The Silent Power Shift Disrupting Your Top & Bottom Line

The Silent Power Shift Disrupting Your Top & Bottom Line

By Kelly Lawrence, Founder & CEO, Lawrence Innovation

Should-cost models are exactly what they sound like -  a model that provides insight into the base cost of a product or service. Different functions of an organization use them in different ways:

  • Procurement: Your procurement team uses the should-cost model to identify opportunities to get your costs down. Conversely, your customers' procurement teams use should-cost models to get your prices down.

  • Sales: Your sales team is on the front line working with your customers' procurement, technical, and business teams to communicate and capture the value your organization delivers.

  • Strategic Marketing: Your strategic marketing team is listening to customer unmet needs, identifying opportunities to create value for customers and then putting together your right-to-win package that enables sales teams to capture value at each customer for both existing and new products & services.

In my time as a strategic marketer, it took a significant amount of research and validation to put a should-cost model together. Thanks to AI, today, I can have a should-cost model in less than 5 minutes. I can then focus my efforts on validating the accuracy of the data and figuring out the value propositions that justify desired margins. Skip this step and sales teams will struggle. You'll recognize the problem as a declining top and bottom line.

A Should-cost Case Study

Elon Musk is famous for a lot of things including his cost-analysis and a cost-out mindset. 

[At Tesla] "Take the stamped part, weigh it. That weight x the market price for steel. That's the theoretical minimum price."
- Elon Musk

I consulted ChaptGPT 4.0 and asked it to create a should-cost model for a Tesla Model Y long-range with self-driving package. Within seconds, I had a consumer view of how much I could expect to pay for a new Tesla Y based on April 2024 Tesla Pricing. 

Consumer pricing is readily available so while I appreciated the summary, I wanted to know Tesla's costs.  I modified my ask to ChatGPT 4.0 to give me the should-cost model from Tesla's perspective. In 30 seconds I had a should-cost total with detailed split-outs across 12 categories.

Tesla's Expected Profit Margin (generated from ChatGPT)
Tesla sells the Model Y Long Range with FSD at ~$58,000 retail price:

  • Tesla’s Internal Cost Estimate: $33,000 - $42,200

  • Gross Profit Per Vehicle: $15,800 - $25,000

  • Gross Margin Estimate: 27% - 43%

Tesla's target auto gross margins (excluding regulatory credits) are typically above 25%, and software sales (FSD) significantly boost margins.

My third prompt to ChatGPT is a critical one to enable value capture. Tell me how Tesla communicates the value it brings to its customers to justify its margins. 

ChaptGPT's response summarized Tesla's communicated value propositions pretty well. 

The Tesla Value Proposition

Tesla positions its vehicles as more than just cars—they are technology-driven, software-powered mobility solutions with long-term benefits. The key pillars of Tesla’s value proposition include:

A. Industry-Leading EV Technology

  • Superior Battery & Range: Tesla offers best-in-class battery efficiency and longest EV range in its category. The Model Y Long Range delivers up to 330 miles per charge, minimizing range anxiety.

  • Fast Charging Network (Superchargers): Tesla’s exclusive Supercharger network is faster and more reliable than public EV charging stations.

  • Energy Efficiency: Tesla vehicles achieve higher MPGe (miles per gallon equivalent) than competitors, lowering charging costs.

B. Software & Full Self-Driving (FSD) Capabilities

  • Advanced Driver Assistance: Tesla’s Full Self-Driving (FSD) and Autopilot provide an evolving AI-driven experience, continuously improving via Over-the-Air (OTA) updates.

  • Frequent OTA Updates: Tesla vehicles get better over time, with software updates that enhance performance, range, and safety—something traditional automakers can’t offer.

  • High Resale Value: The combination of software updates, battery longevity, and brand prestige helps Tesla retain value better than most EVs.

C. Performance & Driving Experience

  • Instant Torque & Acceleration: The Model Y Long Range accelerates from 0-60 mph in ~4.8 seconds, making it faster than most gas-powered SUVs in its price range.

  • Minimal Maintenance Costs: No oil changes, fewer moving parts, and lower long-term maintenance expenses compared to gas-powered cars.

  • Tesla’s Unique Minimalist Interior: The single-screen interface, premium materials, and open design contribute to an exclusive, high-tech experience.

D. Environmental & Sustainability Benefits

  • 100% Electric, Zero Emissions: Tesla promotes its vehicles as sustainable transportation solutions aligned with global climate goals.

  • Integration with Solar & Energy Storage: Tesla cars are part of a broader sustainable ecosystem that includes Solar Roofs and Powerwalls for home energy efficiency.

  • Lower Total Cost of Ownership: Although Teslas have a higher upfront cost, they provide lower fueling & maintenance costs, justifying the higher initial investment.

As an owner of a Tesla Y who purchased it when prices were even higher during the pandemic and who re-evaluated her drive in the fall of 2024... Tesla nailed the value prop. The perceived value I get as a customer is greater than the price I paid. Thereby, I made a purchase decision and stuck with it. I'm not saying go out and buy a Tesla. I am saying this is an example of well-articulated communication of a value proposition that resonates with a target customer. Every company should have something like this for every product sold. 



How Well Is Your Organization Capturing Value?

Imagine that your customers have should-cost level of detail on every product they buy from you. If they don't already, they soon will. How will your sales team manage the negotiation? How well does your strategic marketing organization quantify the value your organization provides for most to all of your products/services? Does the perceived customer value out-match your prices?

If you didn't like your answer to any of these questions, you're not alone. Most organizations struggle with value creation, value communication and value capture. The good news is that these are capabilities that can be built and improved in an organization.



Resources for Capability Building

Download this white paper from Fortune 100, award-winning sales leader Tom Zoes to learn how sales teams can improve value capture skills.

Schedule a complimentary growth consultation with me to explore how your organization can improve value creation, value communication and value capture.

Sources

Contact me, for a complimentary growth consultation.

Lawrence Innovation helps B2B leaders accelerate and de-risk growth through strategic market innovation excellence.