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Tesla’s digital pricing is transformative; here are 7 improvements to make it even better

Over three months from mid-February 2023, using the Tesla website I tracked the prices and delivery time estimates of Tesla cars in the US, Canada and the UK. For 15 minutes every day I would record this information in a spreadsheet and immerse myself in the Tesla product offering. My goal was to understand Tesla’s digital pricing strategy and think about any improvements.

Here are my conclusions!

I am afraid it is quite a long blog post. I considered splitting it up but decided it would be more useful to have all in one post for those interested in this subject.

Tesla’s Digital Pricing is transformative.

Worldwide, the only channel that Tesla uses to communicate prices and accept orders of new cars is online via their website. Tesla sets prices for their cars at a country-level and so customers using the site first need to specify which country they wish to buy the car. In North America, customers are also asked to enter their exact zip code / post code to see whether they are eligible for regional specific rebates and to access the local availability of new and used Tesla cars. On the UK site, customers can now browse the immediate inventory of new and used Tesla cars where Postal Code is part of the search criteria.

The role of Tesla sales executives is to help customers with this process.

The Tesla site provides core specifications for each car. One of the features of Tesla EVs is that the same model look can disguise very different performance characteristics. The Model 3 Rear-Wheel Drive is the current entry-level vehicle offered by Tesla with a 0-60 mph time of 5.8 seconds. In contrast, the Model 3 Performance has the equivalent acceleration to the Model S (and faster than any Model Y), with a 0-60 mph time of 3.1 seconds.

The Tesla site also provides customers with dynamic information as to:

  • what models are currently available (e.g., the standard Model Y became available in the US on April 7 and Canada on April 21)
  • incentive news (e.g., ongoing updates to the status of US federal tax credit for Tesla Model 3 RWD during April)
  • special offers (e.g., 3 years free Supercharging for Models S & X in US and Canada on April 21, in coordination with a price increase)
  • delivery times by vehicle type
  • prices by vehicle type

This digital approach allows Tesla high capability to centrally manage prices and facilitate coordination between markets. There is also some variation in the way that prices are presented in different markets which suggests some degree of local decision-making. Tesla prices are considerably higher in the UK yet there is still evidence of coordination with North America in the way prices are changed (e.g., on April 21, Model 3 and Model Y estimated fuel savings increased for both the US and the UK). The pricing in the US and Canada markets is similar and tends to be very closely coordinated on net prices, with list (aka MSRP) prices being impacted by national market conditions.

By way of example, throughout the 3-month period from February 11, Tesla Model 3 Rear-Wheel Drive was available at almost the same net price in US and Canada in areas where no state/provincial-level EV incentives apply (e.g. residents of California and Quebec are eligible for additional EV incentives). Yet during this time, there were 5 tweaks to the pricing in the US, which seem designed to manage changes in the Federal Tax Credit (and associated demand disruptions) for this vehicle, compared to once in Canada and once in the UK.  During the same period, prices for the Model X changed 3 times in both the US and in Canada in a precisely coordinated manner (on March 6, April 7 and April 21). Model X is not currently available in the UK.

The immediate inventory capability shows individual car specific deals that is, presumably, managed by the local markets.

7 suggested improvements (for June 2023)

Here are 7 areas in which I believe Tesla faces challenges with their digital pricing strategy and where they should aim to improve.

My intent in suggesting these improvements is to be helpful. Tesla may like some improvements and not others. What I find so impressive is that Tesla have created an integrated digital infrastructure, with their online platform, Tesla app and OTA software updates to their cars, that they should be able implement any of these improvements. With their ability to make ongoing improvements I can imagine that these suggested improvements are specific to June 2023. This time next year a different set of improvements would likely be appropriate.

1. Recognize that buying a car is different from booking a hotel room

One of the early lessons I learnt in my market research career is that customers tend to look for much more information about their car after they buy it than before they do so. It is certainly true for me with my Tesla Model 3 SR+. I, along with many others, are experiencing the cognitive bias of post-purchase rationalization – the tendency to retroactively ascribe positive attributes to an option one has selected. In a nutshell, we want to feel good about the car that we have bought and look for information to support that decision. If the price is substantially reduced soon after we buy our car we don’t feel so good! We also share our opinions, both good and bad, with other people.

When I bought my Tesla in May 2019, due to tweak that Tesla had done to the Model 3 range, it had just become eligible for the federal $5,000 rebate. Great for me, but painful for customers who had bought the car shortly before this change. My Tesla sales agent told me about the very angry calls he was getting from these customers.

Customers are being exposed to dynamic pricing environments for many categories of products and services. We understand that the price of hotel rooms can vary substantially according to availability. It is different with cars.

Recommendation: Tesla should develop a Price Promise to customers to protect them from any major price declines in the months following purchase. This could be anything from free Supercharging added to the customer’s Loot Box through to substantial price rebates. Before implementation, this Price Promise should be research tested with customers and the financial implications should be well understood.

