Tesla Changed Its Pricing Structure: Demand Cliff Narrative Returns

Tesla doesn't rely on MSRP and discounts. It simply adjusts prices and model offerings from time to time.

2021 Tesla Model Y

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By: EVANNEX

Feb 23, 2021 at 9:38am ET

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Posted on EVANNEX on February 23, 2021 by Charles Morris

Tesla is different from other automakers in many ways. One unique, and welcome, feature: it regularly reduces the prices of its vehicles. Another different thing about Tesla is that, because of the upstart automaker’s prominence, every little thing it does is immediately studied, analyzed and pontificated upon by hordes of online pundits.

Above: Tesla Model Y (Source: EVANNEX; Photo by Casey Murphy)

Tesla recently adjusted its pricing structure, paring the prices of the lowest-priced Model 3 and Model Y by $1,000 and $2,000, respectively. The cheapest Tesla is now a Standard Range Plus Model 3, which starts at $36,990, a bit lower than the average price for a new car in the US ($40,573 as of December 2020, according to Edmunds).

In the traditional auto industry, price cuts are considered bad news—a warning sign of flagging demand for a particular model or make. The chattering classes seized on the price reductions as an omen of impending doom, and TSLA stock took a tumble.

Just a couple of days later, Tesla caused confusion by removing the lowest-price Model Y from its online offerings entirely. Is the company dropping the most affordable Model Y? Is this just a temporary move? Can’t Tesla make up its mind? The muddled messages caused TSLA to really plummet this time, dropping to levels last seen a couple of months ago.

So, is this it? Is the EV revolution all over? Will the most hardcore anti-Tesla short-sellers soon be bathing in champagne, and proudly donning their little pink short shorts, as Elon Musk drowns his sorrows in Teslaquila?

It doesn’t seem likely, for a couple of reasons.

First, what just happened was hardly a fire sale. As it stands now (Tesla may make more changes next week, who knows?) it was only the entry-level Model 3 that got a price cut—Tesla kept the prices of its mid-level trims the same, and actually increased the prices of the top-level trims. Assuming that the price changes reflect the demand situation (and no one outside the company can say for sure whether this is the case), the meaning of this round of repricing would seem to be that buyers prefer the company’s higher-priced variants. Considering that higher-priced products tend to carry higher profit margins, this would seem to be good news, not bad.

It’s also worth keeping in mind that we’ve seen this show before. Tesla is constantly rejiggering its lineup, adding new variants, dropping others, inventing new names for them, and lowering prices for entry-level models while increasing the prices of options (the full self-driving package now costs an additional 10 grand!). Inevitably, some buyers end up on the losing end of the constant changes, and that’s unfortunate, but it doesn’t seem like a real reason not to buy a Tesla. As I’ve written in this space before, it would be nice if car pricing were simpler, but if anything, Tesla’s pricing is more transparent than that of legacy brands.

Finally, as regular readers of this column know very well, Tesla’s mission is not the same as that of other automakers. The old guys (and one gal) are selling in a mature market, and they’re out for one thing: profit. Young Tesla is a disruptor—it isn’t out to steal a piece of the oldsters’ business, but to eliminate their business altogether. Every EV sold brings the end of the Oil Age, and the fulfillment of Tesla’s quest, closer. Seen in that light, forgoing a thousand bucks worth of profit on each base Model 3 sold may be an acceptable trade-off for selling more of them.

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