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How should Tesla go about dropping prices on a car?

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bradtem

Robocar consultant
Dec 18, 2018
1,166
1,260
Sunnyvale, CA
We've all seen the frustration here, both those who bought recently and those who now will see their used car value plummet. I felt it in 2019 after the price of my 2018 Model 3 dropped a ton. But aside from vent, I am trying to figure out, just how would we want a company to drop prices? Of things I have thought of, they all have problems:
  1. They could not drop prices, ever -- but that can't be sustained in a competitive market or one where costs decline.
  2. They could offer a rebate to those who bought recently -- but what about those who bought 1 day before that cutoff?
  3. They could offer a rebate based on a sliding scale of how long ago you bought -- but there's still people who bought 1 day before that starts.
  4. They could announce the price-cuts in advance -- but lose all sales until they happen.
  5. They could keep margins thin so price cuts are not possible -- but that's not how you run a business.
  6. They could give software goodies to people who bought before the price cut, like discounted FSD or premium connectivity -- this could work but what about those who bought FSD, and as always, what's the cutoff?
  7. Other car companies drop prices through their dealers, with incentives, rebates and having the dealer able to offer deals to those who negotiate for them. Should Tesla start having dealers to let this happen?
Do folks have other suggestions? If Tesla did you wrong with these price cuts, how would you make it right if you were Tesla?
 
Simple, they should ignore the vocal minority and do what makes the most business sense for them. Nobody is entitled to any guaranteed amount of depreciation on a new vehicle. Especially when early adopting during a known inflationary period. If that sounds scary, don't buy a new vehicle.

I'm part of the silent majority that is ecstatic about these new price drops on the Model Y as it spurred me to buy one. A couple dozen people at the local Tesla Shop/Service Center who are new to EVs and doing the same are all the proof I need that Tesla did the right thing.

If Tesla had to increase prices $10k suddenly would those who bought in December but as outraged trying to find where to send that extra $10k they saved when they bought?
 
Something to consider with the IRA credits specifically is that it needs to be the MSRP fitting under the MSRP limits, it can’t be ”discounts” or other incentives adjusting MSRP down to below the cap. And it’s the same for the legacy manufacturers, they need to cut down MSRP (where necessary) to qualify for the credit and they can’t keep MSRP stable while letting dealerships adjust at the point of sale.

I think this is clearly designed to be anti-inflationary because MSRP reductions have greater implications than a more temporary discount or discretionary incentive one person may get but another doesn’t. And that shouldn’t be a surprise considering this legislation is called the Inflation Reduction Act.
 
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Something to consider with the IRA credits specifically is that it needs to be the MSRP fitting under the MSRP limits, it can’t be ”discounts” or other incentives adjusting MSRP down to below the cap. And it’s the same for the legacy manufacturers, they need to cut down MSRP (where necessary) to qualify for the credit and they can’t keep MSRP stable while letting dealerships adjust at the point of sale.

I think this is clearly designed to be anti-inflationary because MSRP reductions have greater implications than a more temporary discount or discretionary incentive one person may get but another doesn’t. And that shouldn’t be a surprise considering this legislation is called the Inflation Reduction Act.
It also all but eliminates the crazy rebates that legacy manufacturers regularly put on their vehicles. I recall back in the day seeing $18k+ rebates advertised on pickup truck commercials back when MSRP was more like half of what they are now. Those were crazy times. Stupid inflated pricing just to give stupid high rebates and trick the average consumer into thinking they got a deal.
 
Something to consider with the IRA credits specifically is that it needs to be the MSRP fitting under the MSRP limits, it can’t be ”discounts” or other incentives adjusting MSRP down to below the cap. And it’s the same for the legacy manufacturers, they need to cut down MSRP (where necessary) to qualify for the credit and they can’t keep MSRP stable while letting dealerships adjust at the point of sale.

I think this is clearly designed to be anti-inflationary because MSRP reductions have greater implications than a more temporary discount or discretionary incentive one person may get but another doesn’t. And that shouldn’t be a surprise considering this legislation is called the Inflation Reduction Act.
This is true and is also called socialism. The government forced rules on the capitalist market to force price changes in order for a company to qualify for the $7500 discount. Its what killed the values along with Elon musks betrayal. Yes we all expected prices to fall, but there supposed to gradually fall, not drop > 20k over a 24h period. Elon musk didnt want to raise prices to quickly because it could destabalize the market, yet he did the opposite when dropping. To be fair to everyone that purchased a tesla from him he should have lowed the prices gradually over the course of a few quarters. What he did was criminal in the eyes of everyone who already bought, and what he did is brilliant to those who waited until now to buy.

