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The Tesla Price Cut
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Tesla wants to expand its market. This explains a recent foray into the market for lower-priced sedans as Tesla decided that not enough consumers could pony up $100k for the high end electric sports cars it had been selling, and so it introduced its Model 3 product for under $50k. Even though electric vehicles represent less than 1% of the U.S. car market, and most of them are sold in California, demand for the trendy Tesla brand has been relatively brisk. After many years, Tesla finally had a profitable quarter, and it looks like the brand will be moving in the right direction as the demand for electric vehicles, fueled partly by government in the form of tax incentives, intensifies. And so why did marketers just announce that they were cutting prices across all models?

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Part of it can be explained by simple economic theory. When you lower the price of an elastic product, the demand for it will rise, and since fixed costs can be spread over more units when marketers sell more stuff, higher volumes usually lead to some modicum of profitability. But that doesn't explain it all. The problem for Tesla and other makers of electric vehicles is that the temporary tax break they have all been getting from the federal government is set to expire. This means that the cars will become more expensive for consumers without the incentives and that higher prices will reduce sales. And so a price reduction would have to happen at some point in time. The worry is that, without further government intervention, the demand for electric vehicles might not intensify at all.

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Indeed broader worries concern overall demand for Tesla cars themselves. Most experts believe that auto sales in the U.S. may have peaked, and electric vehicles remain a hard sell among rank-and-file consumers. Without federal and state tax incentives, most of these products are prohibitively expensive when compared with non-electric vehicles and without them demand may fall. But it is important to note that Tesla is reaching only "innovators" and "early adopters" at this point. There are many, many more consumers to be reached, but is there truly an established need for an electric vehicle?

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That question is very much up for debate. But if electric car makers like Tesla can keep price points competitive, invest in enhancing battery technology, and press governments to develop charging facilities, electric cars could be the future of transportation. Yet historically they have been an exercise for the wealthy, the sanctimonious environmentalists, and the technophiles, an industry enabled by government incentives paid for by taxpayers who don't drive electric cars. This is about to stop. It's time to see if the industry can stand on its own two feet.

 

Discussion:

  • Do you think that the electric car industry can survive without government incentives?
  • What market need does an electric car fulfill that a traditional car doesn't fulfill?
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