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Tesla Model 3
One little-understood secret of the luxury-car business is the fact that a high percentage of luxury vehicles are leased, not purchased. But the most successful luxury-brand launch of this millennium — Tesla Motors — has gone very slow on leasing. Now an expert on the subject, Scot Hall, executive vice president of Swapalease.com, suggests that Tesla has a lot to gain by rolling out competitive lease offers on its Model 3. In fact, leasing might be of critical importance to the electric carmaker as its ability to offer tax credits fades to black.
Up to now, Tesla has offered direct leasing of its pricey Model S sedan and Model X crossover SUV, but it currently does not offer a lease for its volume Model 3. According to a recent report from the automaker, “Our Q3 Model 3 deliveries were limited to higher-priced variants, cash/loan transactions, and North American customers only. There remain significant opportunities to grow the addressable market for Model 3 by introducing leasing, standard battery and other lower-priced variants of the car, and by starting international deliveries.”
According to the company’s earning statement, only 6% of its car sales in the second quarter were leased directly by Tesla. To Hall, the opportunity to expand leasing offers the brand significant upside.
“Luxury vehicles have always led the charge on the leasing front,” Hall said in an interview with Forbes.com. “To give you one example, BMW leased more vehicles than it sold in 2017.”
BMW is far from alone in its reliance on vehicle leasing to gain sales volume. The overall “lease penetration rate” for top luxury brands is well over 50%. In recent data reported in Automotive News, Infiniti, Lexus, Audi and Mercedes-Benz joined BMW with lease rates of 50% or greater. Jaguar, Lincoln and Land Rover lease rates were reportedly 48% of total sales.
Some might argue the Model 3 is not a luxury vehicle, but with its brand image and current average transaction price, Hall said “there is no doubt in my mind that they are in the luxury category.”
Since Tesla Motors leases a minuscule proportion of Model 3s now, should it add leasing to its sales/marketing arsenal, it could be a boon to overall sales.
“There are a number of advantages of leasing in the luxury category,” Hall said. “The number one is they make the payments more affordable and that opens up the market for more people.”
The financial numbers are compelling. According to Hall, if one were to lease a Model 3 with a capitalized cost (sales price) of $45,000, the monthly payment on a three-year lease would be $752. (That assumes a 50% residual value at the conclusion of three years.) In contrast, if a consumer were to buy a Model 3 at a similar price and finance it over three years, the monthly payment would be $1,344. To arrive at a monthly payment similar to the $752 lease payment, the buyer would have to take out a 72-month (6-year) loan.
Leasing can also take the potential worry out of buying a pure electric vehicle for the first time. Prospective buyers might be concerned about an EV’s suitability for their lifestyles and about the new technology of the car’s expensive battery pack, which will decline in efficacy over time.
“The question on battery life is an advantage in leasing these vehicles,” Hall said. “Consumers don’t want to be responsible for taking care of that battery if there are issues.”
The current high demand for Model 3s helps support a leasing strategy, as does the fact that EVs like the Model 3 typically are driven fewer miles per year than the average vehicle.
“I absolutely suggest that they ramp up their leasing,” Hall told us. “And that is for a couple of reasons: I think leasing is a great marketing strategy for any manufacturer, and I think it’s even more so for a luxury manufacturer because of the pricing and technology. That’s something they need to do in order to be competitive.”
Hall doesn’t feel it is advisable that Tesla target the kind of lease penetration the luxury brands typically see. Instead, he says a lower lease rate is a logical first step.
“I’m not so sure than Tesla needs to emulate BMW or Mercedes or one of the other luxury manufacturers and their lease penetrations, but I would strongly recommend to keep the vehicles available for everyone and reach a critical mass of folks they should shoot for an initial goal of about 30% lease penetration. And that might be a good goal for Tesla to shoot for to get as many vehicles as possible out on the road.”
Of course, all leases are not equal from the manufacturer point of view. Some are highly profitable; others in which the manufacturer contributes funds to lower the payment are much less profitable. But there seems little doubt that Tesla Motors could profit handsomely from vehicle leasing in the future.