2. Be transparent about the real importance of EV incentives to net prices

The federal EV incentives in both the US and Canada are based on a discount compared to MSRP (Manufacturer’s Suggested Retail Price). In the US this is a Tax Credit which is currently either US$3,750 or US$7,500, and in Canada it is the iZEV rebate of CAN$5,000. Details of the incentives are shown prominently on the Tesla websites for each country.

It can be tricky for Tesla to maintain demand for their vehicles in a changing EV incentive environment – notably in early January 2023 given rapidly rising inventory levels of the Model Y they made a significant drop in MSRP price in the US (and then Canada) in response to the newly introduced US Tax Credit. Yet by focusing customers attention on the EV incentives, Tesla is not being as clear as they could be about prices.

  • For consumers, there is an implicit assumption that these MSRP prices are somehow fixed, and that these are genuine discounts. Yet this is not what is happening.
    • It’s a bit like going into a shop advertising that “today everything is 50% off” yet on closer inspection you see that the MSRP price has doubled over night and the actual net price that you would be paying is the same as the day before.
    • It can also go the other way. As Tesla aligns prices between the US and Canada, the price of the Model Y in Canada has been particularly reduced by the US Tax Credit, yet it is information about the Canadian federal iZEV that is presented to Canadians. Canadians have NOT been told, by Tesla, about why prices of the Model Y have come down.

To dive into one example with the Model 3 Rear-Wheel Drive, on April 1, US customers were alerted on the Tesla site to an anticipated reduction in federal tax credit to take place on April 18. On April 13, Tesla confirmed that on this date this reduction would be from $7,500 down to $3,750, whilst also reducing their MSRP price by $1,000. On April 18, Tesla confirmed that new buyers would qualify for a (reduced) tax credit of $3,750 the Model 3 Rear-Wheel Drive. On April 19, the list MSRP of this vehicle was further reduced by $2,000 to $39,990. On April 21, the estimate of net savings increased by $500, to bring the net price down by this amount. The MSRP price was increased to $40,240 on May 2.

What does Tesla pricing strategy mean in practice for customers?

The net price for the Model 3 Real Wheel Drive in the US stayed reasonably stable from February 11 (when it was $31,790) through to May 10 (when it was US$31,690). There was a period in mid-April when the net price was a bit less in the US (at US$30,290), presumably to stimulate sales ahead of the reduced tax credit. Over this 3-month period, the net price in Canada mostly remained within one or two percentage points of the US price (in states/provinces which did not offer further EV incentives). Converting the Canadian prices to US dollars, the average net price was US$31,423 in Canada compared to US$31,255 in the US. Those in the US NOT eligible for the US tax credit (such as very high earners) would pay more, with their average net price being $38,634 until April 18 and $35,374 from April 19 (i.e. this group has effectively benefitted from the reduction in the tax credit). During this 3-month period, the net prices in California and Quebec were less given their additional state/provincial EV incentives (California US$29,255; Quebec US$26,258).

A simplified communication of net prices can also lead to customers being able to make easier model comparisons based on what they are looking for in a car. Customers could specify what is important to them, perhaps through a simple typing tool, and the Tesla site could suggest options to consider. For example, a customer looking to buy a fast sporty style Tesla might be shown how the Model 3 Performance and Model S compare on value and price.

Recommendation: Tesla should provide clearer information about net prices which is relevant to the circumstances of each customer.

3. Reconsider how price fences might be used

Tesla appears NOT to use price fences between different customer segments except between some national market boundaries. Their pricing could be improved if they reconsidered this approach.

One example would be to provide volume discounts to corporate fleets in North America, which could be designed to guarantee a steady volume of deliveries.

Another example is in the UK to price the business segment separately from the consumer segment. Currently the Tesla Model 3 Rear-Wheel Drive is very expensive in the UK with a list price of £42,990. This is over 50% more expensive than in North America, and around 15% more expensive than other European countries (including Ireland, where cars are also driven on the left and the price is €42,990). In part this is explained by the current tax laws in the UK which are extremely generous for businesses to buy EVs for use by their employees, and this would be pricing some non-business consumers out of buying this car. The current inventory link was not publicized against the price of the cars on the UK site during my 3-month review from February to May 2023, but it is now evident in early June, so it looks to be a new feature. It is interesting that there has been some discounting of new Tesla cars in the UK through the current inventory offers, where the price of Tesla Model 3 Rear-Wheel Drive cars (on June 6) is discounted to £38,790 from the list price of £42,990. Perhaps this is a type of price fence where business customers are more deliberate in their buying and are less likely to react to discounts? Perhaps this practice could be extended and to get non-business customers to go on a wait list and then promote flash sales to them, available through this new existing inventory tab on the UK Tesla site?

However, it is difficult for me to recommend what exactly the price fences might be. I am more recommending that they should consider them. It would then be for the Tesla pricing teams to use creativity and well-tested design to come up with effective approaches.

Recommendation: Tesla should consider how to introduce price fences to better target key value segments.

