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Why Price Increases Are Good

Why Price Increases Are Good

OK, so I realize the price increases suck for folks that are "in process", but from a business perspective, I think this is a good sign. It means Tesla thinks they are leaving money on the table and they feel comfortable raising prices without unduly impacting sales. If they can increase average selling price while continuing to drive down costs, it will help with both top line revenue growth and bottom line profitability, which will certainly help the stock price.

For those of you who don't care about the business angle, remember, Elon has also said he wants to fund Gen III development out of operating income from the MS and MX, so this move will also help them move the Gen III along.

O

stevenmaifert | August 3, 2013

I suspect this will price a number of prospective buyers out of the market. If they keep this up, ModS will become like the Roadster, a niche car for the very affluent.

Carefree | August 3, 2013

My concern is as well that they are over doing the price increases. It might price them out of their customer base.

AmpedRealtor | August 3, 2013

My business partner elected not to purchase a Model S since they eliminated the 40 kWh battery. That configuration was in her price range. So Tesla is losing customers by pushing the Model S into higher price tiers with their recent changes. I pushed ahead at the previous prices and thought I was a little cuckoo. At the new prices, I would not have been able to get all the things that I wanted, so would have been more of a compromise.

I'm assuming the prices are supply/demand related. If so, that's good news for the company.

Brian H | August 3, 2013

The ZEV credits, which are substantial, are likely to run out or be gone by the end of Q3 or so. Elon has said they'll reach 25% gross margin by the end of Q4 anyway. This is part of the 'necessary' to get there, I think.

Brian H | August 3, 2013

Note also that TM qualified for 7 ZEV 'points' by proving it could swap batteries, up from 4 per car.

RedShift | August 3, 2013

Aero wheels are 2500$. Wow.

This is how they get to the margins Porsche commands. Lets see how this plays out. They might lose a few prospective customers, but in the end it might work out OK for Tesla.

rdalcanto | August 3, 2013

The problem I see is that the interior, with all the upgrades you now have to pay for, was already a little inferior to that seen in the competitors. Now you have to pay even more for it. Starting to go like the Leaf, where you pay more than you would if you bought an ICE, and get less. The performance of the electric motor will only go so far in justifying sales.

43north | August 3, 2013

I had a US order on hold (RN3839XX) waiting for the Cold Weather Package. An identically configured S85 is now almost $6K more than last week, before adding any new packages. This pushes me over what I was willing to spend.

I rolled the dice waiting on the new options and lost. If I knew last week what I know now, I would have confirmed my order and skipped the CW package. I just cancelled my order.

Reilly McHugh | August 3, 2013

Helping the resale value for the early adopters!

Tâm | August 3, 2013

@stvt:

Take home lesson: Waiting for additional new options don't come for free!

ian t.wa.us | August 3, 2013

I was hoping the increasing margins would come with production efficiency increases. Apparently not so. Oh well, I hope the increase in margins makes up for the lost orders.

AmpedRealtor | August 3, 2013

I find the timing of it all rather intriguing. Usually when a company needs to make an announcement or take an action that it feels may be perceived negatively by the financial markets, it will usually do so on a Friday evening. This lessens the impact and helps keep markets from overreacting. I'm curious to see how the market responds on Monday.

uroshah | August 3, 2013

@stvt
you could have kept your old order so cancelling your order doesn't make any sense.

AmpedRealtor | August 3, 2013

@ stvt,

"I rolled the dice waiting on the new options and lost. If I knew last week what I know now, I would have confirmed my order and skipped the CW package. I just cancelled my order."

Why did you cancel your order? Tesla pricing only affects new orders, I believe your existing reservation would have been honored.

43north | August 3, 2013

@uroshah My order was on hold because I wanted one of the new options. "On hold" is different than the 2 week configuration period. All on hold orders were reset to current pricing on Aug 1. Keeping my old pricing is not an option available to me today.

In hindsight, I should have cancelled my original on hold order last week and placed a new order. That would have locked in the old pricing for 2 weeks and then I could now choose between the old set of options and pricing or the new. I think somebody on the forum suggested that last week. There are a lot of smart people here.

bradslee | August 3, 2013

Evidently, the timing and the pricing increase are all carefully calculated for the business reasons. TM sees the big demand of its MS and tries to increase the weekly production rate towards its 800 per week goal. I am sure that when TM releases its 2Q result next Wednesday, people will see the big jump production number in 2Q which would mean whole 2013 production goal will exceed 21,000 MS. That is good for revenues growth.

