Tesla focused on user experience over marketing. P&G learned while automotive companies ignored.
With the benefit of a dual personality, he now runs the most valuable automobile company in AmericaâŚ
First rule of innovation, avoid crowds.
In 2003, two engineers and an angel investor reached back to 1888 to borrow Nikola Teslaâs name and copy his engine design. Everything else was invented.
Tesla Motors has been headed by Elon Musk, the companyâs first angel investor, since the day he fired his co-founder and became CEO in 2007. It was his third major startup after Zip2 and Paypal. As a former graduate of Wharton and a Stanford Ph.D. candidate, he acts like an inventor and thinks like an investor. In the Musk mythology, this is an important but seldom recognized fact. (In full disclosure, after he sold the company, I followed Musk as CEO of Zip2).
With the benefit of a dual personality, part dreamer, part financier, he now runs the most valuable American automobile company (not including his other pursuits, SolarCity, Tesla, and SpaceX). One could argue both traits can be in conflict depending on the circumstance. When he was pushed out of Paypal, the dreamer was dominant. But when he nearly ran out of funding for Tesla on several occasions, the venture capital instinct kicked in. It is why he went searching for a more cost effective way to grow a small startup into a well known iconic brand.
Musk knew it was pointless to try to compete with GM and Ford on the comfortable battlefield those giants know so wellâââbig budget advertising and a huge dealer network. Spokeswoman Alexis Georgeson echoed Muskâs sentiments:
_â_The stores are our advertising. Paid advertising may be something weâll doâââyears down the road. But not now.â
To traditional marketers, this was insane. Many are convinced the best time to spend big bucks on advertising is when a company is unknown because the consumer is curious. They reflexively hit the advertising button to solve all problems as thatâs the way theyâve been brought up. At least until Musk came along. In fact, he was banking on exactly that mindset when he developed a âno advertising, no dealer networkâ strategy.
Musk foresaw great resistance to change in a 100 year old industry like automotive. He knew that could give him the time he needed to expand and experiment right under their very noses. Even today, despite Teslaâs overwhelming market success, VW chief Matthias Muller revealed in a recent WSJ article, legacy thinking is hard wired:
âOur own managers (still) remain skeptical of moves to downgrade the business of cars powered by fossil fuels. I donât know if you can imagine how difficult it is to change their mind-set.â
The brilliance of the Musk story will have many chapters. But the one that taught the world how to launch iconic brands is more significant than many realize.
If you want an insight into why Musk does things so contrary to accepted practice, you need to first understand how venture capital operates.
Tesla Model X
The success of a hi tech chief executive comes down to what youâve spent your money on and does it show results?
Second, start thinking like a venture capitalist.
The first money a startup raisesâââcalled the angel investmentâââlasts only 12â18 months. For most early stage companies, the choice of how to spend it is consequential as they have only enough money to build a product or an image, not both. When you choose image over product, Silicon Valley calls it âvaporwareâ.
That is why you never want to take a job as head of marketing for a startup.
The goal of a startup chief executive is to choose the most effective way to spend money from the time the first money is raised until you run out of cash. Because the success of a hi tech chief executive, to paraphrase Cuba Gooding, comes down to âshow me the resultsâ.
Madison Avenue advertising may be creative and it may sound glamorous, but it rarely shows tangible results in a short period of time. Smart founders know this and they simply forego promotion altogether in favor of hiring and product development. The cash constraint effect on a startup is what Samuel Johnson described when he said, âWhen a man knows he is to be hangedâŚit concentrates his mind wonderfully.â
There are two reasons why Musk had such clarity. First, he wasnât bound by past practice as a typical Detroit brand manager would beâââwith only the past as a guide to brand strategy. Musk saw he was looking at the future in which the key assets were not promotion or a dealer network, but product quality and customer enthusiasm.
The other reason penny pinching came naturally to him, it was his money. Several years before it was launched and before he became CEO, he was already making plans to spend every cent on building the right product. In 2006, Musk wrote:
The master plan is:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options.
Donât tell anyone.
Photo: Autoblog
John Wanamaker: âI know half of my advertising is wasted, I just donât know which half.â
Elon Musk: Both halves.
Third, spend more time talking to customers.
The problem every venture investor worries about is can the company scale? Another way to think about it, grow without a high âcustomer acquisition costâ? Thatâs not a big deal if you run a small winery or a cafe in Sausalito and youâre only interested in enough profit to pay the rent.
But a hi tech firm with hundreds of millions in funding needs millions of users so it can pay back the capital and then some. Think of Facebook. If they paid $100 per user during their formative years, as many traditional media companies do, how could they grow to 2 billion users? They would have never made it past the C round and Mark Zuckerberg would be just another Harvard dropout.
