Years ago, when Tesla (TSLA 12.06%) began selling its electric vehicles, it opted to sell them directly to consumers via its website. No dealers, no middlemen, just a car company selling cars to people who want them.
Other automakers balked at the idea. Some said it would never work. Dealers, in particular, despise the idea.
But now, based on the research on new car sales from iSeeCars, Tesla's approach to selling cars stands in stark contrast to the massive markups auto dealers are charging customers right now -- some as high as 24% over the manufacturer's suggested retail price (MSRP).
The current markups prove that Tesla was right to sell directly to consumers, and other automakers could eventually come around to the idea.
Image source: Getty Images.
Only the naive charge the asking price
Analysts at iSeeCars recently showed that new cars are being marked up, on average, 10% over MSRP.
And for some of the most in-demand models (I'm looking at you, Jeep Wrangler!), dealers are asking up to 24% over MSRP. I'll give you a minute to let that sticker shock sink in.
It should come as no surprise then that the median new car price in August reached an all-time high of $48,301, according to Kelly Blue Book, an 11% increase from one year ago.
Part of the problems is rising material costs, prolonged labor shortages, and a lack of semiconductors, which have resulted in fewer cars being produced than consumers want.
But the problem is also that many dealers are tacking on their own price surges in addition to the rising costs of the vehicles.
And this is where Tesla's direct-to-consumer selling strategy sets it apart. While Tesla has had to increase the price of its vehicles to balance out rising material costs, there's no one else tacking on an additional fee after that.
A new model
What Tesla did years ago was create a better business model for the automotive industry -- and other automakers know it.
Ford (F 0.08%) CEO Jim Farley said earlier this year that the current vehicle-distribution model costs his company $2,000 more per vehicle compared to Tesla.
"Our model is messed up. We spend $600 or $700 on the vehicle to promote it, and we spend nothing post-warranty on the customer experience," Farley said.
Farley and other automotive CEOs know far too well that Tesla's margins easily outpace theirs, and they see the pivot to EVs as the perfect time to close the gap. The chart below shows just how much better Tesla's operating margins are compared to Ford and General Motors:
Data from YCharts.
Ford recently split its automotive company into two divisions, one focusing on its gas-powered vehicles and the other solely on EVs. That move is likely more than just a way to divide up resources and could be the best way for the legacy automaker to transition to selling cars directly to consumers.
(Almost) Everybody wins
Ford and other automakers adopting Tesla's direct-to-consumer selling approach won't be easy. In many states, laws governing how automakers sell cars could keep this old model around much longer than is useful.
But Tesla has proved that selling vehicles directly to consumers is not just possible; it's more profitable.
And Ford and its peers can't get that out of their heads. At a time when costs are soaring, and the shift to EVs is well underway, the automotive industry should be moving toward doing what's best for companies and consumers -- direct sales.
Dealers won't win in this scenario, and their current price gouging proves they may not deserve to win in the long term. On the other hand, Tesla left the dealer model behind years ago and is all the better for it.
When other automakers follow suit, a better customer experience and higher profit margins will likely follow.
