What's going on with Tesla's pricing strategy?

Tesla advertises its cars as having a smooth ride, but following the prices for its vehicles has been anything but. Tesla has dropped prices multiple times over the past six months, and then in April, it raised the prices of its two most expensive models.

Tesla is going to be “more disruptive than they used to be,” Yen Chen, senior industry economist at the Center for Automotive Research, told CFO Brew, with a goal to “take as much of the market share” as they can.

Chen noted that Tesla currently has ~4% of the US market in automobiles, after being in the US market for about 15 years, comparing them with Subaru, which has a similar share of the US market, despite coming to the US in 1968.

“For a new company in the automotive industry—a 15-year-old company—[to] pick up 4% of the market share in the US is very, very impressive,” Chen said.

Tesla has long generated far-higher profit margins on its cars than the average manufacturer. Despite shrinking operating margins significantly—from 19.2% in the first quarter last year, to 11.4% in the quarter just passed—the company still stands far above Ford and General Motors, with margins of around 4% and 6.6%, respectively.

For this reason, Yen thinks, Tesla can discount its vehicles and still grow its market share significantly.

Yen also thinks a price cut in January was specifically targeted toward tax credits in the US. The Inflation Reduction Act limited the prices at which electric vehicles are eligible for tax credits, and Tesla’s price cuts kept some of its vehicles eligible, so that purchasers could get an extra $7,500 from the government in the deal.

Despite those discounts, however, sales didn’t hit targets, with delivered vehicles nearly 10,000 units short of the 432,000 vehicles analysts had expected. Afterwards, Tesla short-seller Drew Dickson wrote in the Financial Times, “The Tesla investment story hangs on high expectations and low-probability outcomes.”

Just hours after announcing those disappointing first-quarter results, Tesla announced a partial shift in its pricing strategy: Its two most expensive vehicles would be going up in price, not down. To Yen, this was a strategy to get more money out of customers who are less price-sensitive, since the models aren’t priced near to the point where purchasers could obtain tax credits with them.

Where do things go from here? Dickson watched Tesla’s investor day in March and wrote that came away with the impression that the company is relying on potential breakthroughs in self-driving technology to allow it to fend off the challenges in the electric vehicle market from traditional manufacturers.

But Yen sees something else: He said he believes that recent investments by the firm in Mexico came with a goal of producing far more cars—far less expensively than it has—in a bid to increase global market share.