Lessons From Tesla – Segment Sequencing To Build A Brand

tesla-product-roadmapI’ve had a series of Tesla posts on my mind for a while, but finding the time to write them has been elusive until now. I’ll post them over the next few weeks.

Tesla is today’s “It Car” – the cool, sexy, electric performance vehicle of choice. Who wouldn’t want to take a Model S for a spin? While there is a lot to admire about Tesla’s vehicles, Tesla Motors has also been masterfully executing its business strategy. For those paying attention, Tesla’s business activities can teach important lessons about bringing innovative products to market. Medical device companies could learn a thing or two. Today I’d like to talk about segmentation strategy and building a brand.

When Toyota (with the Prius) and Chevy (with the Volt) looked at auto market segmentation, they saw clearly that the small car consumer segment was the segment most conscious of fuel economy. Pretty obvious, right? Electric/hybrid technology can make small cars even more fuel efficient, even if the upfront costs might be a little higher. So Toyota and Chevy designed their vehicles for that small car market segment – a segment which is quite large and also very price sensitive.

Tesla looked at the market differently – understanding the full-stack automotive value chain / supply chain. Tesla thought about the longer term. Tesla saw that generating energy at a centralized electric power plant and transmitting it over power lines to each vehicle should become inherently more energy efficient than powering a fleet of vehicles via fleets of combustion engines. Tesla concluded that over time, all cars should be electric, and gas-powered vehicles should become obsolete. In Tesla’s view, the question was no longer which segment to enter with electric technology, but which segment to enter first.

Tesla didn’t ask which segment is the most fuel-conscious, but which segment enabled the company to build an innovative motor vehicle company for the long term. A new company needs to establish its brand identity. Think about Tesla’s brand, and ask yourself if Tesla could have created the same brand identity if it started by competing against the Prius and Volt in the small car segment. Tesla’s segment of choice was the lower volume, price-insensitive performance-car segment. Tesla’s choice enabled them to develop their brand, establish premium pricing, and earn significant unit gross margins. Tesla chose a segment where they could capture value, and not compete it away. Tesla established a beachhead in the performance-car segment first, and over time began moving to segments lower in price and higher in volume. Tesla’s brand identity will ultimately enable a premium-priced offering in the family-car segment, a different result from the approach of Chevy and Toyota.

At the same time, Tesla’s initial low-volume-segment strategy matched its operational and financial capacity.

Likewise, in medical devices, initial market segment selection has downstream consequences. Think long term about all the segments in which your innovation might play, and ask the following:

  • What are all the segments might you enter in the next ten-to-fifteen years?
  • Which segment(s) enable you to establish your brand most effectively?
  • Which segment(s) enable you to capture value early? An early positive gross margin helps fund investments in future product development.
  • Which segment(s) offer the highest value per-customer, for each of the four-part medical device customer: patient, physician, provider, payer?
  • How might you sequence segments over time to grow your business while building your brand?
  • How do you match your market segmentation strategy to your operational and financial capacity?

Sometimes, as with TAVI and TAVR, segment strategy is highly constrained by clinical and regulatory requirements. But many other innovative medical devices can define their market segment sequencing. The obvious choice may not always be the best.

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