Tesla recently announced it will offer its customers car insurance. This move could add significantly to its per-vehicle profits, and could prove the first in a series of moves into other adjacent categories. Tesla could easily offer its affluent customers life insurance. Since it holds millions of dollars in customer deposits, moves into other financial services could make sense. This piece offers advice on how companies with strong brands should think about moving into adjacent categories.
Most of the buzz about Tesla’s recent quarter is about its $700 million-dollar loss or its seemingly wild robo-taxi idea. Short-sellers smell blood in the water as the stock has declined more than 20% in 2019. However, lost in the shuffle is Elon Musk’s announcement that Tesla will offer a ‘compelling auto insurance product’ within a month.
Auto insurance may seem like another distraction for a company that should be focusing on its core business. However, what if insurance helps the path to profitability and is just the first act of a powerful mega-brand adjacency that paves the way to Elon Musk’s grander visions?
Having helped several clients build multi-billion-dollar mega-brands, I’ve found there are several critical success factors.
First, you must pick the right first adjacency to enter. The first move is the hardest, so you want an adjacency that either has a very similar go-to-market model or has a partner who does the heavy lifting for you. Tesla is doing the latter by partnering with a unit of Markel to provide insurance.
Secondly, the first adjacency should have attractive economics measured by both the inherent financials of the adjacency itself–but also based on how it improves the economics of the core business. In Tesla’s case, the latter element is particularly important, because part of the reason why consumers buy electric cars is to save money by not buying gas. However, that savings is offset by the costs of insuring a Tesla, which are among the automotive industry’s highest. Therefore, if Tesla can reduce the price of its insurance, it should help make owning a Tesla more attractive and drive more core business car sales.
For Tesla, becoming its customers auto insurance agent has an attractive return on investment in and of itself. Agents typically make 10% to 15% commissions on first-year premiums, and then 2% to 5% on recurring premiums. Tesla’s cars are expensive to insure, at about $2,000 to $3,000 per year. The Model 3 average sales price was $57,000, and Tesla said the Model 3 gross margin is 20%, or $11,400. Assuming a weighted average cost of capital of 7%, auto insurance commissions have a net present value of $660. That’s the equivalent of 120 basis points of margin to Tesla’s model 3 by simply leveraging its brand to sell auto insurance, take the commission revenue, and then pass on the policy to an insurance company to fulfill.
If Tesla succeeds in auto-insurance, where else could it go next? Auto insurance premiums were $246 billion, according to S&P Global Market Intelligence, but life insurance is nearly triple the size of auto insurance. You might laugh at the idea of Tesla life insurance, but if they crack the code on auto insurance, is it really that hard to imagine Tesla offering life insurance? In 2017, Gerber baby food generated $900 million in life insurance premiums; that’s 75% the size of its core baby food business. U.S. life insurance is a $700 billion category with front-loaded commissions of 40% to 100% of first-year premiums. The median age of Tesla owners ranges from 46 (Model 3) to 54 (Model S). The average annual life insurance premium is nearly $1,100 for a 50-year-old non-smoker. If we said the commission was 70%, that would add another $770 in commission revenue to Tesla, or another 135 basis points of margin on a Tesla Model 3.
Tesla could notionally increase Model 3 gross margins from 20% to 22% just on auto and life insurance commissions. Karl Stark, the CEO of Elagy (a digital insurance agency) said “numerous insurance companies recognize they need help to acquire customers and would be more than happy to have Tesla bring them leads and sales that they can fulfill. This would not be a stretch at all.”
The final critical success factor is to avoid too many mega-brand extensions. Your mega-brand is only as strong as its weakest category. Too many extensions add a ton of organizational complexity. Robo-taxis are exciting, but do Tesla owners want strangers riding around in their car to earn some cash? Maybe some do, but I doubt the demand is higher than the percentage of Tesla owners who own life insurance and is undoubtedly lower than the percentage with mandatory auto insurance.
The world of finance is certainly not as sexy as technology and autonomous driving. However, mega-brand strategies need both the sizzle of new technologies and the steak of trillion dollar categories where you can bring something unique to the table. Tesla already has over $800 million in deposits for future cars. Starbucks has $1.2 billion of cash loaded on its app for a so-so rewards program. How much in deposits could Tesla raise if it offered slightly more interest on a Tesla checking account? What if Tesla could raise debt financing platforms like Yieldstreet from retail consumers or Tesla enthusiasts who love them?
It might mean Tesla would be less dependent on Wall Street to raise capital to fund its core business, robo-taxis or anything else Elon Musk dreams of. Having a successful mega-brand lets you play chess, while others play checkers.