Many of you will have seen that at the end of last month Tesla launched their affordable, mass-market electric vehicle — the Model 3. You may know someone who has put a deposit down for one, or even done so yourself. It’s a pretty remarkable achievement — an attractive, functional electric vehicle for USD$35,000 is no mean feat.
So how did Tesla achieve such a milestone? Tesla launched with an expensive, low-volume sports car (The Roadster) and then a mid-range mass-market car (The Model S, though here in Australia at least, the Model S is a fair few rungs above mid-range) and now the Model 3. They actually developed an SUV between the Model S and the Model 3 called the Model X which was a pivot in the strategy (see below) and gave them access to the lucrative SUV market.
Regardless, they needed early adopters to purchase the Roadster and Model S to fund further development and avoid raising eye-watering amounts of equity and debt-based capital. Some would argue Tesla have raised eye-watering amounts of capital anyway, but that’s a story for another post. Essentially it’s a hybrid debt/crowdfunding model on a very large scale. What’s interesting about this narrative, though, is that Tesla weren’t selling cars (and doesn’t). They sell an experience (any readers who haven’t driven a Tesla, I highly recommend you find a way to), they sell aesthetics (their cars are pretty high on most people’s list of attractive cars out there), and they sell environmental hoity toitiness (very hard to quantify but a unique value proposition nonetheless). They are selling a premium car experience, not the car itself.
Tesla are getting impressive traction in the home battery space, but not by selling energy.
And Tesla are getting impressive traction in the home battery space by not selling energy. If they were selling energy they’d have a retail offering and it would be a commercial no-brainer to buy a battery. Grant wrote about batteries achieving grid parity back in November last year when he discussed the rapidly improving economics of home batteries. For most of us, though, it doesn’t make sense to buy a battery right now but very very soon it will. To illustrate, let’s look at Tesla’s home battery product journey.
They had a vision of a distributed, affordable sustainable energy system. They built a strategy around how to achieve this — leverage their car battery technology to provide stationary energy storage systems to bolster existing rooftop solar systems. And finally a product — repackage their car batteries into something people would be excited to hang in their garage and sell them even though they were prohibitively expensive.
This is broadly in keeping with Tesla’s electric vehicle strategy and, to an extent, follows the lean startup principles developed by Eric Ries and illustrated in his book by the same name. The vision is the foundation for the strategy which supports the product.
Under lean startup, refinement of the product is iterative and rapid, leading to optimisation. Digital technology companies do this very rapidly, even releasing new software versions intra-day to assess customer reactions. This concept is at the heart of lean startup and can lead to early criticism of a product because of a lack of refinement. This is inherent to the culture, with famed Silicon Valley venture capitalist and early Apple employee Guy Kawasaki quoted as saying, “If you are not embarrassed by the first version of your product, you’ve launched too late.”
Guy Kawasaki: “If you are not embarrassed by the first version of your product, you’ve launched too late.”
Tesla has done this too, with the first version of their home battery, the Powerwall 1, suffering from both industry and customer criticism. They launched a couple of sizes and configurations and in some cases have pulled them as learnings on their efficacy with customers were obtained. And just 18 months after the launch of the Powerwall 1, Tesla launched the Powerwall 2 which has double the capacity and an inbuilt inverter at a more competitive price point. I’m sure they learned a lot about what their customer wants by launching the Powerwall 1, albeit before it was technically optimised, hence the new product release so quickly after the launch of the first version.
Regardless, the Powerwall 1 obtained considerable traction (up to 100,000 reservations made) which proved that the market existed. And it didn’t matter that it wasn’t technically optimised, because for the early adopters who could afford a solar system and a Powerwall the payback of the system was not the driver for their actions. This challenged many in the industry approaching home batteries with purely economic rationalist mindsets.
These customers sought premium electrons — and they got ‘em — because a sleek Powerwall hanging up in the garage is a really good barbeque conversation starter even if the power consumed is exactly the same in quality as before battery installation. And it has started a global, mainstream conversation on distributed energy storage — a critical part of our clean energy future — which is good for battery manufacturers other than Tesla as well because it lifts visibility for the whole sector.
Posted by Darius Salgo, CEO of Nexergy.
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