All the new customers are fighting with the old. He destroyed his brand over night with his fanbase and now has to make it up with new customers. The problem for new customers is this, what happens when dealers wont buy your used cars or take them as trade ins? What happens to your value that you buy today if elon musk decides to drop it another 10k next quarter. Those who are for it, will be on the opposite side against it realizing how wrong they were and how crappy it feels. I for one wont ever be buying another tesla and will no longer be recommending his solar system to anyone anymore eventhough i have it and it works quite well. Destroy a customers faith and there gone forever.
 
This is true and is also called socialism. The government forced rules on the capitalist market to force price changes in order for a company to qualify for the $7500 discount. Its what killed the values along with Elon musks betrayal. Yes we all expected prices to fall, but there supposed to gradually fall, not drop > 20k over a 24h period. Elon musk didnt want to raise prices to quickly because it could destabalize the market, yet he did the opposite when dropping. To be fair to everyone that purchased a tesla from him he should have lowed the prices gradually over the course of a few quarters. What he did was criminal in the eyes of everyone who already bought, and what he did is brilliant to those who waited until now to buy.

All the new customers are fighting with the old. He destroyed his brand over night with his fanbase and now has to make it up with new customers. The problem for new customers is this, what happens when dealers wont buy your used cars or take them as trade ins? What happens to your value that you buy today if elon musk decides to drop it another 10k next quarter. Those who are for it, will be on the opposite side against it realizing how wrong they were and how crappy it feels. I for one wont ever be buying another tesla and will no longer be recommending his solar system to anyone anymore eventhough i have it and it works quite well. Destroy a customers faith and there gone forever.
Criminal?

I find it difficult to take anyone seriously who insists on brokering in such hyperbole to garner support when their stance is flimsy at best w/o such tactics.
 
This is true and is also called socialism. The government forced rules on the capitalist market to force price changes in order for a company to qualify for the $7500 discount. Its what killed the values along with Elon musks betrayal. Yes we all expected prices to fall, but there supposed to gradually fall, not drop > 20k over a 24h period. Elon musk didnt want to raise prices to quickly because it could destabalize the market, yet he did the opposite when dropping. To be fair to everyone that purchased a tesla from him he should have lowed the prices gradually over the course of a few quarters. What he did was criminal in the eyes of everyone who already bought, and what he did is brilliant to those who waited until now to buy.

All the new customers are fighting with the old. He destroyed his brand over night with his fanbase and now has to make it up with new customers. The problem for new customers is this, what happens when dealers wont buy your used cars or take them as trade ins? What happens to your value that you buy today if elon musk decides to drop it another 10k next quarter. Those who are for it, will be on the opposite side against it realizing how wrong they were and how crappy it feels. I for one wont ever be buying another tesla and will no longer be recommending his solar system to anyone anymore eventhough i have it and it works quite well. Destroy a customers faith and there gone forever.
So you feel betrayed -- others have said the same. So the question is, how would you have done it? Drop the price gradually? How gradually? Won't that stop people from buying, wanting to know when the price dropping is complete? Yes, part of this change is to qualify for the government's price caps. Would you have not done that, kept the price up above the caps? Gradually decreased it until it got there?
 
We've all seen the frustration here, both those who bought recently and those who now will see their used car value plummet. I felt it in 2019 after the price of my 2018 Model 3 dropped a ton. But aside from vent, I am trying to figure out, just how would we want a company to drop prices? Of things I have thought of, they all have problems:
  1. They could not drop prices, ever -- but that can't be sustained in a competitive market or one where costs decline.
  2. They could offer a rebate to those who bought recently -- but what about those who bought 1 day before that cutoff?
  3. They could offer a rebate based on a sliding scale of how long ago you bought -- but there's still people who bought 1 day before that starts.
  4. They could announce the price-cuts in advance -- but lose all sales until they happen.
  5. They could keep margins thin so price cuts are not possible -- but that's not how you run a business.
  6. They could give software goodies to people who bought before the price cut, like discounted FSD or premium connectivity -- this could work but what about those who bought FSD, and as always, what's the cutoff?
  7. Other car companies drop prices through their dealers, with incentives, rebates and having the dealer able to offer deals to those who negotiate for them. Should Tesla start having dealers to let this happen?
Do folks have other suggestions? If Tesla did you wrong with these price cuts, how would you make it right if you were Tesla?

Chrysler did something similar to #2 back in the late 1980s/early 1990s but it actually covered the entire model year. They called it a "Guaranteed Rebate." If after purchasing a car, the rebate increased during the model year they buyer would get a check for the difference. For example, if someone bought when the rebate was $1,500 and it went up to $2,000, they would get a check for the additional $500.

