Tesla Price Cuts: What can SaaS founders learn about this case study?

Tesla has already dropped the prices of their cars 6 times already this year.

In the latest quarterly update to investors, they shared that it is all part of their strategy: they want to expand market share and benefit from the services revenue in the long run. But this strategy seems not to be working in the short term.

Is it really viable in the long term?

What are the consequences that nobody is talking about?

In this article, I will analyze Tesla's decision through the lens of a pricing expert who dealt with hundreds of product price changes in his career while I give you actionable insights into how to analyze if a potential price reduction decision is worth it in your case.

A short history of Tesla price decisions and their reasoning

(Almost) everyone's been reading in the news about the Tesla cars' price drop, but for those of you who aren't, here's the story.

It all began last year in 2022, Elon Musk gave the first signs Tesla might change prices to boost sales:

Musk said he expected inflation to start easing by the end of the year and most commodity prices to stabilize, which he hoped would allow Tesla to cut prices slightly.
Reuters

Then, Tesla started lowering prices in early January 2023:

(...) the firm said its focus on "original engineering and manufacturing processes" and a recent "normalisation" of some of the cost inflation, had allowed it to pass on savings to customers.

Like other carmakers, Tesla is grappling with the likelihood of slowing demand for vehicles as customers deal with rising borrowing costs and concerns about an economic slowdown.

Tesla shares fell again after the price cut announcement, as investors feared lower prices would eat into profits.

However Wedbush analyst Dan Ives said the move was a "shot across the bow" for Tesla's rivals. suggesting that Tesla was "not going to play nice in the sandbox with an EV price war now underway".
Tesla cuts prices by up to a fifth to boost demand - BBC News

It was clear that Tesla was signaling to the market it needed to make a price adjustment because prices were at "embarrassing levels" (as Musk sees it). But it wasn't a small adjustment, as "the price cuts are in the range of 10% to 13% in the UK, but run as high as 20% on some US models." as said BBC.

The market and some analysts were seeing beyond Elon's words: Tesla wanted to sound like a brief adjustment, but it felt like an offense on the competition.

Apparently, they were right.

On March 2023, Tesla came again to the stage:

Tesla has cut prices for its electric cars - again - as it tries to boost sales and compete with rival firms.

(...) They follow big markdowns of up to 20% that the firm introduced in January.

(...) The company did not respond to a request for comment. Last year, the firm missed its 2022 target of increasing its deliveries by 50% annually, a shortfall the firm blamed on supply strain constraints and a weakening economy.

But boss Elon Musk has said previously that price cuts were working to lift demand.

"The desire for people to own a Tesla is extremely high. The limiting factor is their ability to pay for a Tesla," Mr Musk said last week during a presentation to investors.
Elon Musk's Tesla cuts prices again as tries to boost sales - BBC News

Another price drop and Musk says Tesla wants to boost sales because potential buyers can't afford their cars.

Is it, though?

How come, if they couldn't meet their production targets, and by February, customers were still [waiting between 1 and 2 months to get their cars](https://insideevs.com/news/557667/us-tesla-estimated-delivery-times/#:~:text=Tesla's estimated delivery times (for,backlog reported in late 2022.)?

Clearly, Tesla wants to buy market share as more and more car manufactory companies enter the electric vehicle (EV) market. The truth is that Tesla sees "competition is coming and they are responding with price cuts."

Fast-forward to the latest news: Tesla has cut US prices for the sixth time this year and has signaled in their quarterly report that their "pricing will continue to evolve, upwards or downwards".

Having had experience consulting for large corporations, I can almost predict what is going on inside Tesla meeting rooms.

Let me give you more context.

Tesla basically was the first to the EV market and executed phenomenally well. They transformed an idea into an object of desire, and their longing for success proves it. Moreover, they managed to sell highly profitable EVs.

The EV market is one of the hottest markets at the moment, and it is rapidly expanding year after year.

The counterpart: every car manufacturer wants a piece of it.

Read more at the Pricing Corner