Refusing to spend any money on advertising yet, electric-car maker Tesla Motors (NASDAQ:TSLA) has historically relied heavily on word-of-mouth marketing and test drives to increase sales. While these continue to be the company's primary means for demand generation, Tesla began testing a way to accelerate word-of-mouth marketing in 2015: a referral program. Announcing its fourth version of the referral program this weekend, it has clearly been a success for the company.
Model X joins the referral program
Beginning on May 30 and running until July 15, Tesla's newest referral program is particularly notable because it includes both Model S and Model X for the first time. Until now, Tesla has avoided including Model X in the program. Model X production had not yet reached meaningful levels, so Tesla didn't want to unnecessarily boost demand when it couldn't fulfill new orders. However, as Tesla continues to increase production of Model X, the company now appears ready to begin pulling some demand-generation levers for the new SUV.
The new referral program gives customers buying a Model S or X a $1,000 credit toward the purchase price. With Model S and X starting at $76,500 and $83,000 respectively, the credit certainly isn't a game-changer -- but it may be significant enough to generate some incremental interest.
To encourage owners to participate in the rerral program, Tesla offers a range of perks. Most notably, every referral enters the referring Tesla owner into a drawing to win a fully loaded Model X. Other referral incentives include Tesla-branded clothing and accessories, invitations to Tesla's Gigafactory grand opening event in July, and 21-inch custom wheels. The specific benefits a referrer qualifies for depend on the number of qualifying referrals.
The referral program continues to show the company's dependence on its loyal customer base for marketing.
"We know that without our customers, we would not be where we are today," Tesla said.
Why Tesla prefers a referral program to paid advertising
Tesla's referral program has outcomes and benefits that aren't as easily achieved through traditional advertising.
First, it passes the cost of customer acquisition from its retail and sales team on to the customer -- a smart move for a company that has seen word-of-mouth marketing serve as a boon to sales in the past. Tesla CEO Elon Musk estimated last July that it costs Tesla about $2,000 or more to sell a Model S through one of its stores rather than directly to a customer. In other words, a successful referral program could mean the company won't need to open as many new stores in the future as it would without the program.
Second, and perhaps perhaps even more importantly, Tesla explained that a referral program gives the company a better sense of where it may have strong markets for its vehicles.
Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.