Tesla\'s Terrible Pricing Strategy

Pricing Strategy 
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
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. 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.
Pricing Strategies
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.
Critical Factors
Tesla’s technology is innovative and revolutionary: it has combined style with battery-powered, computer-based design to bring an EV to market that has never before been seen. However, pricing has been a barrier for many customers—but governments have helped by giving incentives, such as the $7500 write-off for consumers who purchase an EV like the Model 3 thanks to the tax credit available to green energy buyers in the U.S. (Sheldon & Dua, 2018). Still, this incentive is set to expire and that has put pressure on Tesla, too. The high-priced its EVs, the fewer consumers there are who can afford to buy them. The tax incentive was a big boost, but it is expiring and Tesla needs to get its prices down organically by cutting production costs.
The rest of the auto industry is not far behind Tesla anymore either. Numerous companies are planning their own EVs both in affordable middle class models and in luxury models so as to compete with Tesla. This means Tesla will have to use a pricing strategy that remains competitive by way of differentiation (Zeng et al., 2016). With the market embracing the EV more and more, Tesla cannot rely just on design to attract consumers.
Consumer preferences are for an EV that is stylish and good for the environment. Tesla has been able to meet these demands. The one demand that Tesla has not been able to meet is price. For middle class consumers, Tesla is priced too high and that is because production costs are high. Tesla’s margins are razor thin and at $35,000 a vehicle, Tesla would be losing money. That is why Tesla has yet to sell its Model 3 at the base price: it simply cannot afford to do so.
Pricing, Profitability and Market Segmentation
Tesla did well pricing its luxury brand Model S and Model X to the high-end retail segment, but now it must focus on the middle class segment if it wants to be profitable long-term. Tesla has borrowed billions and is deeply in debt and that debt will not be paid off just with Model S and Model X sales. Tesla has to move the Model 3 in order to become profitable, and that means it has to make the Model 3 affordable for the middle class by selling it at the $35,000 price target. Market segmentation is extremely important in this regard because if Tesla does not connect with the middle class market, it will not be competitive in the auto industry and will remain a niche player with debts that it cannot repay.
Price and Value Communication Strategies
Tesla’s CEO Elon Musk is a strong believer in the powerful use of social media as a communication strategy. Indeed, Musk has won a strong following for his company by teasing previews of what the company is going to bring to market sooner or later. Musk has made a lot of promises but so far Tesla has not delivered on its most important one—the $35,000 Model 3. Musk needs to get production costs down so that the company can get this model in the hands of consumers now. Otherwise, the following he has amassed with get tired of waiting and find that other car companies have engineered EVs that are just as good if not better.
Conclusion
Tesla has to make some change to its pricing strategy. Right now its top three products are priced too high for middle class consumers, which is the most important market segment for Tesla as it seeks to climb out of debt and gain market share. However, it has not yet delivered on its promise of an affordable Model 3—and it needs to get production costs down so that it can price this car appropriately. That is what will middle class consumers over the long-term.

References
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