2014-04-02

Co.Exist

How Tesla Is Driving The New Purpose Economy

The electric car company is slowly reshaping how people think about driving. Following the same pattern can help any social entrepreneur get people excited about world-changing products. Here's what Tesla is doing.

This is an excerpt from Aaron Hurst's new book, The Purpose Economy: How Your Desire for Impact, Personal Growth and Community is Changing the World. You can read another excerpt, introducing the Purpose Economy, here.

The Purpose Economy is about more than just profits; it’s about creating meaningful impact in service of people and the planet. The great business challenge now is not just how to build a successful organization, but how to build more human-centered markets. We all see how much need there is in the world, and it breaks our hearts, but it also inspires our empathy and creativity—the ability to see the need as opportunity. It is this kind of opportunity, the kind that serves people and the planet, that is fueling entrepreneurship and the transformation of old world businesses within the Purpose Economy.

The challenges and opportunities we face today are unprecedented and sometimes overwhelming in scale. Issues like climate change are part of a long list of challenges that could and likely will impact that way we live. And while we can often find solutions to address the demands of a specific community or niche population, finding a systemic solution is almost always elusive. But we can no longer delay solving the most intractable problems. If not us, then who? If not now, then when?

I believe that social challenges and the desire for self-expression and community are new market opportunities in the Purpose Economy. Just as data storage and software development formed some of the Information Economy markets, things like sustainable energy and resource sharing are emerging as Purpose Economy markets. By thinking of these as markets, we can imagine powerful new ways to create value by helping people and the planet. By using the language of economics and investment, we attract the human and financial capital needed to build and grow markets in the Purpose Economy.

Below, I lay out a framework I developed based on over a half century of social science and economics, as well as the insights of some of the most successful entrepreneurs of the era. I believe it has the potential to help us solve some of our most difficult social problems. It provides a clear path for not only creating a wildly successful organization, but affecting meaningful change on a systemic scale. It is a step-by-step guide to understanding how to make an impact as an investor, academic, employee, or simply as a voter. It does not belong to any one sector, and it transcends organizational structure.

Electric Cars and the Diffusion of Innovations Theory

Elon Musk is the man behind PayPal, SpaceX, and Tesla Motors. He has successfully built a number of companies, but more importantly, he has moved markets. Elon Musk had a different kind of vision from the start: to build a market for electric cars, beginning with luxury cars, and then expanding over time to reach a broader consumer base. This was a rather specific vision; that is, it wasn’t simply about building an amazing electric car, it was also about creating an environment in which it could be successful. Not unlike Steve Jobs, Musk is constantly designing his products and services as he simultaneously readies the marketplace for them.

Musk’s vision completely aligns with a principle that scientists have known for over half a century: innovations spread socially and over time. The diffusion of innovations theory, developed in 1962 by sociologist Everett Rogers, explains how, why, and at what rate new ideas and technologies spread through populations. As a young graduate student, Everett was studying one of the hottest innovations of the day—hybrid corn seed. Specifically, he was trying to understand why some farmers were using this new improved technology, and others weren’t. As Thomas Edison famously wrote to the CEO of General Electric in 1926, "It takes about seven years to convert the average man to the acceptance of a solved problem." Everett Rogers wanted to understand why this was the case.

I personally became aware of the diffusion of innovations theory in Geoffrey Moore’s Crossing the Chasm. It was a bible of technology marketing when I was working in product management in Silicon Valley in the late 1990s. By providing a model for how to target the right segments of the population for each stage of sales, the theory enabled you as a marketer to set realistic expectations about pick-up rates, and it instructed you how to send the right message at each stage of market development. It also modeled the best practice of using each group as a base to market to the next group, leveraging your existing customers to help sell to future customers. The book put a special focus on the most difficult part of getting widespread market adoption for a new technology: going from early adopters to the early majority, the tipping point for technology adoption.
The first group, the innovators, are a small group of people who actively seek out risks and new challenges. Risk (and its accompanying reward) constitutes a large part of their motivation to engage. They are the first individuals to adopt an innovation. They tend to be young, financially well-off, and highly social, with the closest contact to emerging research and data. Often, they interact with other innovators. They also tend to have a financial and social cushion that can absorb the potential losses associated with trying something that doesn’t work.

