Tesla vehicles and other products like batteries and solar power systems are considerably more expensive than their counterparts and substitute products. Hence, on the surface, it would appear that the pricing strategy of the company leans toward premium pricing. But a further look at the pricing decisions it has made in the past would reveal that its pricing strategy centers on a combination of premium pricing and dynamic pricing.
Exploring and Explaining the Pricing Strategy of Tesla
Most automakers use a cost-plus pricing strategy that involves adding a profit margin to the cost of production to arrive at a selling price. This strategy is complemented by other strategies like penetration pricing, skimming pricing, and value-based pricing depending on the branding of the automaker or the positioning of its specific products.
However, in the case of the pricing strategy of Tesla, its approach is considered unique in the automotive industry. It is also important to note that the company is not just an automaker. Its product strategy and overall marketing strategy are actually anchored on the fact that it is a tech company and even a clean energy company.
The aforesaid is the reason behind its unique approach to pricing. It uses pricing models similar to high-end brands like luxury fashion companies, consumer-oriented tech companies like Apple, and service-oriented and demand-driven companies like airliners and hotels. The following are the details and explanations of its pricing strategy:
1. Premium Pricing
A Tesla electric vehicle is several thousand dollars more expensive than a vehicle based on a combustion engine. It is also more expensive than other battery-powered electric vehicles and hybrid electric vehicles. The high price point is intentional in some aspects because the company has positioned its vehicles as high-end or luxury products.
However, aside from the premium positioning, its vehicles and other products like its batteries and solar panels are expensive because the technologies involved are new and innovative. These products also come with after-sales perks. Advanced technologies and premium customer experience differentiate these products from the competition.
It is important to underscore the fact that the cost of manufacturing electric vehicles remains high. The specific manufacturing processes of Tesla are costlier because it uses novel technologies. Its vehicles, batteries, and solar power systems are high-performance products that have excellent workmanship and innovative capabilities
2. Penetration and Skimming
The pricing strategy of Tesla is not restricted to premium pricing. It has also used penetration pricing for some of its vehicles like the Model 3 vehicle and its Solar Roof residential photovoltaic energy system. The company sets a low price for a new product or during periods of low demand to attract customers and gain or retain market share.
It is important to note that even companies like Apple and Samsung have utilized some sort of penetration pricing strategy for some of their products. This is done to promote a new product or entice prospective customers to be part of their respective product ecosystems. This is also the same reason behind the penetration pricing strategy of Tesla.
There are also certain instances in which Tesla has utilized skimming pricing. This involves setting a high price for a new product to recoup costs and lowering it as competitors enter the market. The company introduced vehicles like the Model S with a high price tag but lowered it when demand is low or if a newer model or iteration is introduced.
3. Floating Pricing
The main pricing strategy of Tesla is floating pricing. This is somewhat similar to dynamic pricing but is simpler. It involves adjusting prices periodically based on a pre-determined set of rules centered on demand and supply. This allows the company to be responsive to market conditions and maximize earnings and profits potential.
Floating pricing also enables the company to adjust for changes in expenditures and retain a strong financial position regardless of cost-related disruptions in production and its supply chain. The company can recoup potential losses from expensive production inputs and related production processes by passing these costs to the consumers.
The same pricing strategy has also complemented its promotion strategy. Changing prices can help engage target customers and also help in building brand loyalty. Keeping prospects guessing what the next price tends to create a sense of urgency and scarcity. This can entice prospective customers to purchase its vehicles before prices go up.