Tesla revealed a concept for the Ghostgrilled Killah better known as the Model 3. Im going to ELI5 profitability (that’s Explain Like I’m Five-ish, to all you ol’ fogeys) and hopefully make sense of why a technology company building a car is worth more than a car company building a car.
Let’s cap Tesla at 400,000 pre-orders at $1,000 each for a $35,000 car. That equates to about 11,428 cars paid for at that retail price. The Nissan LEAF had over 17,000 sales in the US in 2015. Now you may be thinking, “Wow, Im surprised so many LEAFs were sold!” Me too!! But let’s focus on something interesting instead.
With 400,000 pre-orders, Tesla would accumulate 11,428 cars paid for at retail without building a DAMN THING! That’s as impressive as it is frightening! That’s even worse than selling nothing at all because you’re at least guaranteed to be getting what you paid for when you buy nothing! With that 400,000 pre-order limit, Tesla could potentially make $400,000,000 for showing a concept car.
For. Showing. A. CONCEPT. CAR!
That’s not even its final form!! It’s just Part 1!! Part 2 will have an interior!!! DAFAQ??!!!!
Let me see if I can *bicky bicky* break this down for you, Old Skool! There is a heirarchy of premium for goods: Appliance, Toy/Craft, Technology, and Art.
Here’s the deal, the higher up your brand or product is on that perception scale, the larger the gap can be between the cost to make and the price to sale.
When something is as essential or practical as an Appliance, the maker is lucky to make a 50% profit. If you buy laundry detergent for $7.99 and it cost the store $3.99 to buy it, the store just made a 50.1% gross profit (because 49.9% of that $7.99 you paid is used to make back what the store spent to stock it). Now the manufacturer probably spends $1.99 for the entire process of making that one item, then sells it to the store at $3.99. Again, that’s a 50.1% gross profit because 49.9% of that $3.99 goes to recouping the cost of making the product. The Manufacturer makes 50%, the Retailer makes 50%, and you have to buy it, and thus shop for the cheapest way to get that item. This creates a hugely competitive market and kills potential profitability.
Consider 50% to be the minimum for gross profits because once you add in operating costs (salaries, taxes, sourcing materials, marketing, items going on sale, etc.) many large businesses run on a 1% total profit margin. Now remember that 1% of $1 billion is $10 million in money that has no where it needs to go. So don’t feel bad for any large company. That’s business!
Level 2: Toy/Craft, aka “Something Special”
The problem with that appliance level is that you need to be huge as a business! So when you aren’t big but need to make the same cash, you charge more! Let’s say you skip selling your $1.99 cost item to the store at $3.99 and start selling that $1.99 item to the consumer directly for the $7.99 retail. Your gross profit just became 75.1% (because 24.9% of that $7.99 goes to the cost of making the item). This is when your company or product has moved to Toy/Craft level, which is a simple way of saying it’s “something special.” You are the same item others are selling, but people want you because there is just something about you that is better to them. I always consider clothing around this point because how the hell can something always be found at 50% off and still be double the retail price?!
Level 3: Technology, aka “Cutting Edge”
Now let’s say that last level is working for you, but you find a way to make the same product for just $0.99. You convince consumers to still spend $7.99, meaning you are now making an 87.6% gross profit (because only 12.4% of that consumer cash in your pocket is needed to make back that reduced cost). How do you spend less money while getting people to pay the same for something they thought was special when it was costing you twice as much to make? Get them to believe that your product is “leading the way.” It’s the “cutting edge.” Take the term literally as a knife. There is no part of the knife in front of the edge. It is the first to penetrate whatever the future places in front of it. Technology is renown for being the knife that cuts into the future, and makes a path for whatever may come behind it. When something is at the cutting edge of technology, it is literally the edge of the knife that is opening the way for all other things to exist in the future.
This is what Tesla has as a brand, and they are held back by making cars, which cannot exceed a Toy/Craft! This Level is how a 5 year old tech company (I’m refering to App Devolopers especially) can have a higher value than century old, tangible product makers. In fact, the making of tangible items automatically kills profit because you can’t make something out of nothing. If you reduce the cost to make that item down to $0.01 and continue to sell it for $7.99 on the grounds of it being the only way for humanity to progress forward into the future, you’re still at a 99.9% gross profit. Simply put, making things kills your profit, always!
This is why software is more profitable than hardware, and why it seems like everything that is worth the most can’t be experienced through any of the senses. We can’t touch a Facebook, but so many other companies have created the ability to “experience” it by using their tangible items. Facebook doesnt have to supply anything tangible to the consumer. That said, for Facebook or any App, the cost is minimum and therefore the profit is maximized leading to outrageous values. Yet, there is still an operating cost because time is always paid for! Even when volunteered, time costs something.
Level ?: Art, aka “You Wouldn’t Understand”
Now you’re probably wondering about that implied 4th level I called Art. Here’s the deal, Art is like Technology, except backwards! Instead of requiring constant motion and progress, Art stays stationary in the time it was made. A painting today, found 40 years from now is still a painting from today. A phone from today, found 40 years from now, is a paper weight (if we even have paper to be weighted by then!)
Art doesn’t become obsolete like technology, it’s timeless. Now, some Art is better at being timeless than others and that is where the pricing/value comes from. Art still requires a medium and that is a tangible cost. Art is also directly linked to time, and as we discovered, time is never free even when Art is done in your “free time.”
What Art can do is increase or hold the value of any product from Appliance, to Toy/Craft, to even Technology! Have you looked at the prices for an original video game console? *shudder* If the item losses value over time, it’s simply NOT Art! Apparently Ferrari and Porsche only made Art prior to the 90s...
So the next step after Technology...well there is no step. However, we can take that edge under a microscope and truly figure out where the absolute edge is. We have established that making anything costs you money. Spending time on anything costs you money. So what can you NOT make and spend NO time creating? Easy, the answer is obviously existing! Or rather, being paid to exist but not being the creator of said existence. That’s right, we are talking Existential Profitability!
Now, if you are religious, you already know your existence is paid for even though you’re down nothing for it. If you aren’t religious, then I’ll simplify: Rich kid gets money from parents. Boom! Either way, you’re undeserving of what you’re getting, and people hate you for it. Of course I’m talking from a business perspective. If you’re thinking of anything Religious or Sociological...perhaps even Political then that’s on you, not me!
I hope this gets your brain juices a churnin’! As always, tip your waiter even though it’s just a scheme to not pay people a living wage. Oh, and don’t forget to pre-order your Model 3, the interior is supposed to be like a Spaceship! This is why they waited for SpaceX to be successful before showing off the interior.
The more you know....