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One little-understood secret of the luxury-car business is the fact that a high percentage of luxury vehicles are leased, not purchased. But the most successful luxury-brand launch of this millennium — Tesla Motors — has gone very slow on leasing. Now an expert on the subject, Scot Hall, executive vice president of Swapalease.com, suggests that Tesla has a lot to gain by rolling out competitive lease offers on its Model 3. In fact, leasing might be of critical importance to the electric carmaker as its ability to offer tax credits fades to black.
Up to now, Tesla has offered direct leasing of its pricey Model S sedan and Model X crossover SUV, but it currently does not offer a lease for its volume Model 3. According to a recent report from the automaker, “Our Q3 Model 3 deliveries were limited to higher-priced variants, cash/loan transactions, and North American customers only. There remain significant opportunities to grow the addressable market for Model 3 by introducing leasing, standard battery and other lower-priced variants of the car, and by starting international deliveries.”
According to the company’s earning statement, only 6% of its car sales in the second quarter were leased directly by Tesla. To Hall, the opportunity to expand leasing offers the brand significant upside.
“Luxury vehicles have always led the charge on the leasing front,” Hall said in an interview with Forbes.com. “To give you one example, BMW leased more vehicles than it sold in 2017.”
BMW is far from alone in its reliance on vehicle leasing to gain sales volume. The overall “lease penetration rate” for top luxury brands is well over 50%. In recent data reported in Automotive News, Infiniti, Lexus, Audi and Mercedes-Benz joined BMW with lease rates of 50% or greater. Jaguar, Lincoln and Land Rover lease rates were reportedly 48% of total sales.
Some might argue the Model 3 is not a luxury vehicle, but with its brand image and current average transaction price, Hall said “there is no doubt in my mind that they are in the luxury category.”
Since Tesla Motors leases a minuscule proportion of Model 3s now, should it add leasing to its sales/marketing arsenal, it could be a boon to overall sales.
“There are a number of advantages of leasing in the luxury category,” Hall said. “The number one is they make the payments more affordable and that opens up the market for more people.”
The financial numbers are compelling. According to Hall, if one were to lease a Model 3 with a capitalized cost (sales price) of $45,000, the monthly payment on a three-year lease would be $752. (That assumes a 50% residual value at the conclusion of three years.) In contrast, if a consumer were to buy a Model 3 at a similar price and finance it over three years, the monthly payment would be $1,344. To arrive at a monthly payment similar to the $752 lease payment, the buyer would have to take out a 72-month (6-year) loan.
Leasing can also take the potential worry out of buying a pure electric vehicle for the first time. Prospective buyers might be concerned about an EV’s suitability for their lifestyles and about the new technology of the car’s expensive battery pack, which will decline in efficacy over time.
“The question on battery life is an advantage in leasing these vehicles,” Hall said. “Consumers don’t want to be responsible for taking care of that battery if there are issues.”
The current high demand for Model 3s helps support a leasing strategy, as does the fact that EVs like the Model 3 typically are driven fewer miles per year than the average vehicle.
“I absolutely suggest that they ramp up their leasing,” Hall told us. “And that is for a couple of reasons: I think leasing is a great marketing strategy for any manufacturer, and I think it’s even more so for a luxury manufacturer because of the pricing and technology. That’s something they need to do in order to be competitive.”
Hall doesn’t feel it is advisable that Tesla target the kind of lease penetration the luxury brands typically see. Instead, he says a lower lease rate is a logical first step.
“I’m not so sure than Tesla needs to emulate BMW or Mercedes or one of the other luxury manufacturers and their lease penetrations, but I would strongly recommend to keep the vehicles available for everyone and reach a critical mass of folks they should shoot for an initial goal of about 30% lease penetration. And that might be a good goal for Tesla to shoot for to get as many vehicles as possible out on the road.”
Of course, all leases are not equal from the manufacturer point of view. Some are highly profitable; others in which the manufacturer contributes funds to lower the payment are much less profitable. But there seems little doubt that Tesla Motors could profit handsomely from vehicle leasing in the future.
