Recent Price Increase: Good Financial Play for Tesla AND Customer?

[aznt1217]

I know this is against conventional wisdom but hear me out. I am late to the game on this new option/price increase thing, but after finding out about it I wondered what the effect on sales would be then I got to thinking... that it actually could become a net zero gain for customers and a sales generator for Tesla.

There have been quite a few complaints about the price increase (namely the increase of the Sound Studio Package--now known as Ultra High Fidelity). People are claiming that their previous fully loaded P85's now cost about ~14k more (Apples to Apples-- meaning ex Parking Sensors). Some are even saying this is Tesla nickel and dime-ing customers to reach that claimed 25% gross margin by YE13.

First, it may be true that this is the standard auto practice of price increase from Model Year changeover. But aside from that I think there's extra rationale that will probably be explained August 7th when some Wall Street Analyst asks about the price hike.

Here's why I think it will work and was the right move:

Sales Generator/Cost Perspective- previously, Model S was limited in configurations. We all know there are more wheels, but more importantly there are now more configurable options. Previously, the P85 came with a CF spoiler. You couldn't get textile, it had to be Nappa Leather. In essence, the production was more standardized with less customization. Now... after the price increases it seems there are more combinations of Model S. From Tesla's perspective it makes sense. You are producing a car with more variation and giving the customer options to get the exact specification. One has to pay to play. Truthfully speaking, this just pits the pricing closer to Panamera/M5 pricing a Model S is in anyway. Typically this consumer base is less price sensitive. In fact, this price increase might generate more sales because it went up the pricing pyramid and made certain models of the car more exclusive.

Customer Perspective Now for the commoners or would/want to be Model S owners, I think this increase might provide a net zero gain in the long term and even help your buying decision (which makes things easier for you and Tesla). In the past I know people were 50/50 about the 21" wheels vs 19". People were also 50/50 about the SSP. So now that the price increased, decision making got easier. It helps people separate from the need/nice to have/absolute want. Then there were also complaints about the Alcantara headliner and how some people wanted it and how some people didn't. People complained and Tesla had to retrofit. Some people are allergic and some people don't care about this headliner, so why bundle it? Now... onto the financials and why it might work out. People with Model S' now definitely got a good deal. Most people say you get punished for being an early adopter and they complained...well now you win. Because of these price increases, this is going to work out real well for your resale value which makes your effective monthly cost about the same. Your cars are now "better deals," and the laws of supply and demand should kick in. If you don't believe this, just go look at things like the Nissan GTR values. The current Models almost increased +40% in price which basically enabled early owners resale values of near MSRP new.

Anyway, these are my random thoughts on why this works and why it's a good move for Tesla and a net zero on the customer. Curious to know what people would think.

 

[ppl]

I find the timing of the increases very interesting. It is no accident that it was so close to earnings call. They are aware of this of course. If they didn't want to be asked about it they would have waited a week to announce it

i believe it could stimulate sales with the new features the only thing the car lacked, particularly parking sensors fo such a large car. But are they adding them as an answer to why margins are not better or how will they make them better. That is the large question in my mind.

I am jealous that my vin 57xx doesn't have the sensors but glad I didn't see the price increases. I remember that the last increases triggered sales (to get in before the increase) which this one may have done. I also remember the lag afterwards as those on the fence had already jumped before the increase.

i have always considered the car seriously underpriced.

 

[uselesslogin]

I find the timing of the increases very interesting. It is no accident that it was so close to earnings call. They are aware of this of course. If they didn't want to be asked about it they would have waited a week to announce it

i believe it could stimulate sales with the new features the only thing the car lacked, particularly parking sensors fo such a large car. But are they adding them as an answer to why margins are not better or how will they make them better. That is the large question in my mind.

I agree that is a big question. But, as usual, this can go either way. It is possible they are going to use this as a justification for guidance of 30% gross margin. I'll hold on to a couple way OTM options in case that is what happens. It is also likely they are raising the prices simply because the P85/P85+ versions seem to be underpriced based on the high number of orders for them.

 

[Acmykguy]

I agree that is a big question. But, as usual, this can go either way. It is possible they are going to use this as a justification for guidance of 30% gross margin. I'll hold on to a couple way OTM options in case that is what happens. It is also likely they are raising the prices simply because the P85/P85+ versions seem to be underpriced based on the high number of orders for them.

I had made a post in a different thread relating to this and the long term effects on the balance sheet and income statement. Typically, prices rise as demand increases. IE tesla stock. That being said, is the demand now so great this is what happened? Did demand in Q2 far exceed what they were able to produce? And or was sales and production both greater than Elon thought as well as what we investors may be expecting?

just something to ponder as we go into Wednesday.