The need to scale with precious resources for promotion forces startups to find efficient ways to market. Google search terms and Facebook ads are examples of markets that traditional advertisers found more effective, measurable, and more targeted than a television campaign. Market strategy is about ROI, not about the glamor of making commercials on the set with Hollywood directors.
Today, no one believes the old saw attributed to Philadelphia retailer, John Wanamaker: âI know half of my advertising is wasted,â to which he added, âI just donât know which half.â
Elon Musk found the answer. Both halves are wasted.
Instead of advertising, Muskâs digital instincts led him to build a product that compelled customers to advertise for him, research for him, and spread the word contagiously, at no charge. He built the product, opened the stores, the customers came, and they posted. And they posted. And they posted.
As a blogger wrote, Tesla does not spend millions of dollars in a traditional ad campaign. They let you and I discuss it, rave about it, hate on it, or rejoice in the spirit of going electric in a Tesla, be the catalyst to a viral and brilliant marketing campaign. At the end of the day, Tesla advertising is free.
The result was that by 2015, advertising spending at Tesla was zero. At the same time GM spent over $5 billion, a sum that represented more than half their annual profit, according to Mediakix. To make the contrast even more stark, Telsaâs market cap was higher than GM or Ford or any other American automobile company.
Tesla knew something was changing in the way consumers fell in love with brands these days. It wasnât about reaching them through television anymore, but something new, something the techies call âuser experienceâ or UX.
Teslaâs UX included putting stores in malls where people could shop for the cars as easily as if they were sunglasses. Sales people werenât commissioned reps but customer service gurus who seemed not to care how many times you came to look at the vehicle. They made test driving easy. They made buying a car easy even if you live in Arizona or Texas where cars can only be sold through a dealership. These are factors in the experience that can no longer be separated from the product, and for Tesla, they are part of the marketing value.
When the Tesla was designed, every feature and metric matched up to something the consumer loved not just wanted. That made it something customers wanted to brag about, almost as if it was designed for them.
Jeff Bezos, no stranger to contrarian thinking, articulated the transformation in marketing strategy. He underscored the shift in advertising budgets from traditional marketing to stealth marketing, and in some cases, no marketing, when he wrote:
Proctor and Gamble headquarters
Iâm not interested in size at all. Iâm interested in whether we are the preferred choice of shoppers.âââP&G CEO A.G. Lafley
Fourth, once your bright idea works, get ready for everyone to follow.
While Tesla was moving ahead of the competition without spending a dime, a Midwestern giant marketing machine was watching closely. They recognized this was a game changer that would influence everything they did going forward.
Only it wasnât a competitor in Detroit. These guys were in Cincinnati.
In 2014, Proctor and Gamble announced they needed to become a more nimble company to speed up growth. The strategy they chose was to drop over half their brands. But the way to interpret that is they were dropping half their brand spending.
When they announced the shift, Chief Executive A.G. Lafley said: âP&G will shed as many as 100 brands.â He added, âIâm not interested in size at all. Iâm interested in whether we are the preferred choice of shoppers.â
P&Gâ strategy for building brands hadnât changed much since they launched Ivory Soap in 1874. The iconic marketer built brand management based on a set of beliefs that focus on product specialization and differentiation and heavy duty promotion to make the consumer aware. They were the first to discover the consumer could be targeted based on the brand values, with what adman Rosser Reeves called USP or âunique selling proposition.â
Soap was packaged two centuries ago in dense loaves sold by the slice, much like youâll find today in upscale malls selling brands like Lush Cake Soap. That was how P&G fell upon the value of brand differentiation.
The trick that made Ivory worth knowing about was it would float. Other soaps simply sank to the bottom. Why this was important rests on a fact most may not realize, people in the 1800âs took baths in rivers and streams. If your soap floats to the top while scrubbing in a stream, it is a really big deal.
But the only way to get the word out was advertising, first in print and later on national television. This was partially due to the countryâs enormous geography and distribution. Later, due to the mass reach of television, there was still nothing as efficient.
This continued to exist until the digital era when media and information habits changed so significantly. That was when marketers first began to think the old ways werenât working so well. Then they saw Tesla skip marketing altogether.
It was time to change.
Precision targeting, user-generated communication, amplification of earned media is both more efficient and more effective than any medium P&G worked with in the past.
Fifth, customer experience counts more than marketing and more than technology.
A recent New Yorker column noted the book âAbsolute Value,â by Itamar Simonson, a marketing professor at Stanford, and Emanuel Rosen, a former software executive, made the point that the rise of branding was based on a world that was too far apart, too uninformed, and too busy to research for the best product.
