Tesla Price Increase: What Can Companies Learn?

Price increases – can they actually harm the companies implementing them? Yes, if they use the wrong strategy, advises Matthias Riemer, automotive pricing expert at the global strategy and marketing consultancy Simon-Kucher & Partners. A current example is the electric car manufacturer Tesla. Riemer explains why the company miscalculated its recent price increase and what the industry can learn from this.

Boston – Last week, Tesla, market-leading manufacturer for electric vehicles, announced a global price increase for the usage of the company’s fast-charging stations, Superchargers. After receiving indignant feedback from countless customers, yesterday the US-based company revised the measure. According to the initial announcement, the new pricing structure meant an increase of 30 percent on average. For example, the price in New York was supposed to increase from 0.24 US dollars per kilowatt hour to 0.32 US dollars/kilowatt hour. In California, prices were intended to rise from 0.26 U.S. dollars per kilowatt hour to ranging from 0.32 to 0.36 U.S. dollars per kilowatt hour. Due to negative customer feedback, Tesla partially revoked this price increase: The company decided to reduce the Supercharger price increase by ten percent globally, putting the average price in the US at 0.28 US dollars per kilowatt hour.

Cutting back offerings step-by-step

For some time now, there has been an apparent trend toward this price increase: Initially, Tesla included free lifetime charging at Superchargers into the purchase price of its high-end models in order to boost sales volume. Then, not long ago, the company announced that free temporary usage would soon be included for some new customers and models. After this period, every new customer will have to pay a fee for charging. The general outrage at the additional price increase was strong enough for the company to make at least a partial retraction.

What went wrong? Apparently, Tesla underestimated its customers’ price sensitivity. Instead of remaining true to its image of a long-term visionary, the manufacturer increasingly cut back its offerings and created the impression of being a typical, profit-orientated company. Even though the more expensive Superchargers still are an attractive alternative to charging at home thanks to their fast charging and flexibility, customers react by instinct, not by reason, when it comes to paying prices.

Price increases: What companies can do better

Price increases always pose a certain risk – especially when they are being rolled-out in an extensive way. In fact, Tesla increased prices differently in individual countries and states, but only to a certain degree, mostly between 30 and 40 percent. Netflix deployed its latest price increase in a much cleverer way: The streaming provider is increasing its prices in small steps and only some markets, testing the reactions, and integrating the lessons learned into future strategies. Additionally, they have taken psychological price thresholds into account.

To avoid a development like Tesla’s, companies should pay more attention to their pricing model. Don’t go from one extreme (lifelong flat rate) to the other (strict pay-per-use); rather consider gradations, different packages, and payment models, like subscription or two-part tariffs consisting of a fixed rate and usage-based payment. Also, the overall price levels should be examined regularly and communicated to customers only with regard to the expected added value. Due to the planned heavy expansion of Tesla’s Supercharger net and its technical upgrade, as well as new players entering the market, the company awaits an increasingly dynamic market environment with fiercer competition.

 

Simon-Kucher & Partners, Strategy & Marketing Consultants: Simon-Kucher & Partners is a global consulting firm with more than 1,200 professionals in 38 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has more than 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.