For decades, manufacturers have been adjusting prices (sometimes significantly) through adding or eliminating rebates/incentives. What Tesla did here is essentially the equivalent of adding thousands in rebates/incentives and/or removing dealer MSRP markups. This is the nature of business and pricing in general as inventory factors, competition factors, demand factors can all create a need for price changes. It is, of course, a bigger deal dollarwise when you are talking about products costing tens of thousands of dollars.
 
Chrysler did something similar to #2 back in the late 1980s/early 1990s but it actually covered the entire model year. They called it a "Guaranteed Rebate." If after purchasing a car, the rebate increased during the model year they buyer would get a check for the difference. For example, if someone bought when the rebate was $1,500 and it went up to $2,000, they would get a check for the additional $500.

For decades, manufacturers have been adjusting prices (sometimes significantly) through adding or eliminating rebates/incentives. What Tesla did here is essentially the equivalent of adding thousands in rebates/incentives and/or removing dealer MSRP markups. This is the nature of business and pricing in general as inventory factors, competition factors, demand factors can all create a need for price changes. It is, of course, a bigger deal dollarwise when you are talking about products costing tens of thousands of dollars.
Well, since Tesla doesn't have "model years" the way other OEMs do, this is a bit more challenging. Indeed, they could have said, "We extend this rebate to all who purchased a 2023 model" which would mean nothing in their system, just going back a week. Wouldn't have made people too happy. In other cars, people would agree the 2022 and 2023 are different cars that might get different treatment. (Usually people who buy one year at the end of its life after the new one comes out do so for the major discounts. They would not be happy to see the new model year get bigger discounts, it's true.)

But whatever set of customers Tesla extended the savings to, there would have to be some who don't get it. The reality is Tesla can't afford to give back on too many cars, nobody can.

One might imagine saying that "If you bought in the last 30 days you get it pro-rata based on the number of days ago you bought. It would satisfy some people, but not those who bought more than 20 days ago, I suspect. They already got a $7500 or $3750 discount and knew they would not get the rebate, of course. At the same time, Tesla buyers may feel skittish now, which is not good for Tesla. But how skittish? New buyers won't have felt this pain. Maybe repeat buyers, but most people don't repeat buy for many years.
 
Well, since Tesla doesn't have "model years" the way other OEMs do, this is a bit more challenging. Indeed, they could have said, "We extend this rebate to all who purchased a 2023 model" which would mean nothing in their system, just going back a week. Wouldn't have made people too happy. In other cars, people would agree the 2022 and 2023 are different cars that might get different treatment. (Usually people who buy one year at the end of its life after the new one comes out do so for the major discounts. They would not be happy to see the new model year get bigger discounts, it's true.)

But whatever set of customers Tesla extended the savings to, there would have to be some who don't get it. The reality is Tesla can't afford to give back on too many cars, nobody can.

One might imagine saying that "If you bought in the last 30 days you get it pro-rata based on the number of days ago you bought. It would satisfy some people, but not those who bought more than 20 days ago, I suspect. They already got a $7500 or $3750 discount and knew they would not get the rebate, of course. At the same time, Tesla buyers may feel skittish now, which is not good for Tesla. But how skittish? New buyers won't have felt this pain. Maybe repeat buyers, but most people don't repeat buy for many years.

Tesla actually does have model years. The tenth character of the VIN represents the model year and, as with other automakers, it's not always the same as the calendar build year. Tesla and other automakers are also similar in that feature and option availability as well as pricing can (and often do) change during the model year.

Anyway, my Chrysler example was thrown out there only as "similar" to your #2 item. Personally, I don't think it is necessary for Tesla to make any pricing accommodations to past buyers. Yes, some manufacturers and/or retailers do it e.g., 30 day price guarantee, guaranteed rebate, etc. but it’s rarer in the auto industry.
 
Tesla actually does have model years. The tenth character of the VIN represents the model year and, as with other automakers, it's not always the same as the calendar build year. Tesla and other automakers are also similar in that feature and option availability as well as pricing can change during the model year.

Anyway, my Chrysler example was thrown out there only as "similar" to your #2 item. Personally, I don't think it is necessary for Tesla to make any pricing accommodations to past buyers. Yes, some manufacturers and/or retailers do it e.g., 30 day price guarantee, guaranteed rebate, etc. but it’s rarer in the auto industry.
There is also never been a manufacture that dropped prices so much it caused the use market to loose 25k to 30k in value in less than 24h. What was done was unprecedented and no other manufacture is this stupid to hurt every single person who purchase any model tesla before 2023. They are going to loose out on referrals, rebuys and second car purchases. I’m getting an suv next and was planning for a model y. Now I’m going back to Lexus.
 