Elon Musk is one of these innovators, and he understood what it would take to get that group behind the wheel of an electric car. He would need to design a car that could be compelling enough to act as a status symbol for young professionals in the insular community of Silicon Valley. He knew his audience would be highly technologically literate and very social in both how they bought the car and how they talked about it. He needed a luxury car that would be the "it" car in Silicon Valley. But perhaps as importantly, he would need to find a solution for the incredibly expensive battery technology needed for the car to work. Just the battery for an electric car costs more than double the price of an entry-level car in the market. For this reason alone, Tesla would have to focus on the luxury end of the market.

Tesla’s cars are designed and built for the Google or Apple executive. The Apple headquarters boast more Teslas than a Tesla showroom. Early buyers were not price-sensitive and placed a premium on service and design. Tesla identified their innovator customer segment and focused their energies on selling and servicing them in unique ways. For example, Tesla understood the busy schedules of their customers, and had their service technicians visit owners for maintenance appointments rather than forcing them to sit waiting in a garage. Five years after the introduction of its Model S car, Tesla was reporting a profit, and the Model S had become the third best-selling luxury car, behind only the Mercedes E Class and BMW 5 Series.

But it’s not just the innovators that catalyze a market. What Everett Rogers came to understand was that it is the social connection between different segments of a population that diffuse an innovation. Innovators are merely a stepping stone to the most critical group—early adopters. Early adopters are typically affluent, educated, and are motivated by social prestige. They are the proverbial tire kickers of the population, ensuring the car is safe before it gets on the road, and in turn bringing along the more risk-averse parts of the population. More so than any other group, they will determine the success of an innovation.

When early adopters around the world see Apple and Google executives driving a Tesla, they want to be the first in their city and among their peer group to drive one. Whether consciously or not, they see it as a social advantage and part of defining their personal brand. Tesla has now opened showrooms around the world in affluent communities, moving beyond California and the innovators to the next segment of the adoption curve. To further entice the early adopters, Tesla is building a network of car superchargers so that owners can drive coast-to-coast without range anxiety. And to more strongly compel these slightly more risk-averse buyers, Tesla is covering the cost of the power for these stations.

However, that is as far as Tesla has gone. The next segment it needs to reach is the early majority—who can move the company from a niche car manufacturer into a global powerhouse. When compared to the early adopters, the early majority is pragmatic, less affluent, and more risk-averse. And though they look to the previous group for guidance, they often have practical considerations that make it hard to adopt a change. Tesla is not going to be able to sell their current product to the early majority with much success; it is too expensive and not very practical. The battery range is still too short, the price too high, and their charging stations are mostly limited to corridors with high concentrations of early adopters (i.e. California and the D.C. to Boston corridor).

What Musk understands is that to move into the early majority and beyond, he needs to invest in the electric car market, and not just his cars. Tesla won’t succeed just by selling electric cars. They need to grow the overall electric vehicle market. They need to remove barriers for their competitors so they can join them in moving away from gas-fueled cars. To this end, Tesla now sells their patented powertrain components to competitors. They are less concerned about the competition taking up market share than building the market and creating scale that will bring the prices down enough to be viable options for the average car buyer.

By selling luxury electric cars first, Musk and his team at Tesla have actually accelerated the development of technology for the market. Tesla’s success has created further hope for electric cars and spurred investment in research and development. Musk’s initial customers were largely in Silicon Valley and connected to venture funding, a proximity that ultimately increased investment in batteries and renewable energy.

But while the initial scale of his operations allowed Musk to create additional demand and begin to bring down prices, this won’t be enough to bring along the late majority or the laggards. These more risk-averse groups will need power stations all around them, and ultimately it will need to be easier than owning a gas fueled car. In order for the laggards—the most risk-averse group of all—to come along, there will likely need to be policy change or simply no more gas stations left to fuel their antique cars. But if Musk’s "luxury cars for the tech-elite" strategy works, it will ultimately allow Musk to sell electric-powered sedans and minivans to families in Ohio.

It sounds intuitive, maybe even obvious, but most entrepreneurs (particularly those working on social issues) don’t follow this model. They only see what is right in front of them and fail to understand the importance of building a market rather than just a product or service. More importantly, they don’t have the laser focus on a single segment of the adoption curve at one time, much less the correct segment. But the diffusion of innovations theory ultimately explains adoption of hybrid corn seed, why Elon Musk first entered the electric car market by focusing on luxury cars, and other social changes like sustainability, same-sex marriage, and—in my case—pro bono services. Based on this theory, market movers build markets intuitively and with great discipline.

Adapted from The Purpose Economy: How Your Desire for Impact, Personal Growth and Community is Changing the World, which will be published by Elevate on April 2, 2014.

[Image: Abstract via Shutterstock]

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