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How to Transition Pricing as Tesla's Vehicles Evolve

Discussion in 'TSLA Investor Discussions' started by jhm, Aug 6, 2014.

  1. jhm

    jhm Active Member

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    Does anyone know how Tesla will handle a substantial upgrade to the Model S. Some improvement are incremental, like reducing the weight by 200 pounds. Others are easy enough to retrofit, such as software or titanium shields. But there will be others that are significant and too costly for a free retrofit, for example a new battery line with 10 to 20 percent more range. The tricky issue is that Tesla would like to keep the price of the Model S stable over time. But what might that mean as performance improves? Would they price the new line of batteries higher so that price is commensurate with value? If so, then the price of the Model S will get higher over time. Or would they keep the price the same and allow value to increase over time? If so, then the resale value of a Model S will come down as newer versions offer a more compelling ratio of value to price. Of course, in the case of battery improvements, older cars will benefit from the option to upgrade to a newer battery, but their is a nontrivial cost to doing so. Another issue is how to transition. Nobody wants to be the last person to buy the older version at full price. Should Tesla temporarily lower the price of final runs of an older version so that the new version comes in at full price? Or should the new version be temporarily priced higher to smooth over the transition. Basically if you had an order in the works while Tesla announces a major improvement, what options should Tesla give you? You may always have the option to refuse delivery of you older version car, but it would be a very poor customer experience to have to do so and forfeit your deposit. I don't know what the right answer is, but you can see the bind for both parties.
     
  2. eepic

    eepic Member

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    They'll probably try to contact and provide significant new options for customers whose orders not in production yet. For those that were just delivered, a bit of bad luck. But it's the same as if you buy an iPhone this month and a new one gets announced in September, there's always something around the corner.
     
  3. SteveG3

    SteveG3 Active Member

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    #3 SteveG3, Aug 6, 2014
    Last edited: Aug 6, 2014
    I've thought about this quite a lot... hadn't figured out where to share my thoughts. Repeatedly we've seen Elon and Tesla are after something different than solely optimizing shareholder value... that's why we see them do "unconventional" things so often.

    I think there's a good chance we see them do something unexpected with this issue of transition. Tesla can do something other than making it simply a matter of luck whether you just miss out on a step change improvement. Much like Elon's service philosophy of not making money off your customers if your product fails to perform, I think if they saw a way to, he and Tesla would want to remove the roulette table aspect from the timing of when you buy your high tech Tesla product (i.e just before or after a big improvement).

    There are probably various ways this can be done, here's one I thought of... after the fact, smoothing out the transition with ~"rebates" to people who just missed out on the more favorable pricing funded by slightly lowering the price improvement for those who do order after the better pricing takes effect.

    For example, let's say it's every 3 years that there is a substantial refresh of their vehicles. For simplicity, let's pick a simple example of added value that may or may not be an improvement that we will see (i.e. this is just for illustration, not an opinion on whether the hypothetical improvement I'm using in the example will or wont happen)... let's say various improvements in gross margin allowed Tesla to lower the price of the 85 kWh battery Model S $3K as of February 1, 2015. Let's further assume they expected the new battery pricing would continue for 3 years. Tesla could lower the price $2.5K rather than $3K for those who order after 2/1/15. The $500/order Tesla has held back from those ordering under the new pricing after 2/1/15 could then be distributed back to those who just missed out on the new pricing in the form of a "rebate".

    Given Tesla is a technology company, and takes all their orders themselves, I think they could manage to identify, for example, all who just missed the 2/1/15 transition by 3 months or less, 3-6 months, and 6-9 months. From the $500/order savings they are holding back from 2+ years worth of orders post 2/1/15, they could offer those who missed by 6-9 months an $X rebate (perhaps $1K), 3-6 months a larger $Y rebate (perhaps $1.5K), and those that missed by 3 months or less the biggest rebate, $Z (perhaps $2K). This is just a rough estimate of the dollar amounts, and time ranges Tesla might smooth out in such a transition with no net change in profits to Tesla. To be clear, this would not be at Tesla's cost, it would just be Tesla stepping in to more equitably share the improvements they are making to the value of the car. In fact, I wouldn't want them to use the term "rebate"... it's not about cars sitting on a lot... it's about taking a bit of the "what's around the corner" anxiety out of the nature of purchasing a technology product, and even worse feeling a bit down about a car that's only a few months old.

    I realize even with this simple example, this may sound over complicated, and over what, a 1-2% of the car. I would say, as to complexity, one it's probably less complicated than their recently described "elf"/"pit crew" service model of picking up your car fixing it and returning it the same day without your knowing, and, two if Tesla kept this to major changes in value every few years it could be manageable. As to this being a bit much all over 1-3% of car's purchase price, I'd point out that it is more about human psychology than money. Most Model S buyers don't really need the $1-2K this sort of scenario might return them, but psychologically no one likes to feel like they just "missed out." This would make for happier customers, and it would substantially benefit Tesla not to have the public frequently wondering if they should hold off on their purchase another year. Moreover, when we get to the Model 3, $1-3K is a real financial issue to those buying a car in its price range, added on top of the same psychological "missing out" issue it is for those buying the S/X.

