There are several critical factors that affect making pricing decisions: customers, competitors, regulations, government laws, the overall economy, and production costs and some of the most important variables to look at when deciding on a pricing strategy. As Zeng, Dasgupta and Weinberg (2016) put it, differentiation is key to developing a pricing strategy that works for a company that has to set itself apart from competitors in order to secure market share. For Tesla, which is the subject of this paper, the electric vehicle (EV) market is beginning to heat up as competitors come into the business with their own products. That means Tesla has to differentiate itself with a pricing strategy that will appeal to the biggest consumer base in the market—the average middle class consumer. In the past, Tesla has relied on the luxury brand market to drive sales—but with investors anxious for a return on investment (Stringham, Miller & Clark, 2015), Tesla has promised to deliver the Model 3 EV with a base price of $35,000, which would make it an affordable family car for the middle class consumer and put Tesla more in line to compete with bigger names in the industry like Ford, Toyota, Honda, et al., by giving it a “low price, high volume vehicle” for mass marketing (Hardman, Shiu & Steinberger-Wickens, 2015). This paper will describe what Tesla does, evaluate the pricing strategies relative to the life cycle of the Model 3, Model S and Model X, which are Tesla’s top three products, summarize the critical factors that impact pricing decisions, describe the impact that value has on Tesla’s pricing strategy and profitability as well as the importance of market segmentation, and determine the effectiveness or ineffectiveness of Tesla’s price and value communication strategies.
Tesla is a company that specializes in producing EVs: the company has been in business for 15 years and started off as a niche market player, producing high-end, luxury brand EVs—namely the Model S and the Model X, which retail around $100,000.
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The problems the company is having with these products is that they are priced beyond the budget of most middle class consumers, which is where the biggest market is for auto manufacturers. To obtain a larger market share and increase profitability, Tesla decided to produce the Model 3, which was meant to be a low-cost EV for the middle class market. Because of production issues, production costs, and government incentives coming to an end, Tesla is facing pressure to deliver on its promises, which so far have not materialized.
Product Life Cycle
Tesla has lengthened the product life cycle of its Model S, Model X and Model 3 by giving them each a modifiable character—i.e., by making it possible for consumers to have the cars upgraded via digital connectivity. Tesla, in other words, can tweak the vehicles from afar simply by sending out a digital upgrade that addresses a bug or controls something in the car’s mechanics. The normal product life cycle of a car is four to seven years, but Tesla is challenging that life cycle by making it possible to deliver numerous software updates and upgrades to its products year round and year after year (Stringham et al., 2015). This allows the company to differentiate itself by extending the product life cycle, which means an alternate pricing strategy is required—one that takes into consideration that extended life cycle of its cars. That is why Tesla’s EVs are priced so high: they are built to last and not to be recycled every four to seven years.
Tesla’s technology is innovative and revolutionary: it has….....
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Stringham, E. P., Miller, J. K., & Clark, J. R. (2015). Overcoming barriers to entry in an established industry: Tesla Motors. California Management Review, 57(4), 85-103.
Zeng, X., Dasgupta, S., & Weinberg, C. B. (2016). The competitive implications of a “no-haggle” pricing strategy when others negotiate: Findings from a natural experiment. International Journal of Research in Marketing, 33(4), 907-923.