Cybertruck "Foundation series" is a fantastic exercise in economics! ... and PROFITable

The Cybertruck "Foundation series" is a fantastic exercise in economics! ... and very profitable for Tesla!
(background; I've taught university economics for 6+ yrs)

TL;DR: Tesla is figuring out the market for Cybertrucks. They are necessarily doing "price discovery" here, figuring out what the demand side of the market will bear. More importantly, and more profitably for Tesla, Inc. (and TSLA holders), they are executing a fascinating program of "price discrimination" where they maximize profit by pricing Cybertruck higher for those who are more willing to pay that higher price. They've not entered the market with a single price for a particular configuration of the vehicle; they are rather embarking on a very clever program to find the high-willingness-to-pay buyers, and collect an extraordinary price from that subset of all Cybertruck buyers, before they make vehicles available to the more general market, who simply want to purchase at the published prices of 30 November 2023.

——————————————————————————————

Tesla began a period of what economist's call "price discovery" on 30 November 2023, with the initial deliveries of the Cybertruck.

• Tesla understands the supply side: they know their costs to mfg a Cybertruck now, and they know better than us how rapidly they might ascend the manufacturing S-curve.
• But they do not (yet) know what the "willingness to pay" is on the demand side. And they could not: until they published prices on 30 Nov and begin to see how the mere "reservations" turn into confirmed orders, by buyers using the configurator to actually order a particular model and option set for the car, and contractually obligate themselves to pay a certain price.

Tesla did not allow any random bunch of reservations to be configured in those first couple of weeks. Only a very few people, selected by some means we don't have full information about, were able to receive a Cybertruck then. There is little market knowledge there for Tesla to learn from.
Now, two weeks on, Tesla has access to a couple weeks of data on new reservations (at $250 ea.) and on any cancellations, as some number of the legacy reservation holders (at $100 ea.) might have decided they can't afford the newly-released higher prices for Cybertruck, and chosen to get their reservation fee refunded.
This is something of new knowledge for them; but not much.

However, the really large advantage Tesla has—with a novel new truck, the relatively-hot Tesla EV brand, seemingly good performance in various truck metrics, etc.—is the HUMONGOUS database of people (1+ million?) with email addresses who have put a (small) amount down to reserve some nebulous future benefit: possibly obtain an earlier allocation of scarce Cybertrucks during the early months/years before Tesla manufacturing capacity can meet the real demand. Real demand will only be determined when buyers must put real skin in the game. How? By placing a strong contract to purchase a particularly-configured Cybertruck at a particular price for a Tesla-estimated delivery date, and then forfeit that money if they do not follow through and close the deal.

The Foundation-series order approach is a fantastically beneficial exercise to separate the potential buyers on that very large list who are willing to pay a (much) higher price for the Cybertruck Foundation series basket of goods—branding, elite labeling, early(er) access, Full Self-Driving, etc.—from those who have a lower "willingness to pay". This is the classic concept known as "price discrimination", taught in any university intro microeconomics course. The profit maximizing strategy is to "sell the same good to different consumers at different prices" dependent on their willingness to pay.

As your basic econ textbook will teach you, there are three conditions necessary for price discrimination to be successful for a company:

1. Preventing demanders from exchanging amongst themselves. If others can straightforwardly buy and sell the product, then they will “arbitrage” the trades, and will collect the profit that would have otherwise gone to the company that supplied the product. Entrepreneurial economic actors are always alert for these sorts of opportunities, and if the "rules of the game" don't prevent them from doing so, then we can expect to see quite a lot of this behavior. Tesla has contractual rules to limit this behavior.
2. Distinguishing among different demanders. The company can do this easily here via the Foundation series offering, by adding the +$20,000 fee to the published price, and simply observing the take rate as they gradually sort through Tesla's very large backlog of reservations, dribbling out configuration opportunities at a pace of their choice, and refining their own model of "price discovery" as they note the take rate of different groups of reservation holders over time.
3. Controlling any resentment that might prompt potential buyers to take their business somewhere else. Most Tesla customers won't have a big issue here, since Tesla is claiming to throw in a number of extra benefits that (vs. the official published prices on the website) are "worth" much of the $20k increase in price (FSD at $15k, for example). Of course, the market price for FSD is much lower (can't resell it, low take rate, etc.) and the marginal cost of providing it to one more owner is nearly zero to Tesla.

Tesla can readily meet all three conditions here with early Cybertruck sales using the Foundation series program.

At the end of the day, my take on the this is that Tesla published a set of prices on delivery day. They were higher than Tesla had projected on unveiling day in 2019. The news cycle has now run its course, some reservation holders are mad, and whatever downside Tesla is gonna get from that is already known.

