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What Tesla knows about car sales that no one else has figured out

Tesla

Tesla I bought my Tesla in 2015 and I only half-joke that it is my largest online purchase ever.

In fact, I did everything other than take delivery of the car online. While I did get on the phone and ask a series of technical questions, like “How long will the battery last?” and I did meet with Tesla sales people in their showroom, that was nothing but research. I did also complete a test drive, but the final decisions regarding options, color and purchase vs. lease were all done online, not to mention putting down a deposit and frankly, managing my ownership of that same car through my profile on the website ever since taking delivery. No visit to a dealership required.

You cannot do this with any other vehicle that I am aware of.

This comparison arises because my wife and I just went through the process of buying her a new vehicle, a GMC truck. It seems, however, the experience we had, and have repeated a few times with other new car purchases in the past, is virtually the same regardless of the make of car. These days, all automakers (in North America at least) have a website where you can “Build your vehicle”. It is straightforward; you pick the model, color, drivetrain, interior, wheels, options, etc. When you have done all that, you get handed over to a dealer.

Why the last step, I hear you asking. Because consumers never actually buy a car from GM, Ford or any other automaker. By law, we can only purchase cars from dealerships. That is what Tesla has eliminated with their new sales model and why you could not buy a Tesla in New Jersey, Arizona, Michigan, Maryland and Texas initially. Those states maintained laws that prohibited consumers from buying cars direct from automakers.

It seems a little crazy that consumers are prohibited by law from buying a car direct from the automaker but it is not nearly as bizarre as the arcane system dealerships have trapped themselves and their customers in for the purchase of a vehicle. While it may start on a website these days, it always ends in a dealership and with a multi-step process that is so inefficient, painful and disjointed that it makes Soviet era Russia seem modern by comparison.

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First, we start with the salesperson. The smile, the pitch, the useful information about each model, perhaps even the white shoes with white belt. All of it designed to hone in on the “right car for you”. You may already have done that on the website, so next is the test drive.

The test drive is an obligatory process and one even purchasers in Tesla’s new sales model of car buying want to do. Some dealers will even bring the car to your home at an appointed time, as Tesla will do, to make this second step as seamless and as fun as it should be.

The third step is the price negotiation; options, color, interior, etc. Didn’t we already do this on the website? Perhaps, and that may speed things along except for the fact that in the dealership model the cars in inventory are the ones the dealer wants to sell you. As a result, the sales person engages in this annoying process of matching what they have to sell you with what you actually want. Okay, but why can’t you just make what I want like Tesla does?

The fourth step (or is it step 3B?) is where the sales person searches for the car you are looking for. Where Tesla simply builds the car you have designed, dealers actually own the cars on their lots so the salesperson will direct you to a vehicle as similar as possible to the one you want on their lot or on another dealer’s lot elsewhere. If you choose a factory order, it seems that all price negotiation goes out the window. The “customization” within the dealership model appears to be the salesperson selling final add-ons like undercoating (famous for being something that provides un-needed protection at some cost to the consumer and a tidy profit for the dealer), theft protection, Sirius XM radio or other after-market products and services.

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The next step is when the sales manager is brought in to “finalize” the sale. This always seems to me like the salesperson you have just been dealing with for the last hour is not authorized to close the deal. Like they are in training or something, so they need to bring in the manager to finish it all off. That can get a little sticky but once you are through that step you can press on…

If you are leasing the vehicle you next go to the finance or leasing department, something you would have to do even if you were leasing a Tesla, but it is yet another step, it involves yet another person in another office and it can take an hour itself as you comb through the most confounding mathematical exercise ever conceived. I have spent my entire 26 year career in finance, and consider myself fairly sophisticated in understand quite complex financing structures, but the leasing department takes the prize for most complicated and opaque. Even after an hour of checking and re-checking certain figures to ensure I understood roughly how they were being calculated, there remained portions of the calculation I simply had to take their word for how it was being done. Most consumers, I believe, simply focus on the bottom line which is the monthly payment. And frankly that is how most cars in North America get sold –it is almost entirely a function of the monthly payment. In our purchase, we were now on to the sixth step but it was dark by now, and I was feeling defeated by the army of dealership soldiers I was working my way through.

The sixth step was insurance. On to another office within the dealership, yet another person involved in the process (we are at four so far, not including the receptionist). Auto insurance is a necessity but now it is approaching 10pm and we are hours into the process. The sun has long set and I have to leave to pick up one of our kids so my wife presses on with the actual delivery of the car. Are we at step seven? I lost track. A brief explanation of the many features of the new car, a fifth person to affix the license plate, insurance sticker to ensure this hulk is roadworthy and we are finally done. Any remaining explanation is left for another time because the purchaser has long since run out of interest in the process. Phew, can I go home now?

