Tesla price swings are upending auto norms

Tesla Inc. has shifted prices so many times this year that it requires a scorecard to keep track.

All four of its nameplates received reductions of up to 20 percent in mid-January, followed within weeks by a $500 increase for the Model Y crossover and then a $1,000 hike on it. In early February, the base Model 3 sedan's price went down by $500.

The yo-yo pricing, which is likely to continue under CEO Elon Musk, may not sit well with consumers over time, analysts said. Buyers at the lower price point might be happy, but those who bought high are suffering a massive fall in resale values.

While price adjustments are common in the industry, week-to-week shifts could have Tesla shoppers second-guessing a purchase.

"Mainstream buyers aren't going to be comfortable buying a car and then realizing the price has shifted drastically right after they bought it — especially if the price comes down, which happened to many recent Tesla buyers in January," said Karl Brauer, executive analyst at iSeeCars.com.

"That kind of instability could hinder Tesla sales in an increasingly competitive EV market," Brauer said. "It also makes residual values and lease contracts much trickier to implement."

As of Thursday, Feb. 9, the starting sticker of the Model Y, America's most popular EV according to Experian registration data, was at $56,630 with shipping vs. $67,440 including shipping at the end of last year. And the adjusted price came on top of a new federal electric vehicle tax credit of up to $7,500, effective Jan. 1. The incentive favors Tesla more than many of its rivals because the EV maker now qualifies for it based on North American production while its import-dependent rivals do not.

The downward price adjustments came after nearly two years of steady hikes and had their intended effect — juicing demand after Tesla's inventories rose in the fourth quarter of last year.

Musk said on an earnings call last month that orders were running about double production capacity, although he acknowledged that the immediate surge may ease over time.

While Tesla's long history of sudden price changes may not faze its loyal buyers, some newcomers could be scared off at a time when the automaker is hoping to increase sales to about 1.8 million globally this year from 1.3 million last year. Tesla doesn't break out U.S. sales, but the Automotive News Research & Data Center estimates them at 491,000 vehicles in 2022.

Tesla buyers who took delivery before the price cuts complained of a sudden loss in resale value after they were announced. That rippled across the used-car market. Some owners of older Teslas complained on social media that their vehicles' values had fallen so low that they couldn't trade up to a new Tesla, even at the reduced prices.

Brauer said Tesla is likely to continue raising prices, depending on the strength of the economy and increasing EV competition.

One reason for Tesla's mid-January price drop was to get the Model Y below the $55,000 price cap for cars to qualify for the EV tax credit under IRS guidance at the time. But the IRS has since changed the classification of the Model Y from a car to an SUV, pushing the price cap to $80,000 — and theoretically giving Tesla more room to raise prices.

"It's clear Tesla dropped pricing on the Y more than it wanted to, as a response to government incentives, and it's already moved the Y's price back up," Brauer said. "I'd expect prices to go up further, but at a modest rate to avoid attention and customer frustration. Tesla also has to wrestle with increased competition, higher interest rates and concern over the economy."

Musk emphasized on the earnings call that Tesla was focused on pricing to stimulate demand.

"Price really matters," Musk said. "I think there's just a vast number of people that want to buy a Tesla car but can't afford it."

Tesla also has two U.S. factories churning out the most popular EVs in the market. Tesla had about two-thirds of the U.S. EV market last year, according to registration data and analyst estimates.

So far, with a few exceptions, legacy automakers have not cut prices for their EVs in response to Tesla. That could change as the EV race heats up with new models coming this year.

Legacy automakers already adjust prices regularly through a variety of levers, including incentives, lease deals and vehicle content levels. As the supply chain crisis eases, automakers may return to generous incentives after enjoying recent record-high transaction prices.

"Price adjustments aren't uncommon in the auto industry," said Jessica Caldwell, executive director of insights at Edmunds. "In fact, price changes are always expected every model year."

But at traditional automakers, pricing changes go through franchised dealers in a "more layered" process, Caldwell said, whereas Tesla just posts new prices on its website.

"Tesla will likely be evaluating the demand and production for the Model Y to determine appropriate pricing," Caldwell said. "But Tesla will still want the vehicle to be competitive — particularly given the onslaught of new EVs coming to market."