Is an­other ex­am­ple:

Finweek English Edition - - BUSINESS -

start­ing a new com­pany to pro­duce an elec­tric car (with all the as­so­ci­ated R& D costs of new tech­nolo­gies), then set­ting up a pro­duc­tion line to re­li­ably man­u­fac­ture them en masse re­quires deep pock­ets. Yet he’s done it again, at the same time set­ting up SpaceX! It’s widely known that he’s used government grants/loans and other in­cen­tives along the way, but the fact re­mains that he’s tack­led a highly com­pet­i­tive and cap­i­tal-in­ten­sive in­dus­try as a brand-new en­trant and so far he looks to be suc­cess­fully on his way. For Musk to have suc­ceeded in th­ese in­dus­tries he’s not only had to have a clear un­der­stand­ing of the tech­no­log­i­cal ad­van­tages in his re­us­able rocket com­po­nents (SpaceX) or bat­tery tech­nolo­gies (Tesla) but he’s also used fi­nance as a strate­gic tool; I’d ar­gue that his true abil­ity has been to suc­cess­fully raise the cap­i­tal to fund the tech­nolo­gies (a trait which Richard Bran­son also shares – both are ex­cep­tional storytellers).

Musk’s abil­ity to use fi­nance as a tool to ex­tend his com­pet­i­tive ad­van­tage goes fur­ther than that, as shown by his com­pany’s re­cent an­nounce­ment re­gard­ing t he fi­nanc­ing scheme it pro­vides with the Tesla Model S. Here are the core ideas:

US Bank and Wells Fargo have agreed to pro­vide 10% down fi­nanc­ing for pur­chase of a Model-S (on ap­proved credit). Th­ese are big-name trusted banks putting their weight be­hind a new tech­nol­ogy.

The 10% down pay­ment is cov­ered or more than cov­ered by US Fed and state tax cred­its rang­ing from $7 500 to $15 000. New Jersey, Washington state and Washington DC also have no sales tax for elec­tric ve­hi­cles. (Th­ese ad­van­tages are not avail­able when leas­ing, so it’s also im­por­tant that the con­tract is clearly a sale.)

When con­sid­er­ing the sav­ings from us­ing elec­tric­ity in­stead of petrol, de­pre­ci­a­tion ben­e­fits and other fac­tors, then Tesla claims that the true net out-of­pocket-cost to own a mid-range Model S drops to less than $500 a month. In other words, he makes a strong case that it’s not a very ex­pen­sive pur­chase, ac­tu­ally.

Af­ter 36 months, you have the right, but not the obli­ga­tion, to sell your Model S to Tesla for the same resid­ual value per­cent­age as the iconic Mercedes S-Class, one of the finest pre­mium sedans in the world, made by Daim­ler (also a Tesla part­ner and inves- tor). Here Musk does two clever things – he an­chors the new Tesla brand to the well-es­tab­lished brand Mercedes brand, and he jus­ti­fies a sim­i­lar pric­ing range by link­ing the re­sale value di­rectly to the S-Class.

Not only is Tesla guar­an­tee­ing that re­sale value, but Tesla CEO Elon Musk is per­son­ally stand­ing be­hind that guar­an­tee to give cus­tomers ab­so­lute peace of mind about the value of the as­set they are pur­chas­ing.

In other words, you own the car, but you have the op­tion to sell it back to Tesla. Sim­ply put, you’re get­ting the ben­e­fits of both leas­ing and own­ing a car. In the world of fi­nance, this is called a put op­tion. The holder of a put has “the right, but not the obli­ga­tion” to sell back an as­set at a cer­tain price. Of course, op­tions aren’t free – in­vestors buy op­tions for a pre­mium, which in Tesla will be priced into the up­front cost of the car.

Any risk that you don’t like the prod­uct shifts to­wards Tesla and Musk. In ef­fect, Musk is gam­bling that you’ll like the car enough to keep it, but he’s also set up a fi­nanc­ing scheme that gets the ben­e­fits of a lease while re­tain­ing the tax cred­its from the sale. He’s pulled off a great mar­ket­ing ‘an­chor’ by link­ing the re­sale value of the car to a great, es­tab­lished brand. How can you struc­ture your of­fer­ing to cus­tomers to of­fer the best fi­nan­cial in­cen­tives?

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