But Tesla has the incredible opportunity to maximize profit by, two weeks on, adding another $20,000 in price for anyone who actually wants to get a Cybertruck in the near-term. Then, gradually working through the huge reservations list, and only selling to those buyers willing to pay the extra $20k, at least during the early months of Cybertruck production.

Brilliant!
(if you are Tesla, Inc., or a TSLA stockholder)

Less satisfying if you are (now) one of the potential buyers who, unlike condition no. 3, you understand what is going on, and your "resentment" is rather less controlled.

That's my take. I don't mean to throw shade on Tesla here. I'm trying to merely explain descriptively what is going on, and for many who haven't thought about economics ever, or not since that one required course they took in university, provide some helpful understanding.

Happy to engage in any serious questions, or corrections, or confusion about my post.

"Tesla Cybertruck outside unveil" by u/Kruzat is licensed under CC BY-SA 4.0.
Admin note: Image added Blog Feed thumbnail

 

[ChooseFreedom]

In a way, this is only fair.
The earliest Cybertrucks will cost much more to build than they will cost later on. As production volume ramps to scale, individual costs will quickly come down.
The first Cybertruck have a higher sales price than they will have as Tesla learns how to produce them more efficiently.

Well, yes and no. I do see what you're saying about costs, and you're partially right.
If you include the years of R&D costs that have already gone into the CT, then all the new equipment/parts to build up the production line, since not much (if any) of the CT shares components with other models, then it's going to take quite awhile to break even.
But to your point, eventually yes the cost of production would come down as they fine tune the process, increase efficiency.

But don't make the mistake of thinking that just because the costs of production go down, that the price to buy a CT would in correlation go down as well. That's a matter of supply and demand.
As Tesla ramps up production, if they're seeing that the demand matches or continues to exceed production, and they can continue to sell Foundation Series versions, why would they lower the price just because they can build them for less? As long as they have more demand than production ability for whichever phase they're in, they won't move to the next phase.

Now, obviously, there are a limited number of buyers in that category, and eventually when that niche runs dry, they'll move on to the next phase down, the tri-motor Beast. And the process repeats. They sell those at the current price until those sales slow. Then move on to the dual motor, and finally they would start building the singles.
This process is a big part of their "marketing" strategy if you think about it. They want the top of the line version to be the first one that everyone in the public sees the first time. You don't want to have people see or ride in a base model as their first impression. So for the next year or so, all you're going to see in public is the Foundation Series.

But the timing of that sequence is very much linked to the sales numbers.
So they'll keep building and selling FS models for as long as they can keep more orders than production can keep up with.
If that's mid '24, '25, '26 even, they won't have to build anything else, and there's no incentive to because they're continuing to sell the most profitable model.
Tesla has "tentative" dates for those other models, but they don't really know yet, and won't be held to those dates anyway.
As long as they have a deposit paid wait list, they're good with maximizing profits. As any business would be.

Now, once that sequence has run it's course, and they've met the demand with the supply, then and only then, would they look into lowering the price, if the sales had slowed enough to warrant it.

 

[henderrj]

Well, yes and no. I do see what you're saying about costs, and you're partially right.
If you include the years of R&D costs that have already gone into the CT, then all the new equipment/parts to build up the production line, since not much (if any) of the CT shares components with other models, then it's going to take quite awhile to break even.
But to your point, eventually yes the cost of production would come down as they fine tune the process, increase efficiency.

But don't make the mistake of thinking that just because the costs of production go down, that the price to buy a CT would in correlation go down as well. That's a matter of supply and demand.
As Tesla ramps up production, if they're seeing that the demand matches or continues to exceed production, and they can continue to sell Foundation Series versions, why would they lower the price just because they can build them for less? As long as they have more demand than production ability for whichever phase they're in, they won't move to the next phase.

Now, obviously, there are a limited number of buyers in that category, and eventually when that niche runs dry, they'll move on to the next phase down, the tri-motor Beast. And the process repeats. They sell those at the current price until those sales slow. Then move on to the dual motor, and finally they would start building the singles.
This process is a big part of their "marketing" strategy if you think about it. They want the top of the line version to be the first one that everyone in the public sees the first time. You don't want to have people see or ride in a base model as their first impression. So for the next year or so, all you're going to see in public is the Foundation Series.

But the timing of that sequence is very much linked to the sales numbers.
So they'll keep building and selling FS models for as long as they can keep more orders than production can keep up with.
If that's mid '24, '25, '26 even, they won't have to build anything else, and there's no incentive to because they're continuing to sell the most profitable model.
Tesla has "tentative" dates for those other models, but they don't really know yet, and won't be held to those dates anyway.
As long as they have a deposit paid wait list, they're good with maximizing profits. As any business would be.

