Great products generally don't need much -- or even any -- advertising to sell well. The products sell themselves. That was the case with Apple's iPhones in the early days.
But great products advertised well could be game-changing, as evident from the overwhelming success of Apple products -- especially iPhones -- in recent years.
While Tesla (TSLA -5.59%) has generally avoided the use of advertising in the past, it has now shifted course to embrace ads as it goes beyond early adopters to seek out mass market consumers.
And that's probably an intelligent move.
Image source: Getty Images.
Improving branding and market awareness
Tesla is an unconventional company. One of the significant differences between it and conventional car producers is that Tesla doesn't engage in advertising to sell its products. Instead, it has relied on generating buzz and attracting customers through word of mouth, social media, and innovative product launches by its one-of-a-kind CEO, Elon Musk. And, of course, well-designed electric cars sell themselves.
The approach has historically worked well for the company as it created a strong following among its dedicated enthusiasts -- those interested in cutting-edge electric cars and environmental sustainability. It is also a highly profitable strategy, with Tesla's selling, general, and administrative costs standing at 5% of revenue in 2022 -- much lower than General Motors' 6.8% ratio -- even though the former has less than 40% of the latter's revenue.
The downside of such a strategy is that Tesla has little presence among people who are less active on social media -- especially the mass market consumers with little knowledge about Tesla's offerings. Moreover, it will probably start losing its voice as the electric vehicle (EV) market becomes more crowded, with competitors introducing more electric cars over time.
With a proper advertising and branding strategy, Tesla can reach a wider audience and actively build a brand image to differentiate itself from the pack. It can also showcase its cars' latest features and benefits, better educating potential consumers on the advantages of owning Tesla cars.
Ultimately, a strong brand image and improved market awareness will improve sales conversion later, cementing Tesla's leading position in the EV industry.
Becoming the largest car producer
Tesla has been a great success story, but Musk wants more for the company. One of his ambitious goals is to sell 20 million electric cars by 2030. For perspective, the world's largest car manufacturer, Toyota, sold nearly 10 million cars in 2022 while Tesla sold just 1.37 million vehicles.
Tesla needs all the tools (and more) to hit its goal. The company has already embarked on a global price reduction campaign to increase sales volume to make its car more affordable. As sales grow, Tesla will have economies of scale to reduce production costs, allowing it to lower selling prices further and boost sales volume.
Advertising will be another essential weapon in its arsenal to help grow its sales volume. The most apparent effect is that effective advertising can help drive consumer demand and increase sales. Tesla can target new market segments locally and overseas via traditional advertising channels like TV and radio to reach new potential customers.
In its advertising campaign, Tesla can highlight to potential customers features like safety, environmental friendliness, and technological features, which will help attract the right customers and increase sales conversion. Such an advertising campaign can also distinguish Tesla from other car manufacturers, positioning it as a premium product for consumers wanting to buy cars with these features.
Overall, advertising will be a powerful tool for Tesla to expand its market reach, differentiate itself from competitors, and increase sales revenue.
What does it mean for investors?
Tesla's decision to embrace advertising could be game-changing, but it wouldn't happen overnight.
Delivering the desired result will take many years of well-designed, well-executed advertising campaigns. In other words, the company must be patient to reap the benefit of its advertising endeavor.
Likewise, investors should not expect significant transformation to take place immediately. Instead, they can stay optimistic, knowing that Tesla is doing the right thing to improve its long-term competitiveness.