So marketers liked to believe their advertising was like a neighborly chat over the backyard fence. You were given a few good ideas and nice images so you would remember what to buy.
My father drove Oldsmobile cars all his life, although he never had anything very good to say about them. The switching costs were just too hard for him to even contemplate. I attribute this to his not wanting to buy a different clunker and then have to listen to Oldsmobile commercials. If you wanted to create a more Madison Avenue perfect world, dad was it.
No longer.
Today, a thoughtful consumer doesnât read Consumer Reports or a review in Wired Magazine. They simply turn to Yelp or Amazon for a world of brand switching encouragement or confirmation. Digital rankings have the power, and distributed via social media and the internet, the average consumer is practically a consumer goods genius.
P&Gâs Chief Brand Officer, Marc Pritchard
Even P&Gâs Chief Brand Officer, Marc S. Pritchard, is a true believer:
âThe potential to create business value is significantâââwith precision targeting, automated buying, selling and distribution, user-generated communication, and amplification of earned media. It is both more efficient and more effective than any medium P&G worked with in the past.â
Whether anyone outside of Silicon Valley can be adept at these fast moving technologies is another question. These are not only new, but because they are algorithmic based and AI informed. They are also intuitive, adaptive, and highly transformative. Even the best brand minds in the world donât know where it is headed:
P&Gâs Pritchard claims: âWeâve all been understandably racing to master the new technologies in this ever-changing machine, but I have a little secret for you: we will never master all these technologies. As long as we try, we will forever be on our heels. I try to simplify by taking the mystery out of the new world and telling our people to look beyond the obsession of technology and turn our attention to what really mattersâââthe consumer experience.â
His comment on the âconsumer experienceâ sounds suspiciously like something Elon Musk would say. One result of the change is the death knell of anything âtraditionalâ.
P&G recently announced it was cutting the number of ad agencies on its roster by 50% to increase efficiencies around promotional spending. The mantra they are chanting is, âWe are on a mission to become âsimpler and more focused. Three years ago, we spent nearly $8bn in advertising, including more than $2bn in agency fees and the cost to produce advertising and marketing related material.â
Everyone is trying to get into the act of digital marketing. Not all are wholesome as Ivory Soap.
Sixth, nothing will be easy going forward.
A recent PricewaterhouseCoopers study noted, â80% of consumers look at online reviews before making major purchases and have a strong influence on the decisions people make.â
Thatâs the good news.
The bad news is everyone is in the act of digital marketing, and not all of them are savory, wholesome, you might say, as Ivory Soap.
Online is driving consumers but it is also driving them away. There are two main challenges as marketers move into digital, neither of them will be easy to solve.
Rise of the haters
Oscar Munoz, United Airlines CEO
If you are a great airline brand that flies 5,000 flights and a half million passengers per day safely and without incident, you might think youâre doing a damn fine job. Not many industries can claim that kind of error rate in their operations.
But if on one of a half million flights, while following rules set by the FAA and local law enforcement, you remove a passenger and it is caught on video, youâre toast.
Everyone knows the story of Dr. Dao and Oscar Munoz, Unitedâs CEO and his ham fisted response to the altercation. The media uproar and social media trolling were historic.
If youâre a marketer, it isnât enough to say the airline handled things poorly, which they certainly did. Now every company with any consumer savvy knows if you serve the public, this could happen to you. Too many customers with too many attitudes and an anti-business and anti-establishment angst is waiting for any company dealing with the public to make one mistake. One day people are on line waiting to buy your product, the next day youâre a pariah.
For major consumer brands, this is a nightmare. That is why we canât afford to simply laugh at Unitedâs example (Delta had the same thing happen, without the benefit of a video, the following week). The economic value of a brand is dependent on how vulnerable you are and how adept you are at managing your brand on social media. That is like saying the house you bought is only as valuable as the quality of the local fire department.
Rise of the raters
Digital reviews arenât legal tender, they are what your enemies or fans have to say. The incentive for the enemy to say something bad is much greater than for your fans to say good things. Therein lies the problem. Then, reviews remain forever in the digital newsfeed.
Even P&Gâs Ivory Soap gets reviewed:
Amazon customer reviews of Ivory Soap
There arenât many lousy reviews of Ivory Soap. But thatâs not true of other products. In the era of Amazon, as a New York Post story noted, if the box you ship doesnât contain the right screws, your brand is reviewed and then screwed. If the waiter drops a spoon on the floor, your brand review is on the floor.
