Tesla’s Price Cuts Backfire: Why Discounting Is Dangerous

When inflation is up and interest rates keep heading higher,  dropping prices to stimulate sales is as tempting as an Apple in the Garden of Eden.

Religious analogies aside, the idea of discounting in the face of declining consumer demand and expensive money appeals to the rational side of our brains.

Prima facia it makes sense. But when we dig deeper into how well our flee-from-rate integrity instincts play out, a load of caution needs to be factored into the equation.

The Market Leader Stumbles

Case in point for this issue of Business Intelligence Weekly is the world’s number one electric vehicle maker Tesla. Its modest price cuts slashed profits by 44% in the third quarter of 2023.

Its operating margin was a lackluster 7.6% making it look more like a traditional car company than the high-tech disruptor that made Tesla the world’s 8th most valuable company in 15 years.

Considering that it landed in the end zone with a 17.2% margin in 2022 before it started discounting, it doesn’t take a rocket scientist to conclude that its numbers are moving in the wrong direction.

In a classic triple whammy, the topline revenue increase to support the cost-cutting strategy never materialized, market share in the US electric vehicle market dropped 12 percentage points to 50% from 62% in the first quarter and the stock lost nearly a third of its value.

This is a prime case study in the art and science of discounting to stimulate sales. It’s a surface-level tactic that generally fails if the fundamental market structure underneath it is flawed.

As Tesla faces increasing competition from Volvo, Mercedes, and Hyundai, consumer demand and budgets are becoming more fragmented across multiple players, threatening Tesla’s dominance in the space.

Objects In Mirror Are Closer Than They Appear

The Volkswagen Group sold 1.1 million electric vehicles in 2022, compared to Tesla’s 1.3 million. That’s a slim margin by any measure but this is a win by a nose scenario ripe for an upset.

The Volkswagen Group is rapidly closing the gap on market share with 11%, now just three percentage points behind the incumbent at 14%.

And it’s just getting started. The company plans to spend $193 billion by 2028  in electrical and digital technology with the lion’s share being aimed directly at Tesla’s wheelhouse in EVs. It’s gunning for a 25% market share of the global electric vehicle market by 2025.

With that kind of money on the table, it’s fair to say that the Volkswagen Group is demonstrating its all-in commitment to producing 28 million electric vehicles by 2028.

Tesla Won’t Always Own The Last Mile

To answer Tesla’s competitive advantage with 2,000 charging stations, Volkswagen is on the hook to build 18,000 new stations. Even factoring in Tesla’s 17,000 superchargers, the two rivals will be neck in neck.

With iconic brands like  Volkswagen, Audi, and Porsche in its portfolio, the challenger is positioned to capture a larger share of budgets by appealing to a broader range of consumer preferences.

With all due respect to the market leader, to sustain its first-to-market competitive advantage, Tesla would be well advised to go deeper than price cuts and shore up its fundamentals by sticking to its knitting in quality, technology, and innovation.

The Jury Is Still Out

Some analysts believe that Tesla’s price cuts are a strategic move to gain a competitive edge in the long haul as the company aims to produce around 1.8 million vehicles in 2023 and deliver its long-awaited Cybertruck electric pickup.

Whether or not Tesla’s price cuts are a good strategy depends on how they affect the company’s future performance and growth potential.

Tesla may be sacrificing some profits in the short term to achieve greater market penetration in its battle to maintain its dominance and fuel its growth which would mean the discounting was just a painful means to an end.

Lowering prices isn’t going to mitigate supply chain disruptions, regulatory hurdles, quality issues, and rising competition. Therefore, it is hard to say for sure if Tesla’s price cuts will pay off in the end.

So as not to paint the tactic with a broad brush, discounting may be an effective tactic in some cases but it’s certainly not a panacea for ailing sales.

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