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