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There is also never been a manufacture that dropped prices so much it caused the use market to loose 25k to 30k in value in less than 24h. What was done was unprecedented and no other manufacture is this stupid to hurt every single person who purchase any model tesla before 2023. They are going to loose out on referrals, rebuys and second car purchases. I’m getting an suv next and was planning for a model y. Now I’m going back to Lexus.
Let's get back to the core question instead of people sniping at each other. While I don't think Tesla has model years in the same way as other OEMs do (even if it technically has them) I still am interested in the core question I asked.

If you think this was bad and hurt Tesla owners and buyers, how would you do it? Not lower the price so much? Not respond to the arbitrary rebate caps? Just what is it you would want Tesla to do, if you were Musk?
 
1. Be transparent about their pricing strategy vs. having to read the Elon tea leaves. Should be a clear fine print that says "MSRP subject to change based on volume and demand"

2. Clearly identify the base MSRP vs the "surge pricing" and clearly delineate between the two.

3. Give recent buyers of the 2023 model a 1-year credit with the company based on the difference between how much they paid and the new MSRP price. The credit can only be used on any Tesla software product except for premium connectivity, a new Tesla car, and/or Tesla solar roof.

On #3, I think they will earn a lot of customer loyalty with minimal to no cash outlay and they will make their money back and then some based on customer lifetime value expansion.
 
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1. The largest price reduction, bordering on astonishing until you analyze it, is for the MYLR after tax credit. This was a logical* reaction to the (at best) rather arbitrary IRS rules that excluded the 5-seat Y from the SUV designation.
*I say logical in hindsight; I am not claiming that I predicted such a bold move. But Tesla was being put in a hard spot. I don't know, but perhaps they were pessimistic about the prospects of the bureaucrats relenting and fixing the rule.​
Further, I don't agree with the whole government subsidy program for EVs, I'd say that this is the real source of market distortion and Tesla's response happened because they basically had to be price-competitive in order to support their volume growth plan. They're also best positioned to do so because they're far ahead of competitors in their cost structure.​

2. Given that they decided to do the above, they really had to realign their entire product line price structure to fit. Fixing the five-seater model Y price alone wasn't a viable move

3. We should all note that the new MSRPs are now in the ballpark of springtime 2021, a time when the prices had started to rise as often as every couple of weeks - and continued to do so for months on end. At the time, many people chalked this up to global supply chain and inflation issues, and many were saying the prices would eventually l have to eventually readjust back down. The confluence of the market-distorting tax credits, plus the somewhat slackening Tesla demand as the general car market begins a return to more normal conditions, plus Tesla's ramping capacity with two major new factories, created the need for this response.

4. Back to the OP question: should/could it have been done differently? I think the various pros and cons were fairly well summarized in the OP, so I'll just say that:
  • No decrease would have been illogical given the conditions and given Tesla's ability to out-compete.
  • A smaller single-event decrease would not have met the MSRP cap needed for MYLR, so would also have been illogical.
  • A stepped decrease would do little to ease the annoyance of recent buyers, and would only create major angst and order delays among new customers and potential customers. And again, the MSRP cap problem would have existed all during this stepping-down sequence, greatly amplifying the stress about where it would end.
  • Communicating the plan ahead of time is silly on the face of it, but if you don't see that, just think it through for 5 minutes.
5. To each his own, but I find it hard to understand that someone would be so angry about this event that he would swear off Tesla in favor of a less competitive EV, or in favor of an ICE brand that has an even dimmer prospect of holding its future used value.

6. I completely understand that it hurts to have spent the money or assumed the payments, and then have this happen. Psychologically it also hurts to see the used-market value of your current car take a step down. However, used Teslas are still desirable, and the diminished value is happening precisely because a new Tesla is suddenly cheaper (not to mention the other factors you can't blame Tesla for, i.e. the disappearance of the historically and strangely high used-car general market bubble).
So:
  • if you're thinking of selling the Tesla to get another Tesla, it's roughly a wash on that score.
  • If you're thinking of selling the Tesla to get a different EV, hopefully your target EV has the tax credit which helps a lot and is part of this whole story.
  • If you're thinking of selling the Tesla to get an ICE car, well okay, that's a niche problem and I'd suggest you wait a bit longer as other macro forces may affect those prices soon.
  • If you're thinking of adding another Tesla to your household, you should be thrilled.
  • If you're not thinking of selling or buying a Tesla, its used value makes no difference to you, and we're left with the feeling everyone has when a big sale hits, or a fantastic new product announcement is made right after you bought. It's happened to me, but I lived through it.
TLDR: if you're royally frosted about the price dropping after you bought, let it settle and try to be as honest as possible in your evaluation of what Tesla could/should really have done differently. If you play out each scenario logically, none are perfect, none make everyone happy, and what we have is probably the best for the company, given the conditions.
 
