A lesson from Tesla’s pricing strategy from ‘17 to ‘23

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Read time:  3 minutes 15 seconds

Until Tesla came into the show, car pricing worked very differently in the US. Every year, starting around August, car manufacturers finalize features and prices for their vehicles. For instance, the 2023 Audi A4 Premium began at the Manufacturer’s Suggested Retail Price (MSRP) of $43,495 and did not change till the end of August 2024. Dealers could offer incentives, charge additional fees, or give deals based on financial options but MSRP’s remained more or less constant.

The locking of annual pricing tradition dates back to the mid-1930s, aimed at stabilizing jobs during the Great Depression. In contrast, Tesla deployed a floating-price strategy that diverged from the long-standing practice.

Elon Musk rejected the traditional franchise dealership model and established a direct-to-retail (DTC) business. DTC meant that Tesla became both a manufacturer and dealer, always controlling the final price for the customers. This, in turn, gave him the leverage to deploy dynamic pricing based on market behavior for its customers.

Tesla Model 3 Prices, for example, from its launch in ‘17 to ‘23, consistently matched the average price paid for a new vehicle in the same market segment

2017

• Average new car price in US: $34,944

• Tesla Model 3 launch price: $35,000

2023

• Average new car price in US: $47,692

• Tesla Model 3 price: $46,990

Tesla’s floating-price strategy can be broken down into 3 key takeaways

👀Entry prices that demand a second look

By matching the price of its cheapest variant (Tesla Model 3) to the average car price in the US, Tesla ensured that it was always well-positioned in the market.

Tesla started as a luxury car brand with the iconic electric Roadster. The high-ticket car fueled the company’s expansion into the economic variants. After having a product for every price segment, they took the next strategic step of making their entry car price point dynamic, mimicking the average car price in the country. For a new buyer, this move ensured that Tesla was always in the buyer's consideration set.

😧Customer Perception: From Ouch to Alright

In its initial days of Model X and Model Y production - from 2012 to 2016 - Tesla justified its price changes with additional features like an increased battery range or an additional software lock. But by 2018, when Model 3 was released, Tesla sometimes changed prices within weeks, with or without any change in the product. 

Initially, this received some backlash from customers but when the price changes continued, people became accustomed to it.

As the idea of price changes normalized, it created a psychological fear of price increase, motivating users to make faster purchase decisions.

📖A Lesson on Price Elasticity of Demand

Tesla understood that locking prices for a full year limited their capability to play offense. If the demand rose, they would be leaving money on the table and if the demand sunk, they would be sitting on idle inventory with limited options.

Moreover, when external factors like inflation, new market entrants, and part shortages impact them, dynamic prices safeguard their bottom line by passing on the cost to the customers.

With Tesla’s floating price strategy proving effective (53% EV market share in the US), it is poised to become the new standard in the EV industry. Established players like Ford and Volvo are also beginning to adopt centralized control of EV sales and pricing. What follows, is a world of dynamic pricing of electric vehicles across the board.

Until next time! 👋

Saurabh