Why does Tesla’s pricing strategy make everyone feel at a loss?


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He Da Wan Da
Source: akashio (ID: akashio)
In November 2018, Tesla officially announced that the price of model 3 is 540000 yuan, which is not affordable by ordinary people.
With the efforts of Tesla, in the past two years, the global production of Tesla electric vehicles, the localization of parts, the use of lower cost lithium iron phosphate batteries instead of lithium-ion batteries and a series of other operations have led to a sharp drop in the price of Tesla cars.
Take model 3 as an example. According to the interface news data, as of October 2020, the price has been reduced nine times. At present, the price on the official website is 249900 yuan (after subsidies), and the cumulative price reduction is 290000 yuan, with a price reduction rate of 54%. [1] Tesla enables more people to enjoy the low-cost travel brought by new energy vehicles.
However, Tesla’s price cut did not win good reputation in public opinion. On the contrary, it made many users who had paid to support Tesla feel that they were treated as leeks by Tesla.
The higher the frequency and range of Tesla’s car price reduction, the more criticisms and comments on Tesla. Finally, negative criticisms of Tesla are everywhere, from offline stores to Tesla’s official microblog number.
Some car owners ridiculed Tesla’s price reduction as “not a bit defensive and not a bit worried”. The price of the car fluctuated, even giving people a feeling that “musk is pricing himself”.
Some car owners even put the label of “Tesla leek” on the tail of the Tesla car they bought for self mockery and protest.
Tesla allows users to buy better new energy vehicles at a lower price. Originally, it is a matter of bringing welfare to the society. All consumers should be happy. But with Tesla, why do all consumers feel that they are losing money?
This is an issue related to the pricing strategy of economics.
What is Tesla’s pricing?
Tesla’s pricing is constantly changing, which is related to its production cost and pricing strategy. For the convenience of narration and understanding, let’s first talk about Tesla’s production cost and then talk about Tesla’s pricing strategy.
Those who took the course of micro economics in college may remember that Adam Smith described the phenomenon of “economies of scale” very early with the example of needle making in a needle factory, that is, the production cost of products decreases with the increase of production quantity.
Adam Smith’s “economies of scale” exist not only in needle factories, but also in most consumer goods industries, including automobiles. The longer a car comes out, the more it is produced and the cheaper the cost.
The reason is that in large-scale production of automobiles, the automobile R & D costs, design costs, mold development costs, and plant equipment costs that need to be invested in the early stage can be evenly allocated to many automobiles, thus effectively reducing the manufacturing costs. The cost curve of typical scale effect is as follows:
A typical cost scale curve
Tesla electric vehicle, as a “new species” in the automotive field, is in the early stage of development. Take model 3 as an example, the total production of model 3 is small in history, but the production is rising fast. How much and how fast is it? We can compare these two points with any traditional model (such as Toyota Camry)
Tesla’s low historical production means that Tesla is at the left end of the cost curve, with significant scale effect. With the rapid growth of Tesla’s automobile production, the cost will drop rapidly.
On the other hand, Tesla’s price reduction is so many and frequent, in addition to the scale effect factor, there are some other external factors.
According to the in-depth report of sina science and technology, “the mystery of price reduction – revealing Tesla’s automobile marketing skills in China”, the price reduction process and time point of Tesla are also closely related to the localization of parts after Tesla entered China, the use of lithium iron phosphate battery of Ningde era to replace Lithium-Ion battery and other factors. The change of external fixed cost further accelerates the cost of Tesla electric vehicles slide downward. [2]
Therefore, the decline of Tesla’s auto price is caused by the superposition of multiple factors, and the cost curve should be as follows:
If you were musk, how would you price when you got such a cost curve?
The probability is as follows:
OK, so far, you have the same idea as musk. You can be scolded with him.
As the “pioneer” of new energy vehicles, musk said at the financial report conference in the second quarter of 2020, “Tesla’s price is not close enough to the people, and we want more people to enjoy the benefits brought by technology.”.
Therefore, Tesla wants to use lower prices to penetrate more people and quickly seize the market [2], so it adopts “penetration pricing”, which is a method to maintain a low profit range to quickly obtain the market.
This kind of pricing strategy has nothing to do with supply and demand and the price of competitors. It is only related to its own cost. “As long as the cost is reduced, I will reduce the price.”. In this strategy, as long as the enterprise maintains the advanced nature of production, it should be able to maintain market leadership.
As mentioned earlier, the cost of Tesla is declining rapidly. With the pricing strategy of Tesla introduced later, we can see that the price of Tesla is falling again and again, and there is no expected decline.
This leads to the phenomenon that we talked about at the beginning: Tesla’s “timely surrender of profits” only makes car buyers feel that they have become “big losers” at any time.
