Tesla Bucks The Trend: Increases Cost Of Model S To Help Margins
While seemingly all mass producers of electric vehicles these days are cutting prices and offering big discounts to get consumers into their plug-in cars (most notably Nissan with the LEAF of late), Tesla is upping the cost of their Model S.
In announcing a price increase is coming shortly, Tesla does indicate that current reservation holders do not have to worry about this bump in price affecting their orders; that is unless they don’t lock their reservations in by converting to a firm sale when Tesla calls on them to configure their cars.
Tesla says that reservation holders when requested to make their Model S purchase will have a “fair, predefined timeframe” in order to complete the transaction without facing the new pricing.
The company expects the new cost structure to be out in the next 2-3 weeks.
Statement from Tesla:
Yes, we will be announcing a Model S price increase in the near future. However, there are a few very important points to understand about the upcoming price increase:
- The price increase will not apply to anyone with an existing reservation prior to the effective date of the price increase and who also configures their car and finalizes their order within a fair, predefined timeframe.
- There will be a few “options package” changes as part of the price increase (meaning some things that are currently considered standard equipment may become part of an optional package going forward). These changes will not apply to anyone with an existing Model S reservation prior to the effective date of the price increase who also configures their car and finalizes their order within a fair, predefined timeframe.
- All reservation holders who have “deferred” will receive an email regarding the price increase and will have the opportunity to keep current pricing and options packages by finalizing their configuration and order within a fair, predefined time frame, similar to those who did not defer.
This price increase is planned to be announced with full details, effective dates, pricing and options packages in the next two to three weeks. We are starting to hear rumors about “a price increase coming soon” and want to assure current reservation holders that the price increase will not affect them as long as they configure and finalize their order within a fair, predefined time frame after being invited to configure their Model S. If a test drive is all that is holding you back from configuring your car, please make an appointment at a Tesla storenear you.
Tesla previously increased prices on their Tesla Roadster multiple times as the company realized the car was more expensive to produce than originally anticipated. The Roadster originally started around $92,000 before ultimately costing around $109,000 for the 2.0 model.
Unlike the Roadster however, we feel the reason for this upcoming price hike has nothing to do with the cost of production, but Tesla’s need to achieve a 25% profit margin (as stated by CEO Elon Musk) to be successful in the future.
The crisis at Tesla when it comes to profit margins is something the company has indirectly done to itself while in the hunt for as much cash as possible during this costly start-up period.
This 25% profit margin is a goal for ongoing production at the company, however in filling early orders, Tesla has pre-selected for sale only the “best of the best” of the 13,000 reservation the company has procured. Meaning the company has stolen from the future for benefit of today.
The bulk of the cars produced to date have been of the $100,000+ variety, and all upcoming short-term production will be the 85 kWh version of the Model S, which currently starts at $77,400 (standard)-$92,400 (performance). In December, Tesla will start producing the 60 kWh variation which starts at $67,400.
Its not hard to see that if you have 13,000 reservations, and you cherry-pick the top 3,000 high price/high margin cars for 2012 production, your 2013 margins are really going to be a struggle to meet.
Worse still, when the 2nd quarter of 2013 comes around, and Tesla is forced to build an estimated 5,000 base Model S cars at $57,400+ a piece, they will be achieving no where near the 25% margin the company needs to be successful. If future orders are not both strong, and of high quality (like the premium 85 kWh cars) the company has a real problem on its hands.
In our opinion, the only answer for Tesla to alleviate this coming crisis was to up the price in an attempt to alleviate this self-inflicted gunshot wound, while hoping that future demand (and orders) will be strong enough to maintain the company’s forecast of 20,000 Model S electric sedans sold in coming years.