 

[aznt1217]

I also speculate, the increase may have come from additional suppliers on the backend.

 

[blakegallagher]

As they ramp up volume and add higher volume suppliers I would think they would be offered better deals not worse. From what I understand most of the big players in automotive part supplies that did not take them seriously last year have sat up and are paying attention.

 

[brianman]

I also speculate, the increase may have come from additional suppliers on the backend.

That's a very good point. Early (in one of the many threads) I posited that they might have a cost increase on the supply side. Then I was thinking general inflation and production constraints. I hadn't even thought about the cost of adding new suppliers to meet higher volume requirements. For example, maybe Samsung is more expensive than Panasonic for the batteries.

 

[mountaineer]

"People are claiming that their previous fully loaded P85's now cost about ~14k more (Apples to Apples-- meaning ex Parking Sensors)"

------I went to the Model S Design site, chose P85 with every single option, the final price is $124,570. I know a person who ordered one P85 with all options in May, he paid $110,570. So this is an increase of $14K. But the price for the Ultra High Fidelity option is just $2500. Do I miss something here?

 

[aznt1217]

"People are claiming that their previous fully loaded P85's now cost about ~14k more (Apples to Apples-- meaning ex Parking Sensors)"

------I went to the Model S Design site, chose P85 with every single option, the final price is $124,570. One person I know a person ordered one P85 with all options in May, he paid $110,570. So this is an increase of $14K. But the price for the Ultra High Fidelity option is just $2500. Do I miss something here?

That is just one of the options that increased. They split things up. The CF Spoiler now costs $1,500 when it was previously included. Then you have the SSP (which was $950) convert to the Ultra High Fidelity Sound System which is $2,500. Other things are now charged for such as Alcantara headliner and the dash which was previously included in the P85's. It's a price increase because they un-bundled certain things and made things that were previously options--standard (namely HID headlights where people had to buy the Tech package for previously).

 

[mountaineer]

Thanks a lot！ This makes sense

That is just one of the options that increased. They split things up. The CF Spoiler now costs $1,500 when it was previously included. Then you have the SSP (which was $950) convert to the Ultra High Fidelity Sound System which is $2,500. Other things are now charged for such as Alcantara headliner and the dash which was previously included in the P85's. It's a price increase because they un-bundled certain things and made things that were previously options--standard (namely HID headlights where people had to buy the Tech package for previously).

 

[austinEV]

I think it is pretty clear what the price increase means:

1) it's basically bad for the consumer but good for TM and its investors. Yes, some on-the-fence consumers will be rightfully pissed off and may choose to not buy one. But, TM realized its supply constrained and can raise prices. It has a responsibility to its shareholders to do so.
2) The new options scheme clarifies the options and unbundles some options that were strange bedfellows. Why would the performance model automatically include the spoiler/air suspension/red leather piping? Some of it makes sense, some of it was making decisions on behalf of the buyer. Mostly, the changes are a cost increase but there are also some bargains lurking in there, like a lower base cost for the battery options/performance.
3) By pushing up cost they signal on-the-fence buyers that there is no good reason to wait, since prices are going to rise over time. This is good, because they also introduced new features. Without the price increase, the existing owners would have HOWLED in anger. This balances the interests of the existing and future buyers.
4) By pushing up costs they create some air between the model S and the Gen III. Frankly the parts cost of the Gen III will be pretty close to the model S in most ways. This creates clarity on the value proposition of the Model S: namely, its the high end luxury nameplate of the family. The Gen III will be downscale. (if you consider a 40-55k car downscale)
5) This is necessary for going into China and the Middle east (probably helps in Europe too, less sure about that). They will need to reestablish the nameplate as "expensive and exclusive" to be alluring to the wealthy set there.
6) *lowering* prices would be a *disaster* for the stock. It would signal demand weakness, and encourage buyers to wait-and-see.

As a buyer I am tweaked that this will cost me around $1000 and I will lose some features I sort of cared about. As a stockholder I wouldn't have it any other way.

 

[onesixeight]

Truthfully speaking, this just pits the pricing closer to Panamera/M5 pricing a Model S is in anyway. Typically this consumer base is less price sensitive. In fact, this price increase might generate more sales because it went up the pricing pyramid and made certain models of the car more exclusive.

In my opinion, the recent price increase has pushed the pricing past Panamera/M5 pricing by a significant margin. I have both a Panamera 4S and a F10 M5, the M5 with every option except night vision and it was $110k. My P85+ with every option except rear seats was $113k and it lacks many of the options such as vented seats, blind spot monitoring, etc.

I find it interesting that a lot of people say the extra $10-14k shouldn't matter to a customer shopping in this price bracket, but for myself, I told myself I'd pull the trigger because of M5-like acceleration in the same price bracket as the M5 (give/take $5k).

