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Now then, let’s get into today’s breakdown…

Tesla’s Dynamic Pricing

In 2022, Tesla raised the retail prices of their vehicles on 6 separate occasions.

In just the first 4 months of 2023, Tesla reversed the trend and slashed their prices 6 times.

Historically, in the system created by Henry Ford (now codified into law in most states), manufacturers lock in their prices for a full year every August.

So, how can Tesla change their prices so frequently, and what is the strategy behind the movements?

Chess Move

The what: A TLDR explanation of the strategy

Elon rejected the traditional franchised dealership model, where manufacturers had to lock in their recommended price, but independent dealers had the flexibility to negotiate the final sale price with the end customer.

He established a direct-to-consumer (DTC) business model that made Tesla both the manufacturer and the dealer, putting them in full control of the final price of their cars.

This allowed Tesla to price its vehicles dynamically based on market signal: their cheapest model consistently tracks the average price paid for a new vehicle in that market segment in the United States.

Market average when Model 3 was released: $34,944
Model 3 price: $35,000

Market average in Jan 2023: $47,692
Model 3 price in Jan 2023: $46,990

Breakdown

The how: The strategic playbook boiled down to 3x key takeaways

1: Optimal entry price point

By tracking the market average price, Tesla ensures its cheapest vehicles are always positioned fairly in market.

Tesla started as a luxury brand with the Roadster, and used the high-ticket revenue to fund its expansion towards more economical vehicles.

Now their product catalogue has matured, their entry-level Model 3 sits at a perfect price point that is attractive to the average American, without leaving money on the table (at a lower price) or pricing out the critical customer segment (at a higher price).

Takeaway: Don’t guess your optimal price point for a high-volume product category - consider just using the average.

2: Customer perception

When Tesla first made surprise price changes, consumers were frustrated by the industry pattern interrupt. Tesla initially justified the changes on the basis of new features, performance upgrades, and deals.

As price changes continued, sometimes week to week, even without changes to the vehicles, customers became accustomed to them.

Now, the mere potential for change creates a psychological effect that motivates customers to make quicker purchasing decisions, fearing further increases.

Similar to volatile stock prices, Tesla’s cars are ‘probably better to buy today than tomorrow’.

Takeaway: Price sensitivity is important, but don’t underestimate how much consumer preferences can change.

3: Price elasticity of demand

Tesla recognised that locking in a price for a full year meant leaving money on the table if consumer willingness-to-pay rose.

On the other hand, it exposed them to supply chain risks if demand for their cars dropped.

When this happens, dynamic pricing lets Tesla respond by dropping prices to immediately stimulate demand.

When external factors like inflation, parts shortages, and new market entrants impact Tesla’s unit economics, they can instantly de-risk their operations and pass on the cost to customers.

Takeaway: Build in ways to respond to changes outside of your control.

One tweak to the traditional automotive business model → several competitive advantages.

Optimal entry pricing. Deeper market penetration. Market responsiveness. Economic agility.

Rabbit Hole

The where: 3x high-signal resources to learn more

Recommendations, friends, and sponsors

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Not Boring - Packy’s piece this week is a delightfully optimistic take on where exponential tech could lead us: “When My Kids Are My Age - The Wonderful World of the 2050s”