In a world where captivating advertisements reign supreme, there exists an exception: Tesla Inc. Despite Tesla being the world's best-selling car, not a single owner can claim to have been convinced to buy because of an ad. Why? It’s simple. Tesla has steadfastly adhered to a clearly stated policy of never advertising its electric vehicles (EVs). Ever.
Renowned for defying industry norms, Tesla disrupted the automotive landscape with its focus on electric mobility, eschewing the traditional dealer network, employing a nonunion workforce and conspicuously avoiding advertising. In 2019, CEO Elon Musk tweeted,"Tesla does not advertise or pay for endorsements. Instead, we use that money to make the product great."
But now, the boundary-pushing automaker is preparing to chart a new course.
Musk announced at Tesla’s annual shareholder meeting that the company is venturing into the realm of advertising.
This revelation has left investors divided like a rush hour traffic jam. On one hand, skeptics see this as a glaring red flag, signaling a potential decline in demand for Tesla’s cutting-edge creations. With Tesla’s sky-high valuation, any hint of a growth slowdown could send shockwaves through the market. On the other hand, enthusiastic believers view it as an exciting opportunity for Tesla to expand its reach and debunk misconceptions.
The advertising world is constantly changing, with traditional methods like television going away while brands focus in on social media and influencer marketing. Startups like Thumzup change how companies advertise by introducing an innovative platform. People can get paid to post about participating advertisers on major social media outlets through the Thumzup app. And popular influencers like Mr. Beast are becoming billion-dollar brands largely due to sponsored posts and content.
Musk, known for his flair for the dramatic, unveiled that the advertising campaign aims to dispel a common misconception: Tesla’s models are not as financially out of reach as commonly believed. During the shareholder meeting, it was revealed that Tesla’s starting prices are actually lower than the average cost of cars in the United States.
By effectively communicating this fact, a well-executed advertising campaign could transform consumer sentiment and potentially generate increased demand for Tesla’s innovative vehicles.
While the exact advertising budget remains undisclosed, it’s possible to draw insights from the spending patterns of competitors. For example, industry heavyweight Ford Motor Co. allocated a hefty $2.2 billion to advertising in 2022 and its gross margins were $14.4 billion. This translates to approximately 15% of Ford’s gross profit being dedicated to promotional activities. Comparatively, Tesla’s 2022 gross profit stood at an impressive $24 billion, outperforming Ford.
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If Tesla were to allocate a similar proportion of its gross profit to advertising, it could potentially invest around $3.1 billion in this endeavor.
Musk has hinted at a more measured approach, suggesting a modest start rather than an all-encompassing campaign.
The ultimate impact of Tesla’s foray into advertising remains uncertain, like navigating uncharted roads. Investors may soon witness the effects firsthand through personal experiences or evaluate them based on Tesla’s second-quarter results. The key question revolves around the intent behind this advertising push: Is it primarily aimed at educating the public or is it a last-ditch effort to stimulate demand for Tesla’s vehicles?
For now, bullish sentiment prevails, allowing Tesla to maintain its position as a pioneer in the industry. But should sales falter despite advertising efforts, cautious investors may be prompted to reassess their positions and be wary of Tesla veering toward the conventional practices of traditional automakers.
Musk’s business acumen and Tesla’s track record of defying expectations instill confidence that this move may be more than noise. Quarterly results will provide concrete evidence of Tesla’s advertising adventure.
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