rivals. This gives the company far greater pricing power and sustained demand, even in the face of plunging gas prices.

Falling gas prices are hurting demand across the board for the current crop of affordable electric cars, which typically start around $30,000. However, Tesla's sales continue to rise; third-quarter deliveries set a new all-time record of over 11,600 new vehicles. The reason is that prospective Tesla buyers are not particularly price-sensitive when it comes to gas prices. They are considering buying a car that starts at $70,000 after all, and let's face it: no one buys a Tesla purely for the gas savings.

The breakeven period is simply way too long to justify buying a Tesla to save money at the pump. People buy Teslas because they believe in what the company stands for, and because they want to buy in to the premium lifestyle and brand association that Tesla offers. They probably dig fast cars, too. While price-conscious consumers very likely factor in gas prices when deciding whether or not to buy a mainstream model like a Leaf, because the breakeven period is more realistic when you're talking about a $10,000 price premium instead of a $50,000 price premium.

It also ties back to the performance argument above. Since Teslas have no performance compromises, they appeal to a wide range of high-end buyers, too, such as those that are willing to pay up for a P85D with Ludicrous mode in order to get a 0-60 speed of 2.8 seconds ($30,000 more than a standard 85D).

Fuel savings are the primary value proposition for the affordable rivals, which make performance sacrifices compared to gas-powered cars, so sales naturally suffer if the oil market neuters that proposition. While the broader U.S. electric car market is contracting due to falling gas prices (with year-to-date total sales estimated around 103,000 compared to 123,000 for all of 2014), Tesla is doing just fine. That's because in contrast, fuel savings are probably the least compelling reason to buy a Tesla, which is why the company seems so immune to fluctuations in gas prices.

Moving on down

Here's the best part. Even after Tesla successfully moves downmarket with the Model 3, these benefits will likely persist. Since Tesla developed the technology from the high-end, even its affordable models will offer dramatically higher performance than rivals, and brands are particularly long-lasting assets once you build them up.

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The article 2 Important Benefits of Tesla's Top-Down Disruption Strategy originally appeared on Fool.com.

Evan Niu, CFA owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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