How is the traditional car priced?
Reading this, you may have found a paradox that “increasing profits” may make consumers more satisfied.
This may sound counter common sense, but it has been proven in the field of traditional cars and many consumer goods.
The total production and sales volume of the traditional automobile market is stable, and it is occupied by a few leading automobile manufacturers. Each has its own advantages, and the audience positioning is different. In the mature market, automobile manufacturers no longer take “obtaining” market share as their main purpose, but “maintaining” market share and maximizing their own profits.

Around 2000, China’s automobile market was in short supply and made huge profits, especially the profits of medium and high-end automobiles. According to the figures released by an authoritative statistics organization in Germany, the profits of China’s mainstream automobile manufacturers in 2002 were amazing, with an average profit of more than 22% and some companies reaching 30%. However, with the increasingly fierce competition in the automobile market, according to the annual financial report data of Toyota, Volkswagen and BMW Group in 2019, the profits of most automobile manufacturers have dropped to about 9% – 12%.
In different environments and time points, the profit gap of traditional automobile manufacturers is so large, which actually proves that their pricing strategy considers the market and competitors more than their own costs.
What is the pricing strategy of traditional cars? Let’s review the demand price curve in the micro economy
A sloppy demand curve
In such a simple (vacuum spherical market economy) demand supply curve about price, the pricing strategy should only be related to the demand, and the manufacturer should find out the “maximum price of the maximum purchase quantity” in the current period. Above the automobile cost line, the manufacturer finds the maximum product of sales quantity and selling price, and obtains the maximum sales volume as the best pricing.
This will bring about two effects: one is that the enterprise can obtain the maximum profit, and the other is that people who buy a car feel that “Wow, the car I bought has preserved its value”.
But for Tesla, it certainly disdains the pricing strategy that violates the law of value. So in 2020, Tesla even has the phenomenon of “the car has been reduced before it is delivered”. There is no reason to reduce the price of normal goods in short supply, but Tesla has reduced the price because the production cost has been reduced.
This phenomenon will never easily appear in the traditional automobile industry, because for traditional automobile manufacturers, even if the cost drops suddenly, as long as they can hide it, they would rather make profits than make sales.
That is to say, in this market, the actual operation of cutting leeks can pacify the mood of “leeks”.
In the traditional automobile industry, the strategy of upgrade without price reduction will be widely used. In the 10 years since the new car was released, manufacturers have continuously introduced small changes, annual changes, medium-term changes, large changes and intelligent upgrades. If you are an old car owner, you will feel that your car has not been reduced in price. But in fact, although it is called by the same name, it is not that car for a long time.
In addition, the price of traditional cars has been very stable, which has a lot to do with the traditional way of car sales.
The traditional way of selling cars is mainly sales agents (the 4S sales experience shop). Dealers have strong control over the sales price of cars. Dealers generally sell goods to consumers after tens of thousands of goods are sold through car manufacturers, usually has the final say.
In the way of selling cars to dealers, automobile manufacturers have a weak ability to control the price of goods. When automobile manufacturers reduce the price of cars, sales channels have the motivation to delay or hide the price of products in order to earn more benefits.
In the traditional model of car sales in the dealer agent, the signal transmission of car price becomes very weak, and the consumer is not easy to detect the price change. In many cases, even if the car price is reduced, consumers do not know. It weakens or hides the contradiction between automobile manufacturers and consumers caused by automobile price reduction.
On the other hand, Tesla’s sales model is that direct sales across the country have a unified price. Without dealers earning the price difference, there is no middleman to cushion the price reduction. The price is more transparent, but it also brings more risks and tests to manufacturers’ product price reduction.
It can be said that Tesla’s direct mode has become the catalyst for make complaints about the price of Tesla.
Can we learn from millet and apple?
Is it possible to not only make profits, but also make users feel “profitable” psychologically? It’s also possible.
The pricing strategies of Xiaomi and apple have reference value.
In its infancy, Xiaomi also encountered the same problems as Tesla. In the early stage, the cost of product design and R & D was very high, but the production quantity was very small, and the apportionable cost could not be fully apportioned, so it was inevitable that the product cost was very high.
According to the calculation of Morgan Stanley [4], the BOM price of Xiaomi 2 is 1700 yuan, but this cost does not include taxes, royalties, manpower, marketing costs, etc. with these costs, we have reason to believe that the cost of Xiaomi 2 is more than 1999 yuan.
The price of Xiaomi mobile phone 2 is the same as that of the first generation, 1999 yuan. Later, we all know how to achieve this: control the sales volume in the early stage, and wait for the cost of components to drop before moving forward.