    The hypothetical scenario of a $3K drop in 85 kWh is simple because there is a clear monetary value. For other large changes that don't have such an obvious monetary value, Tesla could just make an estimate of the improved value to the customer and use it to establishment adjustments to pricing.
     
  4. Subhuman

    Subhuman Member

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    I think the mechanism to facility this change is already is somewhat built into Tesla current pricing structure. I view the battery packs similar to how Apple views memory. The larger the memory (battery pack)the more expensive the device (car). Once Tesla improves the cost dynamic of the battery pack they will drop the 60 KWH and the 85 KWH will then become the price of the 60 and a new 110 KWH will become the price of the 85. Now currently the 85 kWH has some advanatages over the 60 such unlimited mileage warranty, performance numbers and some included options. When the 85 becomes the new 60, those advantages go away and are then are applied to the new 110 battery pack. This will allow the people that just miss the cutoff to feel like they still received some additional value over the new pricing structure. However, I do understand that this strategy leave the 60 KWH people out in the cold.
     
  5. eepic

    eepic Member

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    I had some thoughts about this, and it would make it very tricky. Among the challenges:

    - Customers arguing over whether they qualify for which brackets and why they did or didn't get certain options.. this could take up valuable staff time that could be spent on servicing, and potentially inconsistent "exceptions" will cause even more frustration.
    - How to manage the accounting for rebates. If they retroactively rebate customers more than a few weeks, it's going to affect the numbers like gross margin for quarterly reports filed with the SEC. While possible, doing this on a regular basis will (rightly or wrongly) raise a lot of accounting red flags. If they decide to pre-emptively keep a rebate reserve, this is going to be easily spotted and picked apart by analysts and folks like us here at TMC to predict whether material step changes are coming to the design.

    There's always going to be customers (in any industry) wishing they had waited for a newer, better version of somehting. The best solution is to make retrofits available to existing owners, so that they can get these options added without having to purchase a brand new car. Perhaps they could discount pricing of retrofit options for recent purchases, sort of like your idea.
     
  6. SteveG3

    SteveG3 Active Member

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    Eepic, thanks for reading through the long post and offering some feedback.

    As to customers arguing re what bracket they fall in... my understanding is that finalizing one's order is an unambiguous action the consumer takes online, and is on record for both Tesla and the consumer. I see what I am suggesting as a positive for those who fall in these groups... yes, sometimes, some people will even complain about a free gift, but I think most people are appreciative. What's more, compared to Tesla standing firm and keeping consumer's non-refundable deposits if they choose to cancel (which, of course, Tesla has every right to do, and we are likely to see some of), I think the sort of approach I'm suggesting would be taken quite kindly.

    This would be a voluntary action of Tesla, a bonus, not an entitlement of its consumers. I do not see why any disbursements for such a program in quarter X would necessitate restating earnings, margins, etc, in previous quarters. Granted, I'm not a CPA, but I just don't see this leading to restatements, thus no red flags. As to a reserve... I don't believe they'd need to do this. Again, it would be a voluntary action. Tesla does not have to formally set up a reserve for the Gigafactory spending to come... I don't see why they would have to set up a reserve for this. What's more Tesla just last week talked about spending on R&D for cards (projects) we've not been shown.
     
  7. Robert.Boston

    Robert.Boston Model S VIN P01536

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    This discussion has made it clear that Tesla must continue to raise the price of the Model S. When Tesla announces the refresh, it can ask current committed reservation holders if it would like to pay the premium and get 2.0, or pay the lower amount they'd agreed to for 1.0. This approach only works if the price goes up.

    We're also assuming that there'll be a bright-line date for a refreshed Model S. So far, they've made some pretty important updates (e.g. battery version A->B->C) without flagging these as changes to reservation holders. There were some unhappy people who got the last A batteries even as B batteries were rolling out.
     
  8. SteveG3

    SteveG3 Active Member

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    #8 SteveG3, Aug 6, 2014
    Last edited: Aug 6, 2014
    Robert, raising prices with new versions, and offering customers option to switch to 2.0 is another approach. Surely I don't think raising prices is the only approach as I've given an example of a manner of approaching this issue without raising prices. Of course, none of these approaches are perfect... I'm not sure there's a very big group that your solution will help out. If I understand your suggestion correctly, it would seem to be a plus strictly for customers who've finalized their order, but do not as yet have a car in production... what of the people whose car just entered production when the new lineup/pricing is introduced... does Tesla eat whatever cost is involved in finding a buyer for a car already entered into production for someone whose not going to take the car? what about the people who just took delivery of their car right before this change? Again, none of the suggestions are perfect, so maybe yours could be made to work better than mine. I think this whole situation is both an opportunity and a risk for Tesla in terms of their relationship with consumers. I hope they make an effort here to try something better than what people are accustomed to. I believe it's in Tesla's nature to want to try something new with this product cycle issue if they can see a likely improvement.

