Elon Musk Knows The Future of Advertising Is No Advertising
Tesla has become the most valuable automobile brand in America after shunning a dealer network and discarding traditional advertising. It turns out these were not coincidences.
“Ads are dead. The future is about things people want, not things they must endure.” — Lou Paskalis, Bank of America
First rule of innovation, avoid crowds.
In 2003, two engineers and an angel investor reached back to 1888 to borrow Nikola Tesla’s name and copy his engine design. After that, they just invented stuff.
Tesla Motors has been headed by Elon Musk, the company’s 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 departed and sold the company, I was named 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 and SpaceX). Musk knew it was pointless to try to compete with GM and Ford on the comfortable battlefield those giants know so well — big budget advertising and a huge dealer network. Spokeswoman Alexis Georgeson echoed Musk’s sentiments:
“The stores are our advertising. Paid advertising may be something we’ll do — years down the road. But not now.”
Traditional marketers would say, “what the hell?”
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 Tesla’s overwhelming market success, VW chief Matthias Muller revealed in a recent WSJ article, legacy thinking is hard wired:
“Our own managers (still) remain skeptical of moves to downgrade the business of cars powered by fossil fuels. I don’t know if you can imagine how difficult it is to change their mind-set.”
The Musk story will have many brilliant chapters. But the one that taught the world how to launch iconic brands “on the cheap” is a more significant disruptor than many realize.
If you want an insight into why Musk does things so contrary to accepted practice, you need to first understand how a venture capitalist thinks.
The goal of a Silicon Valley startup chief executive is to choose the most effective way to spend the money from the time it’s raised until the company runs out of cash, and has to raise a second round. Because the new investors are only interested in one thing, to paraphrase Cuba Gooding, ‘show me the results’.
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 like Musk simply forego promotion in favor of hiring and product development. The cash constraint effect on a startup is what Samuel Johnson described when he said, “When a man knows he is to be hanged…it concentrates his mind wonderfully.”
No one in automotive history ever even remotely considered ‘marketing lite’ could be applied to the car business. The people in Detroit with huge advertising budgets don’t spend a lot of time wondering if it works. They like to fall back on the famous expression by Philadelphia retailer, John Wanamaker: “I know half of my advertising is wasted, I just don’t know which half.”
To Elon Musk the answer was obvious. Both halves are wasted.
Instead of advertising, Musk’s 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. In taking the path less traveled by, he changed automotive and marketing history.
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, Telsa’s market cap was higher than GM or Ford or any other American automobile company.
Musk knew the way consumers fell in love with brands was changing. Part of this is attributed to Google’s epiphany that “search” answers consumer questions more powerfully than a glossy image, and it had far reaching consequences. Suddenly, advertising seemed old fashioned and slow moving. This led him to realize he could shift resources away from Madison Avenue without disturbing the business model. Then he discovered what really moved the consumer. The techies call it ‘user experience’ or UX.
UX is more than the product. For Tesla, it includes putting stores in malls where people could shop for the cars as easily as if they were sunglasses. Sales people weren’t 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.
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, “The balance of power is shifting toward consumers and away from companies. The right way to respond to this if you are a company is to put the vast majority of your energy, attention, and dollars into building a great product and a smaller amount into shouting about it.”
While P&G Was Watching
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 wasn’t a competitor in Detroit. These guys were in Cincinnati.
In 2014, Proctor and Gamble announced they needed to become a more nimble company and 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: “P&G will shed as many as 100 brands.” He added, “I’m not interested in size at all. I’m interested in whether we are the preferred choice of shoppers.”
P&G’ strategy for building brands hadn’t changed much since they launched Ivory Soap in 1874. They were the first to discover the consumer could be targeted based on the brand values, with what adman Rosser Reeves called USP or “unique selling proposition.”
The USP of Ivory Soap was that it floated. Other soaps simply sank to the bottom. Why this was important rests on a fact most may not realize, people in the 1800’s took baths in rivers and streams. If your soap floats to the top while scrubbing in a stream, that’s a big deal.
But the only way to get the word out was to advertise, first in print and later on national television. This continued to exist until the digital era when our media and information habits changed so significantly. That was when marketers first began to think the old ways weren’t working. Then they saw Tesla skip advertising altogether.
It meant it was time for a change.
Today, a thoughtful consumer doesn’t read Consumer Reports or a review in the local newspaper for the latest product information. 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.
Even P&G’s Chief Brand Officer, Marc S. Pritchard, is a believer:
“The potential to create business value is significant — with 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.”
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 like P&G’s Pritchard aren’t sure where it is headed:
“We’ve 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 matters — the consumer experience.”
His comment on the ‘consumer experience’ sounds suspiciously like something Elon Musk would say. One result of the change in focus to digital and analytical marketing is the death knell of anything ‘traditional’.
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, “We are on a mission to become “simpler 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.”
What we used to call marketing has changed fundamentally and forever.
While big budget, Super Bowl type advertising will always be a factor in creating a mega brand, the consumer has abandoned the playing field in other ways. 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 Tesla’s Musk, that is a good thing. He not only knows how to manipulate new media, he knows how to build brands without spending a cent on traditional marketing, which is why he may as well be P&G’s marketing guru.
The need for humility in the face of monumental change may be helpful in guiding us down the right path, as P&G’s Pritchard said, “we will never master these technologies, we will be forever on our heels.” At least we can take some comfort the best branding minds in the world are as confused as the rest of us.