I've showed my Model S to many of my car buddies who are current CLS 63 AMG, M5, Panamera type shoppers and while they are really intrigued about the MS, the hurdle they face is that its so closely priced to what they drive now yet doesn't have the options they want or isn't as nicely appointed for the money.

With that said, if I were to do it again, I'd buy a Model S but the decision would be a lot tougher.

 

[aznt1217]

I know exactly what you are saying, but it's the overall value offer that still makes sense. First off, Kudos to you who are able to purchase/maintain all three vehicles. I hope to get there at some point. My next question is, what was your OTD price (including Gas Guzzler tax) and what's your yearly service and gas cost like (estimated).

I think the pricing move brought it to market. Although I love the M5, it still has a crappy UI (aka iDrive--although it made improvements) and it is highly inefficient for what it is. Costs will still be high for repair in the near future (yes there's the no maintenance for 40k). Nothing matches the Model S in terms of acceleration feel right now. I think what this move does, is it makes people refine and question what they want/need.

I think your friends who have a CLS63, M5, etc. have no need to switch yet because switching costs are high and there's a substantial amount of brand equity/allure of the European luxury brands. A BMW is still a BMW as I like to say it (and I have tons of friends like this). The other part of this whole equation is one of compromise. The Model S, in my mind really doesn't have that much.

The 10-14k is a hefty amount of money and I'm not saying it doesn't matter, but for this bracket it's not about fully loaded it's about getting what you want customized to the way you like it.

In my opinion, the recent price increase has pushed the pricing past Panamera/M5 pricing by a significant margin. I have both a Panamera 4S and a F10 M5, the M5 with every option except night vision and it was $110k. My P85+ with every option except rear seats was $113k and it lacks many of the options such as vented seats, blind spot monitoring, etc.

I find it interesting that a lot of people say the extra $10-14k shouldn't matter to a customer shopping in this price bracket, but for myself, I told myself I'd pull the trigger because of M5-like acceleration in the same price bracket as the M5 (give/take $5k).

I've showed my Model S to many of my car buddies who are current CLS 63 AMG, M5, Panamera type shoppers and while they are really intrigued about the MS, the hurdle they face is that its so closely priced to what they drive now yet doesn't have the options they want or isn't as nicely appointed for the money.

With that said, if I were to do it again, I'd buy a Model S but the decision would be a lot tougher.

- - - Updated - - -

1. Is it really bad for the consumer though? I think it's bad for some brackets, but not all. The price increases mainly come from the optional extras and not so much on what you buy the Model S for: the bloody awesome touch screen, Electric Power, Efficiency, cost of ownership, etc. I think this is just streamlining the process on the company end. With that said, transparency should be increased-- and I think much of this will be cleared up Wed.

2/3. My points exactly. Keep the loyal and get more customers

4. Who really knows. The next focus should be the Model X.

5. True story. My people (chinese) have expensive tastes and its all about wearing/driving your money there.

6. They wouldn't lower prices. It's their only product lol.

I think it is pretty clear what the price increase means:

1) it's basically bad for the consumer but good for TM and its investors. Yes, some on-the-fence consumers will be rightfully pissed off and may choose to not buy one. But, TM ...

5) This is necessary for going into China and the Middle east (probably helps in Europe too, less sure about that). They will need to reestablish the nameplate as "expensive and exclusive" to be alluring to the wealthy set there.
6) *lowering* prices would be a *disaster* for the stock. It would signal demand weakness, and encourage buyers to wait-and-see.

As a buyer I am tweaked that this will cost me around $1000 and I will lose some features I sort of cared about. As a stockholder I wouldn't have it any other way.

 

[hershey101]

That is just one of the options that increased. They split things up. The CF Spoiler now costs $1,500 when it was previously included. Then you have the SSP (which was $950) convert to the Ultra High Fidelity Sound System which is $2,500.

The previous sound system upgrade was Dolby Digital correct? Anyone know if the Fidelity system actually produces better sound?

 

[aznt1217]

The previous sound system upgrade was Dolby Digital correct? Anyone know if the Fidelity system actually produces better sound?

Not sure, the other threads in Model S subtopic claims its the same sound system. When I have time I'm going to go to the store after this earnings madness to find out. For a price increase like that, I think it's justified if some kind of extra tuning or supplier switch occurred. Dolby is just the tech. I wonder who the vendor is. Some people say the speakers are made in house. We'll probably find out in the Q+A.

 

[sub]

Went over and priced out the car I had in mind again, price seems about the same or maybe slightly cheaper. Maybe it doesn't affect my price as much due to the particular options I would want. I'm waiting for the X regardless, I'm assuming the prices of the X will be similar as Elon stated previously.