Now, once that sequence has run it's course, and they've met the demand with the supply, then and only then, would they look into lowering the price, if the sales had slowed enough to warrant it.

You are probably correct, but we mustn't discount Elon's ego. He wants to be perceived as the Savior the world. He might lower prices just to have people tell him how wonderful a guy he is. Seriously, this is a reality. I think he will lower prices before he actually has to. I still think it's going to be 18 months maybe even 2 years! But, he has a desperate need to be seen as the guy whose helping everyone around him. And some of us just might benefit from that.

 

[ChooseFreedom]

You are probably correct, but we mustn't discount Elon's ego. He wants to be perceived as the Savior the world. He might lower prices just to have people tell him how wonderful a guy he is. Seriously, this is a reality. I think he will lower prices before he actually has to. I still think it's going to be 18 months maybe even 2 years! But, he has a desperate need to be seen as the guy whose helping everyone around him. And some of us just might benefit from that.

You're right about Elon's Ego (probably has it's own X parody acct).

But in 2 yrs the focus will have moved on to the new Model 2/Mini Y, which is where his actual dream of being the savior occurs.
A sub $30k car that many more can afford. And if he really wants to make a splash, he'll get the price closer to $25k. His vision with that vehicle is to make it like the Ford Model T, and obliterate the competition, sacrificing some margin for sheer volume.
That's his overall goal, to get as many EV's on the road as possible, replacing the ICE.
It's just taken this long to, 1) prove EV's can work, 2) win over some of the public, 3) influence the industry to shift with him, 4) afford to put the plan in action. (some outside distractions, like Space X and Twitter, not withstanding)

So as for the price of the CT lowering, I doubt Elon will be that involved with it in 2 yrs. He's on to the next project. The internal Tesla teams will be in charge of those decisions. Elon might be notified, but only out of procedure.
Control freaks make terrible bosses. A good leader finds people better than them to delegate tasks. He doesn't want to be involved in the day-to-day. He's always been the business starter/builder, and not really that good as a business maintainer. He gets bored. Has to have something new to build. It's a great trait for building startup companies. Not so much for maintaining established ones. (see Twitter)
So the smart thing for him to do is, build it, find others better at maintaining it, and move on to the next building project.

 

[henderrj]

You're right about Elon's Ego (probably has it's own X parody acct).

But in 2 yrs the focus will have moved on to the new Model 2/Mini Y, which is where his actual dream of being the savior occurs.
A sub $30k car that many more can afford. And if he really wants to make a splash, he'll get the price closer to $25k. His vision with that vehicle is to make it like the Ford Model T, and obliterate the competition, sacrificing some margin for sheer volume.
That's his overall goal, to get as many EV's on the road as possible, replacing the ICE.
It's just taken this long to, 1) prove EV's can work, 2) win over some of the public, 3) influence the industry to shift with him, 4) afford to put the plan in action. (some outside distractions, like Space X and Twitter, not withstanding)

So as for the price of the CT lowering, I doubt Elon will be that involved with it in 2 yrs. He's on to the next project. The internal Tesla teams will be in charge of those decisions. Elon might be notified, but only out of procedure.
Control freaks make terrible bosses. A good leader finds people better than them to delegate tasks. He doesn't want to be involved in the day-to-day. He's always been the business starter/builder, and not really that good as a business maintainer. He gets bored. Has to have something new to build. It's a great trait for building startup companies. Not so much for maintaining established ones. (see Twitter)
So the smart thing for him to do is, build it, find others better at maintaining it, and move on to the next building project.

In the spirit of full disclosure I should point out that I'm actually in Elon fan. I believe he handles the effects of his arrested development, which is a result of a very difficult childhood, better than most by far. It also helps to drive him, something that results in Tesla and SpaceX existing, and is a good thing. So, to make lemonade out of lemons should always be encouraged.

Although I mostly agree with everything you said, I think Elon micro manages to a much greater degree in things that are important to him. I think pricing is important to him. The model 2, or whatever it ends up getting called, is 3 to 5 years out. I think he'll ll want to drive the prices down even further on everything that sells well. The e cybertruck, which is no competition to the 2 at all, will almost certainly be driven down in price before it necessarily has to.

Then again, I could be wrong! Let's wait a few years and we'll all know.

 

[Dale J]

You mean in three to five years from now? Prices will drop off course. You are giving Tesla way too much credit on ramping up production. This will be a long process and demand will outweigh supply, especially when people see them out on the road. 90% of people will hate this thing, but 10% of people will fall in love with this monstrosity.

