Cannibalize

Tesla's record sales quarter... turned out to be unprofitable

Thursday, July 25, 2019 by Snacks

95K brand new Tesla owners are happy... Shareholders not so much. Tesla stock dropped 13% after Elon announced that all those cars sold in the 2nd quarter cost the company more than they sold for β€” a loss of $408M last quarter. We're here to explain how a record quarter of sales could be so πŸ˜”.

Tesla is eating itself... Cannibalization. It's an aggressive term for when one of your products is so good that it's eating sales of another. For a while, Tesla's only models were the high-end S and X, starting at $72K and $77K. "High-end" translates to "I-don't-care-how-much-it-costs" customers, which translates to profits. Now Tesla's pushing its cheaper Model 3 (starting at $39K) to become the 1st mass-production electric car company β€” and the 3 is eating S sales.

  • Exhibit A: In California, where parents dream of their kids' first self-driving ride, the number of Model S registrations at the DMV fell 54% last quarter β€” and the number of cheaper Model 3 registrations doubled.
THE TAKEAWAY

The Model 3 is too good... That's the problem. Styles, looks, performance β€” Squint your eyes and the Model 3 looks like a Model S. But it's way cheaper. Companies can avoid cannibalization by clearly differentiating products to make the more expensive one objectively better. Now Tesla needs to learn how to not just sell a ton of cars, but do it profitably.

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