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Tesla Vehicle Pricing Strategy Explained

An analysis by Bloomberg finds that Tesla vehicles typically sell for close to the average sale price of all cars in a market segment.

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The prices of Tesla automobiles appear to rise and fall in no predictable fashion, but Tom Randall, writing for Bloomberg Hyperdrive (paywall), says some smart people have researched this topic and think they know the answer. If you want to predict how much Tesla’s cheapest car will cost at any given time, he says, you only have to know one thing — the average price paid for a new vehicle in that market segment in the US. In most cases, there is about a $300 difference between the two figures.

According to a new analysis of pricing data compiled by Bloomberg, that correlation has held true for the past 5 years. When the Model 3 went into production in 2017, Elon Musk set a $35,000 starting price that almost exactly mirrored the $34,944 average cost of a new vehicle at the time. Five years and a burst of inflation later, a Model 3 costs $46,990. The average cost of a new vehicle in America today is $47,692 on average.

Tesla’s floating price strategy is unique among car companies and is made possible by Musk’s decision to depart from the traditional business model in the auto industry that has been dominant for over a century. First, he refused to embrace the franchised dealership model, a move that put Tesla in control of the final price of its cars. My colleague Jennifer Sensiba wrote recently about how Chevy dealers, on the other hand, are tacking on $5,000 “market adjustment” fees — and some people are paying them! Second, Tesla does not adhere to the industry norm of setting prices at the start of each model year and sticking with them until the next model year begins. Tesla changes prices frequently — sometimes several times a year.

Every year around August, car manufacturers lock in features and prices for each vehicle they sell. Dealerships will offer incentives, charge additional fees, cut deals, or haggle over options and financing, but the MSRP stays steady. This arrangement for setting vehicle prices dates back to the mid 1930s and was intended to stabilize jobs for the holiday shopping season during the Great Depression. Old traditions die hard, Randall says.

In Tesla’s early days of Model S and Model X production — from 2012 to 2016 — the company justified many of its midyear price changes by offering new features or performance upgrades. It increased the battery range of a base model by 17 miles or offered a discounted model with certain options disabled by a software lock. But by the time the Model 3 reached mass production in 2018, all bets were off. Pricing sometimes changed week to week, with or without changes to the model lineup, to the consternation of many customers.

Over time, consumers came to accept that Tesla prices are always subject to change, which has given Tesla the flexibility to boost demand by dropping prices or adjust to parts shortages by outbidding competitors and passing the added cost on to customers. That has also made other manufacturers envious.

For Tesla, Imitation Is The Sincerest Form Of Flattery

The basic rules of how US dealerships conduct business were created by Henry Ford more than a century ago and later codified into law in most states. One of those rules is that while manufacturers set the recommended price, only dealerships can negotiate the final terms with customers. Early last year, there were frequent reports of dealerships charging thousands of dollars over the MSRP for models, including the Hyundai Ioniq 5, Ford Mustang Mach-E, and Porsche Taycan. In the case of the Ford F-150 Lightning, dealer markets often exceeded $10,000. Many see those tactics as price gouging.

In September, Ford CEO Jim Farley met with dealer representatives and issued an ultimatum. They would have to agree to no-haggle pricing and make significant investments in charging infrastructure. If they choose not to, they will lose their right to sell Ford electric cars at the end of this year. So far, two-thirds of Ford dealers have agreed to the company’s terms. Volvo announced last year that all of its electric cars will be sold online with transparent, non-negotiable prices. Not all of its dealers are happy with that mandate.

Mid-year changes to MSRPs have always been rare among traditional automakers, says Ivan Drury, an analyst for Edmunds. Consumers want to feel like they’re getting a good deal, so MSRPs are intentionally set a trifle high, with incentives then used to bring the price down to whatever the market will support.

Covid Upends The Traditional Sales Model

This rule of thumb that new cars were almost always sold at a discount has been turned on its head since the pandemic, Randall says. With demand strong and manufacturers unable to keep up because of widespread supply chain issues and higher costs of raw materials, automakers largely withdrew their incentives, saving hundreds of millions of dollars. Some dealers created new fees and tacked on mandatory services. For at least six consecutive months last year, the average US consumer actually paid more than the MSRP — the first time that has happened since Edmunds started tracking prices 20 years ago. The inversion lasted until November, when more of the new 2023 suggested retail prices kicked in.

Transparent, no-haggle pricing is ideal for manufacturers when demand is high but less so in a downturn. At those times, dealers want negotiating flexibility in order to move cars off their lots. “That’s why they have targeted the dealership changes literally only for the EVs,” Drury said. “Because that’s where they see the demand, and where they see it continuing for years.” Ford took advantage of its new found pricing control for electric vehicles by changing the MSRP of the F-150 Lightning three times last year. The base model now sells for almost 50% more than it did when it first went on sale.

Last year, Tesla raised prices or changed its model offerings on a half dozen occasions. During its second quarter earnings call in July, Musk acknowledged the swings were unusual. “We’ve raised our prices quite a few times. They’re frankly at embarrassing levels,” Elon Musk said. “But we’ve also had a lot of supply chain and production shocks, and we’ve got crazy inflation. So I’m hopeful — and this is not a promise or anything — but I’m hopeful that at some point we can reduce the prices a little bit.”

Musk is also raising expectations for a new entry level model, which he said in October will slot in below the Model 3 at roughly half the cost. Two years ago, he said the smaller Tesla would cost around $25,000. If the Model 3 price history is any guide, that target will end up being aspirational and may need some inflation-based adjusting. Last week, the company said the generation 3 platform which presumably will be used to build a smaller, less expensive model will be on the agenda for an investor day it has scheduled for March 1.

Customers also are waiting for updated pricing on the delayed Cybertruck, the pickup truck the company plans to start delivering in the coming months. When Tesla began taking reservations for the vehicle in 2019, the all-wheel drive version was priced at $50,000 — almost exactly the average price paid for a large truck that year. The average large truck today goes for more than $56,000. Tesla removed Cybertruck price estimates from its website long ago.

The Takeaway

People complain all the time that they can’t afford an EV, but in fact, the prices of the Tesla Model 3 and Model Y closely track the average price of similar vehicles in the market. Now that you know that, you may choose to defer a decision to buy a new Tesla until average new car prices start to decline. If you do, you will get an above-average car for an average price. That ought to put a smile on your face!

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Tesla Sales in 2023, 2024, and 2030

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Written By

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be "woke" and doesn't really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: "The secret to change is to focus all of your energy not on fighting the old but on building the new."


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