90% of all current pickup owners who currently say they hate CT, will want one and order one when they - see one (live, not a picture or video), drive one, girlfriend or kids wants one, or get the doors blown off their current pickup by one. These are the guys who hang balls off the back of their trucks and have them as a status symbol (aka the majority of 150/1500 series owners). Tesla will soon have you as their customer.

 

[jebinc]

90% of all current pickup owners who currently say they hate CT, will want one and order one when they - see one (live, not a picture or video), drive one, girlfriend or kids wants one, or get the doors blown off their current pickup by one. These are the guys who hang balls off the back of their trucks and have them as a status symbol (aka the majority of 150/1500 series owners). Tesla will soon have you as their customer.

The “Male truck”….

 

[mmanner]

The CT I would order would be the Beast, with FSD, the accessories they are including in the FS, and powershare components. GIven that, the 20K FS cost isn't really much more if any than I'd be paying, and it allows me to get one a bit earlier. So, for me, I don't feel abused by it. I understand other perspectives, however.

 

[T3SLAROD]

90% of all current pickup owners who currently say they hate CT, will want one and order one when they - see one (live, not a picture or video), drive one, girlfriend or kids wants one, or get the doors blown off their current pickup by one. These are the guys who hang balls off the back of their trucks and have them as a status symbol (aka the majority of 150/1500 series owners). Tesla will soon have you as their customer.

Again, when did the Truck becomes status symbol? Only Tesla Stans would all of a sudden consider it a status symbol smh….

You think anyone is impressed with a Lifted $30k XLT?

 

[Twiglett]

I love that Musk obviously feels no irony when he says "but that doesn't feel right to us to sort of gouge people for early delivery" even though that's exactly what they're doing.

 

[jebinc]

I love that Musk obviously feels no irony when he says "but that doesn't feel right to us to sort of gouge people for early delivery" even though that's exactly what they're doing.

The guy has become a real

 

[SO16]

I love that Musk obviously feels no irony when he says "but that doesn't feel right to us to sort of gouge people for early delivery" even though that's exactly what they're doing.

Tesla had the founders edition for other models as well. And one does get some extra features for it albeit not worth it IMO.

But since the founders edition (I guess) is selling well, to raise the price even further is a bit different. I assume that’s what Elon means.

 

[scottf200]

I love that Musk obviously feels no irony when he says "but that doesn't feel right to us to sort of gouge people for early delivery" even though that's exactly what they're doing.

 

[Lightglass]

The upgraded tire and wheels are missing, and the Tesla gateway costs $1800! The Foundation cost seems to be near break even, IF Tesla had only included the vehicle upgrades as standard in the price to allow eligibility for the $7500 tax benefit!

 

[ChooseFreedom]

Again, when did the Truck becomes status symbol? Only Tesla Stans would all of a sudden consider it a status symbol smh….

You think anyone is impressed with a Lifted $30k XLT?

I recently learned about, on this forum (thanks ChiefRollo!), the "Chicken Tax", TL/DR - a tariff on several imports that included chickens, and light-duty small trucks.
What's the significance? Well, because of this high tariff on small trucks, the market basically vanished because foreign auto makers wouldn't pay the tax to export their small trucks to the US. So the Big 3 didn't prioritize making them because their margins were higher selling full size trucks, which is what they spent most of their marketing and advertising on.
Over time, this leads to a psychological social bias towards full size trucks here in the US. Hence, a stigma grows on small pickups, or more accurately, on their owners. This leads to the toxic masculinity only wanting a big truck. But it's really sourced in no small part, to the Chicken Tax. No telling how many smaller truck options there would be if this tariff would've been removed.

 

[T3SLAROD]

I recently learned about, on this forum (thanks ChiefRollo!), the "Chicken Tax", TL/DR - a tariff on several imports that included chickens, and light-duty small trucks.
What's the significance? Well, because of this high tariff on small trucks, the market basically vanished because foreign auto makers wouldn't pay the tax to export their small trucks to the US. So the Big 3 didn't prioritize making them because their margins were higher selling full size trucks, which is what they spent most of their marketing and advertising on.
Over time, this leads to a psychological social bias towards full size trucks here in the US. Hence, a stigma grows on small pickups, or more accurately, on their owners. This leads to the toxic masculinity only wanting a big truck. But it's really sourced in no small part, to the Chicken Tax. No telling how many smaller truck options there would be if this tariff would've been removed.

Or you start with a small truck, love the truck life but have kids who need more room in the back.

