Last month, Tesla dropped its prices dramatically — up to 20%.
Auto companies offering discounts to promote sales is nothing new, but this move sparked a lot of reaction. So what was so special about these price cuts? And what do they mean?
A lot, actually. Here’s how the announcement is having ripple effects, from the impact on Tesla owners to the changes it could spur across the auto industry.
Others are now under pressure to cut prices
When a leading company cuts prices, all its rivals feel pressure to follow suit — it’s economics 101.
And the textbook scenario is playing out in the headlines.
On Monday, Ford announced it was cutting prices on the Mustang Mach-E, an electric SUV that competes against Tesla’s Model Y. Prices dropped by $900 to $5,900, depending on the vehicle’s options.
It was clearly a response to Tesla, and Marin Gjaja, the chief customer officer of Ford’s electric vehicle business, confirmed to reporters that the company was “responding to changes in the marketplace.”
The big question now may be whether other companies can afford to follow suit. Tesla, which started out as an automotive underdog, now has become the overwhelming market leader in the EV sector.
It makes healthy profits on electric vehicles that big automakers are, in many cases, still making at a loss — or struggling to make at volume.
On an earnings call this week, General Motors CEO Mary Barra said she doesn’t plan to cut prices on the Cadillac Lyriq. The luxury SUV is supposed to be a Model Y competitor, but GM only managed to deliver 122 of the vehicles in 2022.
“We think, right now, we’re priced where we need to be,” Barra said.
Used Tesla prices dropped overnight
Lowering prices affects used cars too.
Used car prices in general finally started trending down last year, after a precipitous rise. According to CarGurus, prices overall are down less than 2% for the month, while prices for Teslas are down 8%.
“This is what we call the waterfall effect,” said Jeremy Robb, senior director of Business Intelligence at Cox Automotive. “If new prices come down, used prices have to be pushed down as well.”
And it’s not just used Teslas — used electric vehicle prices in general are being pushed down by this price drop, according to Cox Automotive. (Cox owns Manheim, the world’s largest wholesale auto auction company.)
EV sales are likely to get a boost
Electric vehicles are increasingly popular with shoppers. And the cost of operating an EV is already lower than a gas-powered car.
But the upfront cost has long been a hurdle. According to Kelley Blue Book, the average EV now costs more than $61,000.
At the Washington, D.C., Auto Show last month, attendees Xavion Butler and Frank Smart recently agreed that electric vehicles are the future. “Get on board or get left behind,” Butler said cheerfully.
“But everybody’s gotta be able to afford them,” Smart said. “They’ve gotta make them more affordable.”
Making the best-selling electric vehicle in the U.S. significantly cheaper, while also boosting production, would logically provide a direct boost to electric vehicle sales. Globally, Tesla delivered 1.3 million vehicles last year, and it plans to sell 1.8 million this year.
The more rivals follow suit and cut their own prices, the more dramatic the impact could be.
But price cuts annoy Tesla owners
As you can imagine, people who bought a Tesla in late 2022 were not delighted to narrowly miss out on a bargain.
“Feels like a scam!!!” one owner tweeted.
Because of the way Tesla handles its pricing, the sudden drop is more transparent, and possibly more upsetting, than typical carmaker discounting.
Most carmakers set a “manufacturer’s suggested retail price” that is, in fact, just a suggestion. Dealerships and buyers negotiate the actual price.
To boost sales, a carmaker, through a dealership, can offer a variety of discounts — like rebates, price reductions, discounts on loans — to reduce what customers actually pay without adjusting the MSRP. The MSRP tends to stay the same for an entire model year.
Tesla sometimes offers incentives like that, but for the most part the price listed on Tesla’s website is the price. And it can change whenever the company likes.
Brian Levine, a physician in Tucson who ordered a Model Y last summer, definitely was not thrilled when he heard about the price cut.
“The reptilian-brain part of [you thinks] ‘That stinks,’ ” he says.
Levine is trying to be philosophical. He says he understands not everyone gets every deal. But the immediate loss in his vehicle’s value was a bitter pill to swallow.
Levine also owns a Model 3. But he now says he would think twice before buying another Tesla again.
… while attracting new ones to Tesla
Someone in Levine’s family was thrilled, though. His dad went out and ordered a Model 3.
And that, of course, is why discounts and bargains are a huge part of the auto industry. Price cuts work: They boost sales.
On Tesla’s earnings call last week, CEO Elon Musk said that orders for vehicles are coming in at almost twice the rate of vehicle production.
“It’s hard to say whether that will continue,” he said, “but the orders are high.”
Meanwhile, the percentage of people using the automotive data site Edmunds to research Tesla, as opposed to other brands, more than doubled after the auto maker announced its price cuts, according to Edmund’s head of insights, Jessica Caldwell.
It’s “a tale as old as time,” she said. “You want market share, you’re just going to increase your production, drop the prices.”
Teslas will get more accessible (which could affect the brand)
Caldwell noted the price cuts could negatively affect Tesla’s brand, which until now, has enjoyed luxury status.
On the other hand, Tesla’s not-so-secret “secret plan” has always been to become a mass-market automaker selling millions of affordable vehicles — like a GM or a Volkswagen, not a Ferrari or Porsche.
And the price cuts could make some Teslas even more affordable than the price cut itself suggests, because they can now qualify for a $7,500 tax credit.
The base Model Y, for example, is now eligible for the credit (though there’s an income cap for the prospective buyer. Read all about it here.)
The price cuts are being welcomed by Tesla investors
Investors had been questioning if Tesla still had the magic touch after the company faced increased competition just as Musk appeared distracted by his purchase of Twitter.
Tesla still has other key advantages — including, crucially, a reliable and expansive high-speed charging network. (Teslas can charge at the Tesla Supercharger network; other brands rely on a patchwork of chargers from various companies, and malfunctioning or poorly maintained chargers are a common frustration for drivers.)
But would that be enough?
Enter the price cuts. While some analysts had worried that they would cut too deeply into margins, overall, the stock market seemed relieved to see the company taking action to protect its dominance of the EV market.
Investors now seem optimistic about Tesla’s outlook after a miserable 2022 for the company’s investors.
Since the price cuts were announced, Tesla stock has risen more than 48% — less of a ripple effect, and more of a big, fat wave.
What questions do you have about Southern California?