What Drives Consumer Demand for Tesla?

Tesla Motors, Inc. (TSLA) has a sort of cult-like following for its cars, and even though there are relatively few actual consumers of these cars (when compared to the overall automobile market), the excitement and intrigue are palpable. But what drives the demand for Tesla cars?

Demand for electric vehicles (EVs) is driven by two key factors:

• Cost of fossil fuels (gasoline): AAA concluded “half of US adults consider gas prices to be ‘too high’ when it reaches $3.44 per gallon... 90% believe gas is too high when the price reaches $4.00 per gallon”. There is a strong income effect when gas prices are lowered. The lower the cost of oil, the greater the level of discretionary income. The opposite is true with high prices. When gas prices are unusually high for an extended period of time, consumers look to replace automobiles that get fewer miles per gallon (MPG). These actions spur the demand for more energy efficient vehicles, such as EVs.
• Desire to lower carbon footprint: Eco-friendly consumers may purchase pure electric or hybrid gas/electric automobiles. This type of demand is less elastic, meaning it does not change with the cost of fuel. Eco-friendly demand is influenced by the compelling desire to reduce carbon emissions. 

Tesla, in addition to the demand drivers listed above, has demand driven by the luxury branding of its automobiles. Tesla’s brand recognition and perceived elite status increase demand for these vehicles. 

Tesla Buyer Profile

Tesla established a marketing plan in 2015, detailing the current target individual as “business executives and entrepreneurs who are city dwellers, tech-savvy and green-friendly…wealthy, early adopters in the upper to middle class.” Their customers are mostly males looking for a premium luxury car. These individuals currently own other luxury brands, notably BMW, Mercedes, and Audi. A study conducted by Edmunds.com echoed this target. Edmunds.com created the following profile of current Tesla Model S owners:

The Model S

Source: Edmunds.com

Tesla, recognizing the need to expand its target to reach a greater customer base, is focused on people in their 20’s to young 40’s in three categories: eco-friendly, tech-savvy, and entry-level luxury buyers. 

Substitution Effect

Tesla is vying for market share from various segments of the automobile industry. Consumers are substituting better-known conventional cars and even common hybrid vehicles for Tesla. According to recent data from IHS automotive analyst Tom Libby, 25.3% of Tesla buyers in the US traded a Toyota for a Tesla. The most common vehicle traded for the Model S is the Toyota Prius. The substitution effect also occurs in the luxury buyer category. Ten percent of consumers who purchased Tesla traded their Mercedes and BMW for it. But the greatest substitution comes from the tech-savvy/luxury group who tend to buy more exotic cars. Individuals that own a McLaren supercar are the most likely to buy a Tesla, followed closely by Lotus, Ferrari, Aston Martin, and Maserati owners.

The Bottom Line

The key factors that drive demand for all EVs involve the cost of gasoline, the available features (all-wheel drive, sedan versus larger vehicles), availability of battery charging stations, and the appeal of the “green” movement. Tesla did not invent the EV market, but it has brought to it elements of luxury and elite status that seem to have captivated some segments of the market. The next steps are to penetrate the “mainstream” market, to capture Generation Y consumers, and to lower price points.