The Price of X

I remember struggling to wind up the windows in my dad’s old Toyota Corona and asking him “why don’t we have a car that has those electric windows” and my dad replied with “those are expensive cars and we can’t afford them”. From then on I associated these expensive, innovative and high quality cars with brands such as Mercedes Benz and BMW.

Come 2016, there is a new player in this segment; the all-electric Tesla. Tesla brought the first commercially successful electric car to the Market. They currently sell 2 models and are about to release the third; the Tesla X.

The Consumer

Tesla have positioned themselves as a premium (luxury) car manufacturer (Tesla 2016) with the rare benefit of being completely electric. The electric car consumer is summarised below:

  • Urban and suburban lifestyle with a home and garage
  • 84% men
  • 51% aged 45-64 and 33% aged 18-44
  • Educated – 43% of users have post graduate degree vs. 25% of gen market
  • High Income – 77% of buyers with income over 100K (US)
  • Concerned about environment and effects of fossil fuels
  • Only drive short distances, less than 100 miles per day
  • 5% were previous Toyota owners (25% including Lexus)

The company is positioned in the industry as follows:

capture-1

Figure 1 – Tesla Positioning

Pricing Strategy

In the following we will take a look at the pricing strategy around the Tesla X. The first aspect to consider is selecting the pricing objective and it is clear that Tesla’s objective for the model X is “Product – Quality leadership”. The model X is a Luxury SUV and its segment rival prices are shown below in table 1. As additional features are added to the vehicle the prices increase as expected. The model X starts at a price range that competes with its competitors but also extends to prices beyond its competitors.

price-table

Table 1 – Tesla Model X vs Competitors

capture2

Figure 2 – Tesla Model X Positioning

Based on the above table the pricing strategy employed by car manufacturers in this category is known as Value Pricing. This is where the perception of value determines the price and not the cost. Price is set by customers’ willingness to pay, minus markdown (Lacobucci 2014). This is generally used in situations where the demand is inelastic as illustrated in the figure below. The inelastic graph shows that as we vary the price from P1 to P2 or P3, there is no significant change is quantity sold i.e. Q1 Q2 Q3. However, the elastic graph shows that changing the price from P1 to P3 significantly changes the quantity sold. Only a small change in price P1 to P2 equates to a small change in quantity.

elastic

Figure 3 -Price Elasticity

Furthermore, it can be argued that it is far easier to raise the price as opposed to lowering the price because it meets the expectations of the luxury consumer. This is because consumers will perceive a reduction in price as a reduction in quality/value and harm the brand (Scholz 2014). Therefore, luxury cars reducing their price may actually cause a reduction in Quantity.

Thus the high end strategy is the most appropriate strategy to use for Tesla due to a number of reasons as outlined below:

Like Tesla’s other vehicle; the model X is a great product that cannot be compared to other vehicles. It’s as fast as a sports car, yet as spacious as a SUV and as energy efficient as a motorbike. Customer benefits are optimised not sacrificed in this vehicle and as such a high price is appropriate (Furtwengler 2010).

Their target consumer is the high income individuals with a lot of money to spend. These individuals in general are prepared to pay more to get the best quality product. This can be as a personal function of self-fulfilment to reward oneself. It can also serve a social function of bringing prestige and social esteem to the owner (Scholz 2014).

Telsa’s most expensive model of the X is far more costly than any of its competitors. This gives the customer the image that Tesla have a vehicle that is far superior to all other vehicles and positions them as a more luxurious vehicle than its competitors.

Furthermore, Tesla have a fixed price on their cars, there is no negotiation. As such there is no feeling of remorse from customers once the purchase is made. This lack of discrimination, helps build a loyal customer base.

The Future

Tesla are at the early stages of their life cycle and currently positioned as a luxury car producer. It can be argued that this is mostly to do with their production capacity at present. Their actual company motto is: to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to consumers as soon as possible. This could potentially mean prices may drop in the future when they are able to mass produce, thus appealing to a larger customer base. However, how this transition is made successfully, is yet to be seen.

By: Mayuraj Chandrakaran (Raj)

References

Furtwengler, D 2010, Pricing For Profit : How To Command Higher Prices For Your Products And Services, n.p.: New York : American Management Association, c2010., DEAKIN UNIV LIBRARY’s Catalog, EBSCOhost, viewed 17 September 2016.

Iacobucci, 2014. Marketing Management. 4th ed. Mason OH USA: Cengage.

Scholz, La 2014, Brand Management And Marketing Of Luxury Goods, n.p.: Hamburg, Germany : Anchor Academic Publishing, 2014., DEAKIN UNIV LIBRARY’s Catalog, EBSCOhost, viewed 17 September 2016.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s