Furthermore, Wall Street wants also to see the profit margin in TM moving towards its healthy goal of 25% along with its revenue growth. To achieving it, one of the fastest ways is to raise the price of the product that is in high demand. Even though doing it would unavoidably lose some potential buyers, TM must have calculated in a financial model to believe that the pricing increase should enable TM to achieve its 25% profit margin within its planned time frame.

Therefore, this pricing increase may not be good news for those who have reserved a MS but have not confirmed the order. Yet, it should be a good sign for TM shareholders to know that TM is again on the right track to its goal.

omarsultan.ca.us | August 3, 2013

I am going to assume Elon and company gave a solid model for price elasticity that is driving this. I would argue that, since they did this ahead of the earnings release, they expect this to be viewed in a positive light.

Omar

AmpedRealtor | August 3, 2013

I agree with above that a price increase will most likely be viewed in a positive manner by the markets. It's pretty ballsy of Tesla to increase prices so dramatically and quickly on the heals of the last price increases. They recently raised prices on the 21" wheels, air suspension and extended warranty. Now we see a pretty much across the board increase on anyone who had anything but the most bare bones configuration.

Kimscar | August 3, 2013

As one of those that has to wait till he can place an order I will say that I'm dissapointed. I can't pickup till July next year and this price increase ate my anticipatd price increase between now and then.
Lets look at the timing of the increase. Order to build times have gotten shorter in the US so backlog is beginning to shrink. However this is temporary as shipping to Europe is going to pick up now. Backlog will probably grow at least for the some time into the future before Europe is caught up. From a business point of view maybe a smart move. Some will drop out and some will sadly downsize their options.
This hurts me but still on track for next July.

2050project | August 3, 2013

@bradslee - agreed, it's a bold move in such a short lead-up to earnings on the 8th.

This must be calculated in a move to show the market that Tesla is ahead of the competition -- i.e. "others are dropping the prices of their EVs to increase sales, we're doing well enough where we're increasing prices... because we can."

LionPowered | August 3, 2013

Japanese companies can lower their prices because of the currency exchange rate.

Brian H | August 3, 2013

gone;
I don't think it's one or the other. Price changes and supply line cost reductions and efficiency improvements, the whole range.

At this time, I think price elasticity is fairly low.

carlk | August 3, 2013

Yes I agree. If you study the economic model you'll know it's a brilliant move. I think more people will go buy the car instead of less because they see the value will be preserved better because future purchases will always cost more. It's the same stratege luxury brands know how to use. They always have automatic annual price increse to increase the brand value. The same thing you see in the real estate market. No one is buying when price is going down but you see multiple offers over asking price in markets with already skyrockting home prices.

You do need the good brand image in order to do that though. I think Tesla is confident that they have it.

smd | August 3, 2013

Those of you priced out of a Model S now with the price increase should buy TSLA stock with the cash you had been saving aside for the car. When the stock reached $200, you can cash out and easily afford the price increases at that time.

Brian H | August 4, 2013

smd;
I was thinking the same. The required price wouldn't be that high, though. Maybe $160 or so.

Code4Ever | August 4, 2013

The opening article is ridiculous. People are buying a car , not funding future car development by being nickel and dimed.

cloroxbb | August 4, 2013

@Code

Why are you here? Shouldn't you be on Lexus' forums or something? Are you actually going to contribute to this place or just bitch about a car you don't own?

Tâm | August 4, 2013

@Code4Ever

Your philosophy might be similar to "I come to San Francisco to eat and nourish myself. I am not here to pay for the healthcare cost surcharge for my waiters/waitresses."

Some politicians can't stand the idea and brand it as "communism, socialism" But most commoners do care about the welfare of their waiters and waitresses and they are gladly paying the surcharge in San Francisco! They repeatedly told restaurant owners so!

Elon has stated over and over and over again about Tesla's business plan: YOU pay dearly NOW for those who can buy a cheaper Tesla in future.

I am not sure where you live, but if you can't accept this kind of Californian's thinking, then may be it is not for you!

carlk | August 4, 2013

@Tam You are wrong. People who could afford the $100K car are not exactly commoners and they are entitled to not to care about warefare of rest of people. :-)

Colasec | August 5, 2013

>>I suspect this will price a number of prospective buyers out of the market. If they keep this up, ModS will become like the Roadster, a niche car for the very affluent.

I don't agree with this assertion. My 60 w/ tech+pano config is now only $750 more and basic 85 configs were increased by a similarly small amount. I don't think an increase of 1% will price someone out of the market. A Model S can still be purchased for about the same price as before; it's not yet a car for only the very affluent.

What has changed, obviously, are the prices for the more expensive configurations and options. The people who are now "priced out" are those who could afford to pay for a P85 in the first place. The car is perhaps not as attractive to those potential buyers now as it was before since the same config costs so much more. But the Model S itself is still in range.