    As to your bright-line date, yes, that's one of the imperfections of the solution I'm suggesting. As I had written, it would have to be restricted to major changes. As you've pointed out, better said, this sort of approach would have to be restricted to clear and major changes.
     
  9. dalalsid

    dalalsid Member

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    What Tesla needs to do is move away from the 60 / 85 names and call them Model S and Model S-LR or something like that. Then they can just keep gradually improving the range of the battery as opposed to big jumps. That way nobody feels bad or that they missed something big.
     
  10. SteveG3

    SteveG3 Active Member

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    It would be nice if it was feasible for Tesla to just do gradual improvements, but I think it will be in steps every 3 to 4 years. This is basically what we've seen thus far and heard from Tesla about the future. It's also consistent with what I've heard is the reality of battery development... they may improve on average 5-8%/year, but that's an average looking back over years where the actual change happens in a more step-like fashion.


    I think this is really about Tesla's unique manner of selling cars and its rapidly advancing technology. Other automakers build cars and move them out to the dealers who keep an inventory. Tesla, of course, custom builds each car for an existing customer. When another automaker comes out with an improved model, the older cars on the lot generally get a price cut, and so the manufacturer and/or dealer takes the hit on the lowered value of the older model. This just doesn't fit with a sales channel of custom built cars with a deposit from an existing buyer. The fact that Tesla's progress from model to model is likely to be significantly larger than the ICE automakers makes this "missing out" phenomena more challenging with Tesla.
     
  11. Robert.Boston

    Robert.Boston Model S VIN P01536

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  12. SteveG3

    SteveG3 Active Member

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    Completely agree this should not be an expectation, and I don't think it's hard-ass to stick to the contract.

    I actually first thought about this earlier in the year, mostly from Tesla's perspective. Given where demand is, I'm less concerned about this now, but I've been somewhat concerned that the upcoming X and likely substantial improvements to the S in 2015 might put Tesla through a few month demand constrained phase, with people backing away from the current S to wait for the improved Teslas. Nothing that would have any material long term impact on Tesla, but something that would lead to a bunch of FUD "articles". That is a run of FUD about demand for the S being down, customers canceling orders and complaining about lost deposits (even though, as you say, it's a contract), customers bemoaning their having gotten the older version... Given that FUD flows amply on false information, what do you think we'd see if there were reports of a wave of Model S cancellation and a drop in new orders? A bunch of nonsense claiming that EVs are just not ready and Tesla was just a niche fad on the way to our fuel cell future. Of course, if there were some cancellation and a decrease in orders it would be due to excitement for the X, and likely revised S, but the FUD pieces wouldn't mention it... or they'd frame it as a weak story from Tesla to try to cover up the demise of their business.

    Anyway, demand seems so strong it's not so likely to be a problem. Though not a necessity, if Tesla comes up with something creative here, it would be nice to have a win-win for Tesla and the consumer
     
  13. eepic

    eepic Member

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    Always enjoy an intellectual discussion SteveG3.

    Well let's say there's a new announcement on June 1st and customers with deliveries in the last 31 days receive $2000. A customer named Henrik was supposed to received his car May 2nd, but it came early and was delivered April 30, 32 days ago. You bet Henrik is going to be upset and argue that he is entitled to $2000 (who would blame him? it is $2000 after all, and could cover his trip to TMC Connect!). Let's say Tesla gives the ok that he'll receive the rebate. Now his friend Broder, who had ordered a higher spec'ed MS the same day as Henrik, had a scheduled delivery on April 30 and received his car on that day as expected. Broder is going to be very upset that ordering more options gave him a higher priority and pushed him up in the queue and out of eligibility for rebates. Etc.

    Of course, on paper customers will strictly speaking benefit from any form of rebate over none at all, but with hundreds to thousands of orders falling in grey areas around specific "eligibility" dates for cash rebates there's going to be a lot of arguing and unhappy customers who "just missed out" on some cash as well as new features. This can be mitigated with a more granular scheme like receiving $2000 less $50/day the older the delivery (so Henrik would receive $2000 - 29x$50 = $550, Broder would receive $2000 - 32x$50 = $400), but it complicates things.

