Tesla's Problematic Pricing Strategy Essay

Total Length: 1605 words ( 5 double-spaced pages)

Total Sources: 4

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Pricing Strategies and Decisions

Pricing Strategy Management

Pricing Policies, Processes and Methods

Policies used to manage Tesla’s pricing strategy. Currently Tesla is not only benefiting by but is actually relying on government subsidies to sell its cars. Subsidies come from electric vehicle (EV) tax credits that purchasers are able to obtain whenever they buy a Tesla. The problem is that these credits are only given to consumers for a set duration. Once the government ends the subsidy, sales drop drastically, as has been in the case in Hong Kong where tax incentives basically were the whole of Tesla’s pricing strategy—and once the tax incentives ended, sales were decimated. Currently in Norway, which is Tesla’s biggest European market, consumers pay no import tax or any of the purchase taxes that apply to non-EV cars—which is a big incentive (Tesla 10-K, 2018, p. 22). In the Netherlands, sales are soaring this year because the tax incentive there is ending and companies want to obtain a Tesla Model S under the current tax rate of 4%, which is climbing to 22% in 2019. Unless something happens to keep these incentives in place, Tesla’s luxury EVs may be unaffordable to its target market. The same problems are being encountered in the U.S. and in Canada, where Tesla has recently sued the government for discrimination in ending its incentives program before Tesla buyers were able to take possession of their Model 3 orders (Tesla 10-K, 2018).

Price-setting process Tesla uses. Currently Tesla’s price-setting process is based on reflecting the value and integrity of the product. Tesla’s EVs are marketed as luxury vehicles: even the Model 3 is marketed as a luxury EV for the middle class. For that reason, Tesla does not offer discounts on new cars or negotiate its prices: “We market and sell our vehicles directly to consumers through an international network of company-owned stores and galleries which we believe enables us to better control costs of inventory, manage warranty service and pricing, maintain and strengthen the Tesla brand, and obtain rapid customer feedback” (Tesla 10-K, 2018, p. 5). 

Is it sustainable and profitable? For the Models X and S, yes, this method is sustainable and profitable—so long as the EV tax incentives are available to buyers—but as recent history has suggested, once those incentives fall by the wayside, Tesla may see revenues decline drastically. That is one reason there is so much urgency to get the Model 3 to market.
It is meant to be a base model EV priced at $35,000 and CEO Elon Musk has even recently stated that Tesla will offer a $25,000 within 3 years. The problem here is that at these prices, Tesla would be losing money. The manufacturing costs are too high and the margins virtually non-existent—which is why no Model 3’s are currently being sold at their base price of $35,000. Tesla cannot afford right now to lose money on sales.

Differentiating between incremental and avoidable costs. Incremental costs occur for Tesla when it seeks to expand operations in order to meet target productions goals. For example, it had to increase operations to 24 hours a day, 7 days a week in order to meet its production goal of 5,000 EVs per week. It had to build a tent to facilitate operations and it absorbed substantial incremental costs as a result. These costs could have been avoided, moreover, by examining the options and choosing lower cost option in the differential cost analysis. Tesla easily could have dropped its production goal: the avoidable costs of ramping up production at the facility were not necessary and did nothing for the long-term outlook of the company. The difference between incremental costs and avoidable costs is that the former are necessary and must be absorbed by the company whenever it seeks to do something like increase production to meet market demand; the latter are costs that could be avoided by choosing a less costly option in order to meet, for example, market demand.

Contribution margin for Tesla’s three top-selling products. Tesla aims at a margin of the mid- to high-teens for its EVs. Contribution margin for its Model S, Model X and Model 3 is pegged at 20%. Tesla aims to deliver far more cars than it did in 2017, which was approximately 100,000 EVs. However, with demand flagging due to backlog and tax incentives ending, Tesla’s window of opportunity could be closing.

Why Tesla should invest in a breakeven analysis. Tesla must invest in a breakeven analysis in order to identify the exact number, model and make of EVs it must sell in order to be profitable. With creditors calling and a potential bid to take the company private, Tesla has to be able to show to investors the precise….....

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References

Hardman, S., Shiu, E., & Steinberger-Wilckens, R. (2015). Changing the fate of Fuel Cell Vehicles: Can lessons be learnt from Tesla Motors?. International Journal of Hydrogen Energy, 40(4), 1625-1638.

LeBruto, S. M., Ashley, R. A., & Quain, W. (1997). Using the contribution margin aspect of menu engineering to enhance financial results. International Journal of Contemporary Hospitality Management, 9(4), 161-167.

Wright, P. (1987). A refinement of Porter's strategies. Strategic Management Journal, 8(1), 93-101.

Tesla 10-K. (2018). Retrieved from https://www.sec.gov/Archives/edgar/data/1318605/000156459018002956/tsla-10k_20171231.htm

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