Tesla's dynamic pricing echoes legacy sales tactics

Tesla's aggressive sales tactics, including multiple price cuts since January, are helping the electric vehicle maker achieve CEO Elon Musk's lofty goal of growing deliveries by 50 percent annually, despite high interest rates and growing EV competition.

Tesla sold a record 889,015 vehicles globally from January to June, the company reported. It captured about 60 percent of the U.S. EV market in the first half, according to industry estimates, and the Tesla Model Y displaced the Toyota RAV4 as the most popular non-pickup model. 

With those recent successes, Tesla's dynamic-pricing model — with constantly shifting prices and incentives — is not going away anytime soon, company executives said.

Musk said on an earnings call last week that Tesla is willing to cut prices further to match supply and demand. Musk said he receives a daily report on factory production and customer orders with the goal of keeping them in balance. Tesla sells direct to consumers through its online portals.

But Tesla's pricing model, analysts say, is not magic. It suffers from the same drawbacks as other sales tools that stimulate demand, including reducing residual values for existing owners and damaging brand image through heavy discounts.

In fact, some analysts say, Tesla is copying the playbook of legacy automakers by using what are essentially rebates and incentives to juice demand and keep inventories at bay.

"Tesla is the brand that broke the mold, but now they are doing the same things that virtually every automaker has done," said Ivan Drury, director of insights at Edmunds. "The moment you start to do this it becomes an addictive way to sell cars, but there are repercussions."

Tesla's direct-to-consumer model does have an advantage over legacy brands in that it allows the automaker to change prices quickly without consulting retailers. Legacy brands set a suggested retail price, but dealers handle the selling process, trying to maximize their own profits.

Given that difference, legacy automakers have been reluctant to follow Tesla's lead on EV pricing tactics, analysts say, and they probably shouldn't.

"You might play with your pricing and what sort of incentives you can offer through the end of this year on a specific vehicle or for a specific situation, but I don't know if you want to change your overall strategy," said Stephanie Brinley, principal automotive analyst at S&P Global Mobility.

"The next few years are just about patience and picking a strategy on incentives and making adjustments along the way," Brinley said. "Everyone is trying to figure out how to sell electric vehicles."

That's not to say that Tesla's dynamic pricing isn't affecting legacy brands as they move into EVs.

Ford reduced the price of its Mustang Mach-E crossover after Tesla's biggest price reductions in January. And this month, Ford cut the price of its F-150 Lightning pickup, attributing the move to an improving cost structure as it ramps up production.

But most legacy automakers are leaning instead on tried-and-true incentives, such as interest-rate deals worth thousands of dollars in the current credit market or subsidized leases.

Federal incentives through the Inflation Reduction Act provide up to $7,500 toward the purchase of certain electric vehicles for certain customers. Finance companies can get the full incentive for every EV they lease out, and it's up to them whether to pass it through to customers.

One advantage in using traditional incentives over price cuts, Brinley said, is avoiding the sudden loss in residual value that Tesla buyers from last year are now feeling.

The Model Y is about $15,000 less expensive this year because of price cuts. And both the Model Y and Model 3 sedan became eligible for the $7,500 federal EV incentive Jan. 1. Tesla buyers from 2021 and 2022, when prices were high, have complained on social media about their loss in value.

"When you make pricing changes that hurt residual values, over time you're going to end up with angry customers," Brinley said. "And if you're adjusting your pricing too much, then consumers get confused or don't really trust that the price they're getting today is the best price they could get. Maybe it will be better in a week."

Tesla has been offering its own incentives, in addition to price cuts, such as deep discounts on inventory vehicles. The automaker has also offered free charging on its national Supercharger network and additional vehicle discounts for using a referral code from current Tesla owners.

The EV maker also began offering 84-month loans this month after a previous maximum of 72 months, according to its website. The seven-year loan is a tactic gleaned from legacy automakers to draw in buyers focused on monthly payment amounts rather than on total vehicle cost.

"We don't control the macro conditions," Musk said of the current economic climate on last week's earnings call. "If macro conditions are stable, I think prices will be stable. And if they are not stable, then we would have to lower prices."

Musk wants Tesla sales to grow by 50 percent annually for the foreseeable future, reaching as many as 20 million vehicles a year in a decade. That growth would include autonomous taxis that Tesla intends to build, with "quasi-infinite demand," Musk clarified last week.

Last year, Tesla opened new plants in Austin, Texas, and Berlin and expanded its factories in Fremont, Calif., and Shanghai. Tesla said in its second-quarter earnings statement that global vehicle production capacity is just over 2 million vehicles per year.

The automaker remains highly profitable, reporting a 20 percent increase in second-quarter net income to $2.7 billion, allowing it to keep prices relatively low as it pursues growth.

But one disadvantage Tesla has compared with legacy brands is its lack of a dealer network to soak up excess inventory when demand softens. That's one reason why Tesla switched gears this year after raising prices during the pandemic when demand outstripped vehicle supply, analysts said.

"One of the strengths of the direct-to-consumer model is that you get total channel profits both as a manufacturer and a retailer," said Tyson Jominy, vice president of data and analytics at J.D. Power.

"Where the direct-to-consumer model falls apart really quickly is whenever you get inventory building," Jominy said. "As inventories have started to rise on average for Tesla, they have been very aggressive on prices to keep their lots moving. They have to be very proactive."

But on the other hand, inventories of electric vehicles in general have been rising rapidly in recent months — despite robust sales — opening up the possibility that legacy automakers may follow Tesla's lead and cut prices or further boost incentives to move cars off dealer lots, Jominy said.

"At the end of June, we're seeing close to 90 days' supply of EVs on dealer lots," Jominy said. "So maybe we're going to start to seeing some aggressive pricing actions here in the third quarter."