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Elon Musk: The Master of the Physics of Pricing – And Winning With It

Elon Musk: The Master of the Physics of Pricing – And Winning With It

Another price cut by Tesla: “Tesla has slashed the prices of all of its electric vehicles in the U.S. for the fifth time this year, Reuters reports, as it tries to woo new drivers. The biggest price cuts went to its most expensive but slowest-selling models..” But look deeper, pricing is Elon Musk’s finest skill in business.

Tesla pioneered new pricing models, making selling cars to mirror the ways the world sells software. They have this business model where a buyer of your car must call Tesla to acquire new “licenses'” since the ones you have are not transferable.

More so, if you want more “capacity” in that car, you can send more money to Tesla and they will add more. If you check it, Tesla has a Basic Plan, Premium Plan and Enterprise Plan – and it is a car company. But if you open the books, that is how you price software.

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People, the main reason why Tesla is valued more than most companies in the world combined is because of pricing innovation, not just the engineering feats! It makes selling cars look like selling software. Because of that, investors give it the same multiples as software companies because every car produced by Tesla will keep earning money until it is moved to landfill. No other car brand can say that at scale. So, when it is playing with cuts, do not think it is coming from the angle of pure weakness.

Of course, if Musk succeeds in the new pricing model he is pioneering in the social media world through subscriptions in Twitter, that would be another big one. The blue tick is no more free and if that works, expect Facebook, Instagram and others to copy it at scale. LinkedIn does not give ticks that much and it may not even have to do that. But my point is this: Elon Musk is using Pricing Strategies to Win in markets.

Tesla has slashed the prices of all of its electric vehicles in the U.S. for the fifth time this year, Reuters reports, as it tries to woo new drivers. The biggest price cuts went to its most expensive but slowest-selling models, the S sedan and the X SUV, which were reduced $5,000; it’s bestselling Y crossover SUV was cut by $2,000; and the 3 compact sedan was reduced $1,000. Some analysts have expressed concerns that the price cuts will eat into Tesla’s healthy profit margin.

Innovation does not end in engineering; pricing innovation could be catalytic.

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Comment (inmail): Interesting article – aren’t around 84% of new autos financed in the USA? How are the USA based Auto funders reacting to the large pricing movements? In the U.K. the sudden discounting has materially impacted the residual value of the vehicles.

Tesla has reduced the vehicles by a similar value in GBP to $. But the lease value has barely moved (ie not dropped) as the funders have seen the residual value move by a similar amount – this doesn’t yet look like pricing mastery.

How is the used market for Tesla in the USA – the used market in the U.K. is not really supported in the same way as over OEMs meaning that they are not yet an attractive used buy in the U.K. as the servicing cost is much higher than the other OEMs.

It’s not yet looking like pricing mastery in the U.K. – how did you think it will evolve?

My Response: Tesla has limited choices right now because its products are largely expensive. It is not doing this in the position of strength. Yet, since Wall Street has focused on the number of vehicles shipped or sold to value the worth of the company, it can do this and get away with it. The core playbook is to increase volume even if the margin drops.

Tesla will lose a huge market cap if investors think no one wants to buy its cars. So, to avoid that, it has to make sure it can sell, and then can use inflation to explain margin challenges.

On the second hand value issue, that is for current owners, not for NEW owners who are getting better deals to drive Tesla. More so, by absorbing this margin hit, it forces Ford, GM, etc who are unveiling EVs to struggle to differentiate on price. Many people who did not consider Tesla in Dec for an EV, will not put it there.

EV will become a commoditized class in years. Tesla will use pricing to compete. Tesla is not built for the used market. Most drivers will like to have the new thing since relatively most Tesla owners have more cash to spare.

What Tesla could do is to buy these used vehicles via trade-in and open new markets in Africa and LatAm where it can get a premium. But for price conscious second hand buyers, I do not see that evolving at scale in the US.

Comment 1RIt will be interesting to see how it plays out….

I guess the issue though could be that no one will want to finance Tesla’s as the RV becomes too unpredictable, which becomes a problem for them if 84% of the USA auto market is financed (similar in the U.K.).

If Tesla is not managing and considering it’s used values or providing market aligned pricing for its servicing (this makes it high risk for anyone offering residual value based pricing) which in the U.K. is the vast majority of the new car retail finance market.

So this quickly becomes a problem for the new car buyer wanting to sell their car or for the funder taking the RV risk – the new and used car market are very closely aligned. I am not sure an OEM can just think about the new market and ignore what happens in the used market (for any period of time)

Ie Will the new car market for Tesla be sustainable if they can’t be sold at a value comparable in percentage depreciation terms to its peers?

A 3 year old Tesla Model S has a residual value of c £30k – is there is a market for this value of car in the markets you suggest?

Ps There was a really interesting article in the FT on Tesla’s problems in China – I suspect it will be the Chinese OEMs that give Tesla the biggest headache in the future

“Tesla’s price war in China backfires as BYD sales surge” on 28 March

My Response: Tesla’s moat is not forever. Very soon, this market will become a commoditized one.


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