How Tesla Is Breaking the Big-Budget Advertising Habit

First rule of innovation, avoid crowds.

In 2003, two engineers and an angel investor reached back to 1888 to borrow Nikola Tesla’s name and copy his engine design. After that, they just invented stuff.

Tesla Motors has been headed by Elon Musk, the company’s first angel investor, since the day he fired his co-founder and became CEO in 2007. It was his third major startup after Zip2 and PayPal. As a former graduate of Wharton and a Stanford Ph.D. candidate, he acts like an inventor and thinks like an investor. In the Musk mythology, this is an important but seldom recognized fact. (In full disclosure, after he departed and sold the company, I was named CEO of Zip2).

With the benefit of a dual personality, part dreamer, part financier, he now runs the most valuable American automobile company (not including his other pursuits, SolarCity and SpaceX). Musk knew it was pointless to try to compete with GM and Ford on the comfortable battlefield those giants know so well — big budget advertising and a huge dealer network. Spokeswoman Alexis Georgeson echoed Musk’s sentiments:

“The stores are our advertising. Paid advertising may be something we’ll do — years down the road. But not now.”

Traditional marketers would say, “what the hell?”

Musk foresaw great resistance to change in a 100-year-old industry like automotive. He knew that could give him the time he needed to expand and experiment right under their very noses. Even today, despite Tesla’s overwhelming market success, VW chief Matthias Müller revealed in a recent WSJ article, that legacy thinking is hard wired:

“Our own managers (still) remain skeptical of moves to downgrade the business of cars powered by fossil fuels. I don’t know if you can imagine how difficult it is to change their mind-set.”

The brilliance of the Musk story will have many chapters. But the one that taught the world how to launch iconic brands “on the cheap” is a more significant disruptor than many realize.

If you want an insight into why Musk does things so contrary to accepted practice, you need to first understand how a venture capitalist thinks.

The goal of a Silicon Valley startup chief executive is to choose the most effective way to spend the money from the time it’s raised until the company runs out of cash, and has to raise a second round. Because the new investors are only interested in one thing, to paraphrase Cuba Gooding, Jr., ‘show me the results’.

Madison Avenue advertising may be creative and it may sound glamorous, but it rarely shows tangible results in a short period of time. Smart founders like Musk simply forego promotion in favor of hiring and product development. The cash constraint effect on a startup is what Samuel Johnson described when he said, “When a man knows he is to be hanged…it concentrates his mind wonderfully.”

No one in automotive history ever even remotely considered that ‘marketing lite’ could be applied to the car business. The people in Detroit with huge advertising budgets don’t spend a lot of time wondering if it works. They like to fall back on the famous expression by Philadelphia retailer, John Wanamaker: “I know half of my advertising is wasted, I just don’t know which half.”

To Elon Musk the answer was obvious. Both halves are wasted.

Instead of advertising, Musk’s digital instincts led him to build a product that compelled customers to advertise for him, research for him, and spread the word contagiously, at no charge. He built the product, opened the stores, the customers came, and they posted. And they posted. And they posted. In taking the path less traveled, he changed automotive and marketing history.

As a blogger wrote, Tesla does not spend millions of dollars in a traditional ad campaign. They let you and I discuss it, rave about it, hate on it, or rejoice in the spirit of going electric in a Tesla, be the catalyst to a viral and brilliant marketing campaign. At the end of the day, Tesla advertising is free.

The result was that by 2015, advertising spending at Tesla was zero. At the same time, GM spent over $5 billion, a sum that represented more than half their annual profit, according to Mediakix. To make the contrast even more stark, Telsa’s market cap was higher than GM or Ford or any other American automobile company.

Musk knew the way consumers fell in love with brands was changing. Part of this is attributed to Google’s epiphany that “search” answers consumer questions more powerfully than a glossy image, and it had far reaching consequences. Suddenly, advertising seemed old fashioned and slow moving. This led him to realize he could shift resources away from Madison Avenue without disturbing the business model. Then he discovered what really moved the consumer. The techies call it ‘user experience’ or UX.

UX is more than the product. For Tesla, it includes putting stores in malls where people could shop for the cars as easily as if they were sunglasses. Sales people weren’t commissioned reps but customer service gurus who seemed not to care how many times you came to look at the vehicle. They made test driving easy. They made buying a car easy even if you live in Arizona or Texas where cars can only be sold through a dealership. These are factors in the experience that can no longer be separated from the product, and for Tesla, they are part of the marketing value.