4. Recognize that prices are transparent to competitors and government

With their current approach, Tesla is providing a high level of price transparency to their competitors and to EV grant bodies within government. There is a danger that this information could be used to Tesla’s disadvantage. Competitors can use this information to better price their own cars. EV grant authorities can design their programs in ways that could be to make Tesla face uncomfortable pricing choices.

The good news is that there is plenty of data in which to guide decision-making.

Recommendation: If they are not already doing this, Tesla should invest in pricing analytics to guide how they should price in this transparent and evolving market environment.

5. Price FSD as a valued, albeit depreciating, asset which customers can choose for their Tesla

In the Tesla Q1 2023 earnings call, Elon Musk spoke about the anticipated importance of autonomy to future profits:

“We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy. So we do believe we’re like laying the groundwork here, and then it’s better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy. This is an extremely important point.”

Elon Musk, Tesla Q1 2023 Earnings call

Currently the price of FSD (the Tesla autonomy product offering) is CAN$19,500 in Canada, and US$15,000 in the US. It is also available on subscription in the US at US$199/month, but not Canada. In a May 9 2023 tweet, Elon Musk talked about plans for a one-month free trial once FSD is ‘super smooth’. As a product with no marginal cost, Tesla do leverage the value of FSD as a perk for employees, and to increase the resale of some models of used cars they sell in Canada:

  • Tesla employees do NOT get a discount on their purchase of a Tesla car, but they can add FSD at no additional charge (according to a conversation I had with a Tesla service technician).
  • On the Canadian Tesla site, all used Model 3 and Model Y cars I saw for sale had FSD capability. I presume that Tesla is adding this FSD capability on trade-ins they receive, and then to take the additional sales revenue of this FSD upgrade at no marginal cost.

The current pricing purchase approach is a flat fee tied to the capability of a specific car. This approach is less attractive to customers with older vehicles with less time, and less certainty, to get an ROI on their FSD investment as their warranties expire. FSD also adds a smaller percentage to the price of more expensive models than less models. Customers should also have reassurance that an investment in FSD contributes to the resale value to their car.

Recommendation: Tesla should encourage customers to consider FSD as a valued feature that they can add to their cars. Tesla should price FSD according to a formula which reflects the residual value (age and model) of a Tesla car. Tesla should consider NOT adding FSD onto used cars they sell as this can negatively impact the resale value of cars with FSD, especially if a customer wants to sell through Tesla.

6. Include service costs in net prices calculations
Currently the Tesla site provides a calculation of gas savings to derive net prices but makes no calculation of savings based on service costs.

Yet Tesla EVs do have a cost advantage compared to ICE vehicles, for ‘maintenance, tires and repairs’ – see page 29 of Tesla’s 2022 impact report (pdf). The insurance cost may be higher for the EVs, but this can largely be determined by a customer ahead of purchase. As a supporting point, in late 2021, Elon Musk made the observation that “the large legacy automakers sell their cars at low to zero true margins. “Most of their profit is selling replacement parts to their fleet, of which 70% to 80% are past warranty,”.”

Recommendation: Tesla should include service cost savings in the net price calculations shown on their site.

7. Fix inaccurate and inconsistent execution

The most notable inaccurate execution of prices on the Tesla site is with the pricing of Model X. This is an error I first noticed on February 15 on both the US and Canadian sites and has persisted through three price changes. On the US site (with the prices of May 10), if you click on the price for Model X you will see that the Vehicle Price is $97,490 and that the Price after potential savings to be $90,890. If you then look at the price of Model X Plaid and then go back to Model X you will see that the Vehicle Price has now increased to $103,990 and the Price after potential savings is $97,390. A similar inaccurate change in prices with Model X also happens on the Canadian site. (I intend to make a note on this blog if and when I notice that this error is resolved.)

With the UK site, during early March, some models were given delivery during a ‘Mar – Apr 2023’ timeframe; inconsistently others would be delivered in ‘2 – 6 weeks’. On March 15, all cars were shown for delivery between ‘Apr – Jun 2023’, suggesting that Tesla UK did not want to spend much effort on being more precise with delivery estimates. The messages on the UK site were sometimes out of date. On April 1 there was still a message which read “Take delivery by March 31, 2023 and benefit from 3,000 miles free Supercharging’. On May 1 there was still a message which read “Business Contract Hire rates valid for orders placed and delivered by April 30th”. On the UK site, the savings calculator for each variant of Model Y shows both the savings and net price; for each variant of the Model 3, the savings calculator just shows the savings.
In both the US and Canada, fuel savings are calculated over 6 years whereas in the UK they are calculated over 5 years. Without a common standard, there becomes a suggestion that Tesla fudges the figures for their net price calculation according to the argument they would like to make. Specifically, in the UK, a suspicion is that the savings are so strong for business customers that the numbers ‘look better’ over 5 years.

Recommendation: Tesla should make extra efforts to ensure that accurate and consistent information is available through their site.