1. Be transparent about their pricing strategy vs. having to read the Elon tea leaves. Should be a clear fine print that says "MSRP subject to change based on volume and demand"

2. Clearly identify the base MSRP vs the "surge pricing" and clearly delineate between the two.

3. Give recent buyers of the 2023 model a 1-year credit with the company based on the difference between how much they paid and the new MSRP price. The credit can only be used on any Tesla software product except for premium connectivity, a new Tesla car, and/or Tesla solar roof.

On #3, I think they will earn a lot of customer loyalty with minimal to no cash outlay and they will make their money back and then some based on customer lifetime value expansion.
I really don't think any warning about prices subject to change would change anything. Is there anybody who doesn't know prices can change?
#2 seems unlikely as something they would do. You are suggesting they should have said that "The real price of the MYLR is $54K, but right now there is a $15,000 surcharge?" I mean, they could do that, but it would curtail sales a lot, so I do not see them motivated to do it. Regular car companies let the dealer put on the surcharge (which they would prefer not happen but they are not allowed to control that.)

When did the "2023 model year" begin with Teslas? When they took out the ultrasonics?
 
I really don't think any warning about prices subject to change would change anything. Is there anybody who doesn't know prices can change?
#2 seems unlikely as something they would do. You are suggesting they should have said that "The real price of the MYLR is $54K, but right now there is a $15,000 surcharge?" I mean, they could do that, but it would curtail sales a lot, so I do not see them motivated to do it. Regular car companies let the dealer put on the surcharge (which they would prefer not happen but they are not allowed to control that.)

When did the "2023 model year" begin with Teslas? When they took out the ultrasonics?
I think you're right on no. 2 but I think on no. 1 they defied customer expectations on just how volatile prices can be without having to go on this forum to understand this. It's one thing to swing prices by 5% but 20% is massive - this is certainly a buyer beware sort of moment and would help people decide if this was the right time to buy or not.

But ultimately, I think my 3rd suggestion is the solution to all this. What they did is similar to a mass layoff - you can't say anything before it happens and you will burn people. Employers typically give something to those impacted to soften the blow to their own image and help remaining employees know that if it happens to them, they won't be left with nothing otherwise they'd be looking too.
My suggestion is give something to impacted buyers that doesn't cost cash - e.g. Acceleration boost or EAP that helps stabilize the value of their cars as long as they own it. It does not have to make them whole (e.g. free FSD vs EAP) but something that eases the value gap will go a long away. Short-term Tesla will be fine but if they ever raise prices again, I think their demand curve will be much more elastic due to skittish buyers knowing they can be left out to dry at any moment. Auto consumers have fairly long memories of bad behaviors by car companies in the past so I don't expect that to change with Tesla. There are certainly hardcore fans that don't care but that's not enough to sustain the company.

And yeah 2023 model year = no uss cars.
 
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1. Be transparent about their pricing strategy vs. having to read the Elon tea leaves. Should be a clear fine print that says "MSRP subject to change based on volume and demand"

I think it's pretty common knowledge that prices change. It seems unnecessary to put that in writing. Besides, the issue some people are having is the AMOUNT of the price reduction, not the at there was a price reduction. Tesla has lowered prices a number of times in the past.



2. Clearly identify the base MSRP vs the "surge pricing" and clearly delineate between the two.

This is one area where Tesla is different than most other automakers. While Tesla typically adjust prices by raising or lowering the MSRP, others more often do so by adding or removing rebates, etc. In that sense, Tesla can be less transparent about pricing e.g., unless you regularly follow Tesla pricing, you may not know that there was a recent price reduction whereas with other car brands, it can be more clearly reflected by a rebate or whatever.

Still, the issue some are having is that AMOUNT of the price reduction and not that there was a price reduction. Again, price changes are to be expected.
 
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Perhaps offering free charging for customers who bought recently. Sliding scale based on when you bought and perhaps going back 6 to 12 months. So if you bought the day before the cut, you get 2 years free charging. If you bought a year before you get one month, for example. It’s not perfect but should be a relatively cost effective way to acknowledge the customers.
 
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