Some might say that the Tesla business model is absolutely perfect. They offer a direct sales model with a few twists that meet the needs of their targeted consumers. People are able to order their cars online. Having battery-powered supercharged vehicles at a luxury price point creates a targeted marketing campaign that funnels in passive income. Even the battery, which has proven to be a PR nightmare at times, has an 8 year warranty on it.
Why aren’t more vehicle manufacturers selling directly to their customers? It is because there are certain places where it is actually against the law to do so. Vehicle manufacturers are not allowed to compete with independent retailers for the same makes and models of vehicles. For Tesla, the answer to this law is simple: don’t have independent retailers.
Tesla Offers a Closed System Business Model
The closed system business model first considers what the external environment happens to be. For Tesla, this means considering who has the rights to sell their vehicle. In Ohio, there is concern about Tesla selling directly to customers instead of selling to independent retailers because they don’t want the major automotive names like Ford and General Motors to do the same thing. Tesla may only average 100 sales per year in Ohio, but it is precisely because they use this business model.
The closed system offers a number of advantages to the businesses that are able to operate with one.
Technological advancements bring greater profit.
Tesla invests into its own research and development because it can directly profit from advances. Any patents it develops become a money making machine for the company.
Customer segments and demographics can be controlled.
If you go to an independent retailer of vehicles, then pretty much anyone can step foot on the lot and try to buy something. Tesla can control their price points, their deals, and the specs of each vehicle so that individual sub-segments can be targeted. They look for their best customers, then look to see how they can clone their best customers with product advancements.
Legal decisions stay in house, as do political decisions.
At Tesla, there is no need to depend on external influences in order to attempt to explain managerial concerns or to find solutions to problems. Everything can be closed to the outside world so that a message of consistency is able to reach each target demographic.
The closed system relies heavily on internal systems to determine outcomes. Although this can somewhat limit a business, it is more advantageous to run this business model than it is to run an open business model.
A Closed System Business Model Makes It Easier To Find Problems
Think about the way a prison is structured. You’ve got three essential elements: prisoners, guards, and facilities. There’s a giant fence with razor wire that surrounds the property to prevent escape. There might be multiple fences. Visitors are either kept separate from prisoners or are sent to a specific room or location. It is the epitome of the closed system business model.
Now let’s say a pattern of abuse is uncovered at the prison. A certain group of prisoners starts showing up with strange injuries and it is happening consistently. Where would the prison look first for a solution? At external factors that could be entering the prison to cause the pattern of abuse? Or would they look internally?
They would look internally. There would be a complete review of internal policies and procedures. The prison guards might be interviewed. The culture of the prison would be examined. Even the organization of prisoners would be investigated. Investigators would know that there is something within the prison that is causing the problem.
Tesla has this advantage for their vehicles. The battery issues that they encountered are a classic example of this. Tesla knew that there had to be an issue in-house for the battery issues that were starting fires in their vehicles. Unlike Boeing, who had similar battery issues and had to go through outside systems to track down the issue, Tesla knows that there is an in-house problem. They can segregate the issue, research it, and the fix it more quickly than an open system would generally allow.
Isn’t It Inefficient to Have a 100% Closed System?
Most businesses today would be unable to operate on a completely closed system like the Tesla business model. Something as simple as using a Windows O/S on computers is enough to potentially cause the system to become open or at least a fusion of open and closed. It isn’t efficient for the average business to do everything. At some point, a third party is required to help facilitate at least some part of the supply chain.
For Tesla, they don’t consider the peripheral needs they have to be part of an open system. They use what they need to use, keep maintenance, research, and repair in house, and then sell their products directly to customers without any middlemen.
This perspective, however, is probably not going to hold up in the future as their business continues to expand. Part of the complimentary products that are being manufactured for their vehicles are charging stations. These stations may not work with other electric vehicles, which would greatly hinder other vehicle manufacturers from entering the market. This could create the legal conditions of a monopoly that would force Tesla to change.
How Does This Affect the Aftermarket?
Tesla has another advantage when it comes to their closed system business model: how they treat customers that didn’t directly purchase a vehicle from them. In San Diego, a salvaged Tesla Model S was restored, but the company was under no obligation to service or reactivate the vehicle whatsoever.
That’s right. Tesla can turn off a vehicle if they want and it won’t be able to run. Even if a vehicle is completely repaired and road worthy, the closed system gives Tesla the right to refuse service without a customer service nightmare. The Tesla business model also makes it possible for the company to refuse to sell items that are classified as dangerous without it being considered a discriminatory act. Why? Because the in-house R&D creates specialized knowledge that the average mechanic isn’t going to know.
It also means that the average customer is going to be giving up a lot of their personal privacy when it comes to their driving habits. The closed system helps Tesla be able to maintain and access data about every single vehicle that they sell. Each vehicle keeps track of the mileage driven, the energy that is being consumed, how fast it is being driven, and even how long an owner has the vehicle plugged into a charging station.
Owners can remove the ability of the vehicle to transmit that information, but doing so will completely void the warranty. As the salvaged Model S case proves, once the warranty is considered void, it’s almost worthless to own a Tesla vehicle because the closed system business model says that the company doesn’t have to help.
Can’t a Business Create Its Own Products And Market Them?
Microsoft was once in Tesla’s shoes. In some ways, they still are even though they are publicly traded. The argument that Tesla is making about their charging stations not being able to be compliant with other battery types is a similar argument that Microsoft made when they were accused of creating monopolistic conditions. Microsoft said that Windows couldn’t operate without Internet Explorer.
In the end, Microsoft was ordered to remove the monopolistic conditions. The Tesla business model looks to be headed down a similar path. Should that happen, that may force the company to change their business model to one that is more open. In turn, that could make it possible for states like Ohio that are concerned about the direct retail sales that Tesla makes to make the company comply with independent dealer laws.
In other words, the Tesla business model right now is a stack of dominoes that have been set up in a row. If you knock one of them down, the rest of them might just fall down as well.
Is the Closed System Business Model Right For You?
There are many favorable aspects of this type of business model, but as Apple has also discovered, there can be quite a lot of bad that comes with the good. A typical outcome of implementing this business model is that at least one segment of the population will see the company has been discriminatory and potentially practicing favoritism.
There are tough decisions ahead for the Tesla business model. Should they open it up in a limited fashion? Would it be possible to supply some parts to make the vehicle function like other vehicle manufacturers do?
The lessons learned here should put up a word of caution for a small business contemplating a similar business model. In your community, one accusation of discrimination could put you out of business.