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As it turns out, the dealerships, and the car companies for that matter, don’t make much money selling cars. All the profit for the dealer is in the optional extras sold at the end and the follow on service of the vehicle. And in the lease. I recall seeing a brilliant comment by a research analyst covering the auto sector that truly captured the essence of the auto business: in this case it was Ford being described a money-losing manufacturer of cars with a profitable bank on the side (referring to the fact that they made all their money leasing cars, not selling them).

How does it work when you buy a Tesla? Well, when you make the decision a bright light appears, angels sing and and the car appears in your driveway. Well, not exactly but it sure seemed like a close description compared to buying a car from a dinosaur dealer.

As I stated above, I consider my Tesla to be my largest ever online purchase. Once I had configured the car on their website, put down a $2,500 deposit with my credit card, I got a message: “Thank you for your purchase. We will hold your deposit for 10 days before starting the build process. You are able to make any changes to the vehicle whatsoever during these 10 days. At the end of the 10 days we will send you another email notifying you that we have taken your deposit are about to start building your car to your specifications. You can still make changes but some changes may result in an additional $500 charge and/or a change in the delivery date.”

Presumably you can change something like the wheels anytime prior to when they are put on the car but changing the color after it has been painted would result in a charge and a change in the delivery time. A little less than two weeks after the deposit was taken I got a VIN number and a couple of weeks after that the car was made and I was selecting a delivery date. Now that was simple, transparent and it felt custom made. But not exactly rocket science, and I still had to take delivery.

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When it came time to pick up the car it was such a completely different experience from the GM dealer. The same obligatory details needed to be completed, such as lease details if that is your choice, and insurance, but at Tesla they are all handled by the same person. One person. Not multiple departments. And all while I was seated in the same chair. The vast majority of time I spent at the dealer receiving the car I had bought was all spent learning how it works, basic features and simple setup (like how to charge it, connecting to Bluetooth or where the windshield wiper fluid is refilled).

All the awkward steps involving multiple people, separate departments and individual offices each run by a specific manager had all been taken care of online. Why? Because I was buying the car from Tesla, not from a dinosaur that already had an inventory of cars they needed to move. My car was factory ordered, made in three weeks and delivered in another three weeks. The price was the price and the only haggling arises if you are factoring in the value of a trade-in.

The best part is, this way of buying a car is not proprietary to Tesla. Anyone can do it. The traditional auto makers, however, would have to unwind their entire dealership network in order to do what Tesla does so it is not likely to happen with them anytime soon. Hopefully, the moment one auto maker adopts Tesla’s online configuration and the direct purchase model, the others will be forced to follow. And then, the painful, exhausting and unnecessarily complex process of buying a car will be replaced with something more akin to a purchase on Amazon.

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About The Author /

Blake Corbet
Blake Corbet is co-head of Investment Banking at PI Financial. He joined PI in November 2010 and brings over 25 years of investment banking experience and knowledge from working in Vancouver, Toronto, London and New York. Mr. Corbet started his banking career at Haywood Securities in Vancouver in 1990 as a banking analyst. In 1992, he moved to London, England where he worked for Salomon Brothers there and in New York for 5 years. After that, he spent 8 years with CIBC World Markets in Toronto. Mr. Corbet returned to Haywood in 2004 as Managing Director, Investment Banking covering the Technology and non-resource sectors. During the past 7 years at PI Financial, he has completed a variety of financing and advisory transactions across the Technology, Telecom and Healthcare sectors. Mr. Corbet has an Economics Degree from UBC and has been actively involved in the community.

Comment

  1. Best comparison between the dealership model and the Tesla model that I’ve read in a very long time.

  2. Why does the purchase price matter when comparing the dealership model to Tesla’s model?

  3. It doesn’t in the view of the writer. There probably are those that think it does matter. I just find it ironic that it wasn’t mentioned.

  4. Ironic? The writer was pointing out the differences in how cars are delivered to clients. Of course current Tesla models are more expensive than your average car but so are high-end Mercedes, BMWs, etc. Just because a Ford or Chevy offer some inexpensive models does not mean that their customers have to put up with the dealership delivery model. Wait a minute. They do because some states have laws that protect the dealership delivery monopoly.

  5. Good read. Well done, the dealership landscape does need to evolve, but not like Amazon. Like Amazon! I just attempted a lager TV purchase and now after 10-12 days still have to go retrieve my TV from a Fed EX site! Not a great experience and a complete waist of my time trying to get something I NEVER even got to see in person! So you can sit in your underwear and order stuff that you hope is what you want so you save a buck on Amazon, and I will just go to the store and get it now and save the, hope I will like it feeling… Oh and have it now.Thank you

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