At the beginning of this year, the pricing for the Model 3 began to deviate sharply from the prices of comparable electric vehicles (EVs). In a move that may have startled some, the Model Y SUV underwent a drastic change. At one point, more than $19,000 above the average transaction price, it now has a starting price below the industry average.
Instead of following the traditional auto industry norm of setting prices at the start of each model year, Tesla has adopted a “floating-price” strategy, meaning its vehicle costs change throughout the year.
It’s a strategy that may unsettle some, but others see it as an innovative approach for a rapidly changing industry. At the end of the day, Tesla isn’t just selling its EVs. It’s also helping to shift the whole market by moving drivers away from conventional, dirty energy-powered vehicles.
And then there’s Tesla’s high production capacity, which can be a double-edged sword.
The company reportedly produced tens of thousands more vehicles than it delivered in the final months of last year, leading to increasing inventory. As a result, Tesla is transitioning from being supply-constrained to being demand-constrained, as a Bloomberg opinion piece points out, so it makes sense to reduce prices in order to encourage more purchases.
These price cuts are made from a position of strength, given the company’s unmatched production volumes and significant economies of scale. Apart from China’s BYD Co., no other automaker can match Tesla’s EV production. This production prowess, combined with manufacturing innovations such as single-piece vehicle structures and simpler batteries, has allowed Tesla to decrease costs steadily.
But that doesn’t mean other companies aren’t trying to keep up.
As the demand for EVs surges and traditional manufacturers strive to catch up with Tesla, other car companies are gradually moving toward a similar approach to sales and pricing. Ford, for example, altered the suggested retail price of its electric pickup truck, the F-150 Lightning, multiple times last year.
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