Tesla's Pricing Saga: Short-Term Win or Long-Term Risk?

In my previous article, I argued that Tesla's price-cuts move helped the company maintain its lead in the electric vehicle market. However, recent developments suggest that this strategy may not be sustainable in the long run.

First, let's consider Tesla's financial performance. The company recently reported a quarterly margin below estimates, which indicates that its profitability is under pressure. This may be partly due to the price cuts, which reduce Tesla's revenue per vehicle. While lower prices can stimulate demand, they also reduce the company's ability to generate profits from each sale.

Moreover, Tesla's market share is not as dominant as it used to be. Tesla's share of the EV market in the US fell from 74% in Q4 2022 to 58% in Q1 2023. This suggests that other automakers are catching up and offering competitive products.

Furthermore, Tesla's price cuts may not be enough to maintain its lead in the face of new competition. The company's recent price cut for the Model Y SUV brought its price below the average cost of a US vehicle.

Elon Musk, has been sending mixed signals about the company's pricing strategy. While he has touted the benefits of price cuts on Twitter, he also acknowledged in a recent investor letter that "gross margins have been under pressure due to higher input costs." This suggests that Tesla may not be able to sustain its price cuts indefinitely, especially if input costs continue to rise.

Recently, Ford Motor has officially joined the electric vehicle price war. The collateral damage to Tesla could be brutal. Ford announced a new electric vehicle called the F-150 Lightning, which is expected to go head-to-head with Tesla's Cybertruck. The F-150 Lightning will start at a price below $40,000, which is cheaper than the Cybertruck's starting price of $39,900. This move by Ford shows that it is serious about competing with Tesla and could potentially take a significant chunk of Tesla's market share in the EV truck segment.

Elon Musk's statement that Tesla might sell cars on cost and profit from autonomous driving services is an interesting strategy that could potentially revolutionize the car industry. However, there are some significant concerns that need to be addressed before this model can be successful.

First, there is the issue of competition. Tesla is not the only company that is developing autonomous driving technology. If Tesla cannot offer a better or more affordable service, it may struggle to make a profit.

General Motors has been investing heavily in self-driving technology through its Cruise subsidiary. In April 2021, GM announced plans to invest $1 billion in Cruise, which is now valued at over $30 billion. Cruise has been testing its autonomous vehicles on public roads in San Francisco for several years, and its technology has shown impressive results. In fact, a recent report by Navigant Research ranked GM and Cruise as the leading companies in autonomous driving technology, ahead of Tesla.

Second, there is the issue of consumer trust. Many people are hesitant to trust autonomous driving technology, particularly after high-profile accidents involving self-driving cars. It may take time for consumers to trust it enough to pay for the service.

Third, there is the issue of regulatory approval. Governments around the world are still working on regulations for autonomous driving technology. It may take years for Tesla to gain regulatory approval to offer its autonomous driving service in every market.

Finally, there is the issue of profitability. While selling cars at cost and profiting from autonomous driving services may sound like a great idea in theory, it remains to be seen whether it is a profitable business model. Tesla would need to sell a significant number of cars and convince a large number of customers to pay for its autonomous driving service in order to make a profit.

It's important to note that despite Musk's statements, Tesla's car sales currently represent almost 80% of its total revenue. While the company's autonomous driving services do show potential for growth, they still make up a small portion of Tesla's overall revenue.

Tesla should consider the importance of having a clear and compelling value proposition. According to research by Professor Marco Bertini , too many executives are unclear about the unique value their company's products bring to the market. If sellers are unable to articulate a clear and concise argument why buyers should purchase their offering instead of a competitor's – an argument that convincingly demonstrates that the company understands the needs of the customer – they should not be surprised when the customer focuses on and demands a lower price.

"Remember, if all that customers care about is price, it’s probably because you haven’t given them anything else to care about. The absence of a strong value proposition only increases the temptation to use price as the reliable (and relatively effortless) means to close a sale." - Professor Marco Bertini

The solution according to him is:

1. Learn the customer's business model inside out and study how your offering can improve their economic benefit.

• Communicate the value proposition in the language of the customer, highlighting unique features and benefits in terms of impact on financial performance.
• The burden is on the seller to make the business case for a sale, not the buyer.

2. Not all players in a market are created equal.

• Customers group products in tiers (cheap, middle, expensive) and competition varies across tiers.
• Aggressive pricing from top-tier firms hurts all firms below, while aggressive pricing from bottom-tier firms expands the market.
• Managers should focus on companies that truly offer the next-best alternative for customers.

3. Managers make errors of judgment when assessing the relationship between margin and volume.

• The classic mistake is assuming a one-to-one relationship.
• Managers have a blindspot when factoring in the reactions of rival firms.
• Failure to anticipate the dynamics of a market can be devastating, particularly with respect to price actions.

In conclusion, while Tesla faces increasing competition and challenges, it is important to acknowledge the potential advantage the company may gain if it successfully achieves its cost-cutting plans. If Tesla delivers their promises of effectively reducing costs, it may regain its competitive edge and solidify its position as the dominant player in the market. The future success of Tesla will largely depend on its ability to execute these plans and navigate the evolving landscape of the automotive industry.