This practice is affectionately known as “monkey”, but in fact, people who buy it all feel that they make a lot of money, not even the first ones. In the second, third and fourth batches, the consumers who bought the new machines in the first half of the year felt that they had “collected Mr. Lei’s wool”.
Therefore, the price curve of Xiaomi 2 is as follows:
What is the truth of Xiaomi’s hunger marketing?
This is a very radical cost plus pricing method, which requires accurate prediction of the price reduction of each component of the product in a certain period in the future before pricing, and creates profit space by continuously compressing the marginal cost.
For Tesla, in fact, if it is expected that model 3 will be reduced from 540000 to 249000 in the next two years, then the initial price should be set at 370000 or so, so that less delivery in the early stage and more delivery in the later stage can fill in the front loss.
But the consequences are also very obvious: if you are faced with strong competition and large fluctuations in market supply and demand, the company may be out of business before you recover the fixed cost or reduce the marginal cost to the profit range.
In the “high price commodity” field of electric vehicles, Tesla’s own cash flow may not be enough to support this pricing model.
In addition, there is a huge difference between the early Xiaomi and the current Tesla: Xiaomi is not a listed company and does not need to deal with public shareholders.
The price reduction of Tesla electric vehicles and the improvement of production capacity are all favorable factors for Tesla stock in the capital market. Using the current pricing strategy, investors can see at a glance that “the company’s sales and productivity are taking off like a rocket.”.

It turns out that Tesla’s shares have taken off like a rocket.
In contrast, Xiaomi’s pricing method is not very well recognized by the capital market. In 2018, the whole network already knows the price magic of Xiaomi. But when Lei Jun went to do the Xiaomi listing roadshow, there was still a rumor that investors had little interest.
However, in addition to millet, there is also a reference object is apple.
As we all know, Apple’s pricing strategy is basically skimming pricing, which has nothing to do with BOM cost, and its gross profit is extremely high. Therefore, for Tesla, which wants to “yield profits” to expand the market, what is worth referring to is not Apple’s new product pricing strategy, but Apple’s price management of old models.
Theoretically, a commodity with high gross profit, such as the iPhone, should have a higher depreciation rate with the increase of supply, because even if Apple has a strong channel price control ability, when the second-hand and refurbished iPhones on the market begin to circulate, you can’t control how much they want to sell. The new second-hand iPhone is a significant substitute for the new iPhone, which should weaken the price demand elasticity of the iPhone.
But in fact, on the contrary, the iPhone has always been one of the most valuable products in the field of smart phones.
After counting as many as 60 smartphones, Apple’s average three-year depreciation rate is 48.25%, according to comparemobile. As a commodity of less than 10000 yuan, its value preservation rate even exceeds that of Tesla.
So how to ensure that Apple’s commodity prices will not drop precipitously?
Unlike Xiaomi, Apple’s price magic does not define the price of new products, but is based on the definition of second-hand prices. [3]
Apple’s iPhone is steadily updated every year. When the new iPhone is launched, the previous and previous iPhone will be reduced in price and become a mid-range and entry-level machine.
Note that its price on the official website is usually “worthless”. This price defines the upper limit of the price of the previous generation of iPhone, and the real sales volume is generally in the e-commerce channel with lower channel. The function of the official website price of the previous generation of iPhone is to anchor the “psychological pricing” of the previous generation of users for their old models.
On the other hand, after Apple released new products, Apple also launched the service of recycling old equipment and selling “official refurbishment machine” from a very early time. This, to some extent, defines the lower limit for the pricing of old models and prevents the precipitous drop of the previous generation models in the second-hand market.
In addition, “if the price of Apple’s products falls within 14 days after purchase, users can refund the price difference through after-sales channels”, “new year after year” and other programs play an important role in stabilizing the price and brand impression of the old iPhone.
This kind of control over the price range of second-hand models is the reason why Apple users “feel valued”.
Considering that the main group of “complaints” about Tesla’s price reduction comes from loyal customers who support Tesla at high prices in the early days, it may be a good plan to refer to Apple’s official pricing system in Tesla’s second-hand market.
As for whether Tesla will change its pricing strategy in the future, no one knows. After all, for musk, who once joked about calling himself a socialist on twitter, “value determines price” may be the only right way to price.
Main references
[1] Interface news data line: Tesla’s price adjustment nearly 60 times after entering China, model 3 price cut
[2] Geek Park: is Tesla cutting leeks? 》
[3] Tiger sniff: how does the second hand “gray market” push up the average price of iPhone? 》
[4] Driving home: cost of Xiaomi 2 leads to hot discussion, analysis of Damo calls 1700 yuan
(statement: This article only represents the author’s point of view, not Sina’s position.)