    With regards to accounting, if you take an extreme version of this the reason why it can't be done becomes clear. Let's say they sell cars marked up $10,000 more than they intend it to be priced and promise customers a $10k rebate in two months. On a $100k car, you're reporting a 10% higher gross margin, even though it's not the true price you're selling to the customer. If you don't take the rebate out of the revenue you count for the car, its very much accounting shenanigans, if allowed similar companies could "subsidize" products from another cost in their accounting and make it seem like a product is profitable (push gross margin positive) when it's not. In a parallel universe with an evil Elon, he could do this to push gross margin above 30% for 3 years to collect the management incentive, as another example.
     
  14. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Active Member

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    Absolutely not. Capacity ~ range and range is a fundamental purchase decision for a BEV.

    There's really no problem on the transition. You can buy now or you can wait and hope to get a better car. Improvements lower value of older cars. Whoop-de-fecking-do. Tesla is really not going to give a crap. A better product means more sales and Tesla will take any small hit above the standard massive depreciation on a lease return, thank you very much.

    If a new feature can be retrofitted, great, otherwise they'll just shrug it off.
     
  15. Johan

    Johan Took a TSLA bear test. Came back negative.

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    When Tesla increased pricing last year what they did was at least very honest: They gave everyone a choice to either finalize or not before a certain date, if you did finalize before that date you got "the old" price and if you didn't - but some who waited were able to get new features. They (AFAIK) made no exceptions which is important.
     
  16. green1

    green1 Active Member

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    This is nothing new, Tesla has made changes before, and someone is always pissed off because they made their final arrangements before whatever change. That's not Tesla's problem though, they should be continually improving, and if some customer isn't happy because a change was made AFTER they finalized, then that's their problem.
    various examples: people who ordered the parcel shelf right before it was changed to be free, people who bought before the parking sensors were an option, etc.

    If you were happy finalizing your order as is, you shouldn't be less happy, or expect more, just because someone in the future might get a better or cheaper car. Asking to never be disappointed is akin to asking to halt all progress. using that logic we'd still be using horse drawn wagons just in case someone got upset that they bought a new one just before the automobile became available.
     
  17. jhm

    jhm Active Member

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    One basic way Tesla could manage a significant transition is simply to take reservations. Suppose they were to offer a new line of battery packs, say a 70 and a 100 for the same prices as 60 and 85 respectively. They could announce this 4 to 6 months ahead of availability and start taking reservations. Anyone with a current order could be given the option of first priority on the reservations. Some will opt to continue with their current orders, others will voluntarily wait an additional 4 to 6 months. As the reservation queue fills up, new potential buyers will weigh the benefit of buying their 60 or 85 quickly or waiting say 6 to 9 months for a 70 or 100. If the wait time differential is big enough, then Tesla should have no problem working off any older inventory. The wait time differential is the price differential.

    We actually see this playing out currently between the Model S and the Model X. Even when the X starts rolling off the assembly line, there will still be a huge wait time differential between the X and the S. Some customers who might actually prefer an X will still opt for an S because they will be able to get one sooner.
     
  18. Robert.Boston

    Robert.Boston Model S VIN P01536

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    Tesla would have a huge risk with your strategy, @jhm: if the vast majority of customers opt to wait, the production lines would be idled while the new model awaits production. I think that the time between announcement and commencement of production has to be short, and further that there needs to be a step-up in price, to limit the impact on production and the regret of customers who receive the older model ("at least mine cost less").

    I think that this is what we'll see for the AWD Model S release. While we few here on TMC know that it's well along and likely to be released this quarter, Tesla has been silent about a release date. I seriously doubt that people who have finalized their orders this month or next will be able to modify those orders to be AWD. Short lead time on announcement, step-up in price.
     
  19. Cobos

    Cobos S60 owner since 2013

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    What we do see here in Norway though is that people that decides they rather wait for the X or they want feature so-and-so added to their S can sell the Model S in the used car market with hardly any losses. We are talking about 5-10% loss on a car that usually has driven about 3000-8000 miles so is technically not new any longer. In that sense people can then sell and rebuy if they want AWD f.inst.

    Cobos
     
  20. Subhuman

    Subhuman Member

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    The problem that is inherent to Tesla is the wait for the vehicle to be produced. If I bought a Model S and already had it in my driveway, I might still be upset that new option or pricing just came out but at the end of the day I can except that.

    The issue with Tesla is that there is a high likely hood that the car has not even been produced yet. This in my opinion is where the feeling of of unfairness comes into play. At this point it is strictly an arbitrary date that determines what options I get or don't get. This is hard to swallow because someone who ordered the car a day later may have their car assembled along with mine and possibly be getting a better value.

    When Tesla raises the price with the new options, Tesla can and has resolved this issue by allowing reconfiguration. My opinion is that the same thing should be allowed the other way also. If tesla lowers the price or adds an option as standard this should be applied to your car if it has not be produced yet. Basically reconfiguring the car at the new lower price. Therefore the production date is the cut off instead of the order date.
     

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