A Big SUV might be an option, but the. You don’t want to throw crap in the back with the third row down and damage all your seats. So instead you purchase a full size truck that fits everyone comfortable for long trips, has plenty of space and a commanding view of the road…..

There’s your “Chicken Tax”

How many more small truck options do you want?

Cybertruck, Rivian, Frontier, Santa Fe, Ridgeline, Maverick, Ranger, Colorado, Canyon

 

[ChooseFreedom]

Or you start with a small truck, love the truck life but have kids who need more room in the back.

A Big SUV might be an option, but the. You don’t want to throw crap in the back with the third row down and damage all your seats. So instead you purchase a full size truck that fits everyone comfortable for long trips, has plenty of space and a commanding view of the road…..

There’s your “Chicken Tax”

How many more small truck options do you want?

Cybertruck, Rivian, Frontier, Santa Fe, Ridgeline, Maverick, Ranger, Colorado, Canyon

Of course, there are obviously scenarios where buying a full size truck is the right fit. Not saying every full size truck owner is trying to compensate for something.

Your examples are from today.
My point regarding the Chicken Tax, "since 1964 this form of protectionism has remained in place to give US domestic automakers an advantage over imported competitors."
Look for light trucks in the late '60's, '70's, and '80's. No imports, and only the bare minimum offerings from the Big 3.

The 25% tariff only applies to non-North American imports of fully assembled light trucks.
I believe all of your examples are assembled in North America.

 

[T3SLAROD]

Of course, there are obviously scenarios where buying a full size truck is the right fit. Not saying every full size truck owner is trying to compensate for something.

Your examples are from today.
My point regarding the Chicken Tax, "since 1964 this form of protectionism has remained in place to give US domestic automakers an advantage over imported competitors."
Look for light trucks in the late '60's, '70's, and '80's. No imports, and only the bare minimum offerings from the Big 3.

The 25% tariff only applies to non-North American imports of fully assembled light trucks.
I believe all of your examples are assembled in North America.

So what does all this have to do with a Truck being a “status symbol”, well other than the Cybertruck?

 

[ChooseFreedom]

So what does all this have to do with a Truck being a “status symbol”, well other than the Cybertruck?

If you aren't a blue collar worker, need to tow something large, or maybe live somewhere rural with a lot of unpaved roads, there aren't many use cases for a full-size truck. (exceptions to everything) Not getting into the semantics of "how often" or "need".
Most all other use cases could easily be filled by an SUV or light-duty truck, just like your previous list of today's options.
So the "status symbol" label would apply to any full-size truck owner that doesn't really have a true use case for it.

No different than just about every exotic sports car owner that has nowhere to drive it over 100 mph. Status symbol.

 

[T3SLAROD]

If you aren't a blue collar worker, need to tow something large, or maybe live somewhere rural with a lot of unpaved roads, there aren't many use cases for a full-size truck. (exceptions to everything) Not getting into the semantics of "how often" or "need".
Most all other use cases could easily be filled by an SUV or light-duty truck, just like your previous list of today's options.
So the "status symbol" label would apply to any full-size truck owner that doesn't really have a true use case for it.

No different than just about every exotic sports car owner that has nowhere to drive it over 100 mph. Status symbol.

Yeah but Status of what?

If Im driving around in an EB STX or XLT that cost anywhere from $30-$45K lifted with nice wheels, who am I trying to impress with my "Status"?

You are comparing Trucks to Exotic Sports cars? There's only one "Truck" that fits that description and for some reason Tesla Fans are now trying to bring all trucks into the "Status Symbol" category so they can justify their cost and purchase. No, the F-150, Silverado, Ram (Other than Raptor/TRX) are not "Status Symbols" much like the Model 3 isn't a Status symbol.

 

[ChooseFreedom]

Yeah but Status of what?

If Im driving around in an EB STX or XLT that cost anywhere from $30-$45K lifted with nice wheels, who am I trying to impress with my "Status"?

You are comparing Trucks to Exotic Sports cars? There's only one "Truck" that fits that description and for some reason Tesla Fans are now trying to bring all trucks into the "Status Symbol" category so they can justify their cost and purchase. No, the F-150, Silverado, Ram (Other than Raptor/TRX) are not "Status Symbols" much like the Model 3 isn't a Status symbol.

Social status. I'd assume to impress other truck owners. I wouldn't know. The only truck I've owned was a very old Dodge Dakota that I inherited when my grandfather passed away 20 yrs ago. I had no use case for it, but it was free. Kept it a couple yrs.

Why else would anyone buy any vehicle they don't really have a use for if not for the "status", or appearance they're trying to portray, regardless of what it cost?

Guess we'll have to agree to disagree.