Amazon is aware of the problem. The company has spent hundreds of millions and years devoted to fraud crackdown, fake reviews and tricksters who look for openings, sleight of hand to fool consumers into paying higher prices or buying products that arenât genuine. In a New York Post story recently, they wrote:
Originally, fake reviews were paid for at $5 a piece, and since the Amazon crackdown, they refer to themselves as âlist optimizationâ services and charge a flat fee for obtaining hundreds of reviewers to vote positively for a product, with the intention of moving them up in the scroll of a review page. Negative votes can be as powerfulâââand toxicâââfor a competitor as can a positive review. Such reviews have been shown to âtank demand for goods that previously had been well-received.â
Digital caveat emptor, indeed. Amazon is developing a process to detect scamming and alert themselves to the occurrence:
âWe have machine-learned processes to detect inauthentic customer insights including the manipulation of helpful votes and will ban vendors, sellers and reviewers who are found to be out of compliance with our policies,â
Even still, there is a way around Amazonâs attempt at prevention. A competitor can upvote your negative reviews:
âI think I have a competitor who is up voting my bad reviewsâ a seller with the user name Ly Yu recently posted on Amazonâs sellers forum on Facebook, asking others whether theyâd had a similar experience. The merchant reached out to a âlist optimizationâ vendor who wrote âoffered to âclean upâ his problem for $350 or to provide âlisting maintenanceâ for $1,000 a month.â
What does that mean for marketers? It means they are pulling back on digital until this is solved.
Once again, P&G is leading the charge. The adage, âif you canât beat themâ now ends in âleave them.â The company just announced they will reduce digital ad spending by $140m until concerns are resolved in the area of âfalse metrics, viewability, and fraud.â
Those arenât encouraging words. The online space may become the primary builder of brands, but it also building fear that is driving away marketers.
Walmart shopping aisle
Some consumers dislike brands that preach American values and donât trust global companies to behave responsibly.
Seventh, consumers are choosing sides in the âgame of brandsâ.
The impact of social media on consumers has turned ordinary shoppers into highly idiosyncratic and independent thinkers. This has transformed targeted buyer demographics into cult like gatherings that fit into a larger frameworks that are brand independent, brand agnostic, brand loyal, or brand repulsed. Now, itâs not even about your brand, but whether someone likes the idea of a brand at all.
According to John Quelch, Charles Edward Wilson Professor of Business Administration at Harvard Business School, writing in the Harvard Business Review, the consumer segments are:
Brand Believers
The second-largest segment, at 23%, consisted of consumers who are less discerning about, but more ardent in their admiration of, transnational companies. They see global brands as quality products and readily buy into the myths they author. They arenât nearly as concerned with those companiesâ social responsibilities as are the global citizens.
Brand Deniers
Thirteen percent of consumers are skeptical that transnational companies deliver higher quality goods. They dislike brands that preach American values and donât trust global companies to behave responsibly. Their brand preferences indicate that they try to avoid doing business with transnational firms. The antiglobalsâ numbers are relatively high in the UK and China and relatively low in Egypt and South Africa.
Brand Agnostics
Such consumers donât base purchase decisions on a brandâs global attributes. Instead, they evaluate a global product by the same criteria they use to judge local brands and donât regard its global nature as meriting special consideration. While global agnostics typically number around 8% of the population, thereâs a higher percentage of them in the United States and South Africa and a relatively low percentage in Japan, Indonesia, China, and Turkey.
Brandlessness
There is even a market for non-brands, more than generics which are closer to knock offs, but brands that eschew branding altogether in an attempt to distinguish themselves. Sort of like someone wearing a non-designer label to a black tie affair to show sympathy with the downtrodden.
A new company, Brandless, is leading the charge here. They see their mission as bringing great products, sustainable, transparent, community driven values for $3 per product. Whether the product can fight Amazon/Whole Foods and other categories remains to be seen. But it is an entry into an arena that is tired of branded goods.
âWe will never master these technologies, we will be forever on our heels.â
Where does this leave the rest of us?
Marketing has changed fundamentally and forever.
While big budget, Super Bowl type advertising will always be a factor, the consumer has abandoned the playing field. They have just stopped caring about ads in the same way they seem to have stopped caring about network news, and old reruns. Journalism is already in decline, this could push it over the cliff. Will Facebook and Twitter step in to fill the gap? They are trying to with numerous quality and anti-trolling projects to their credit. But the media landscape will change because viewership by the consumer is the venture capitalist of entertainment and news.
For someone like Teslaâs Musk, that is a good thing. He knows how to manipulate new media. For the rest of us watching at home, as P&Gâs Pritchard said, âwe will never master these technologies, we will be forever on our heels.â At least we can take some comfort that the best branding minds in the world feel as confused as we do.