Tesla Model 3 - Pricing Analysis
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The presentation is an analysis of Tesla Motor's Model 3, which Tesla unveiled as its entry-level vehicle. The presentation concludes with further recommendations for Tesla to generate more sales and profit from the Model 3.
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Tesla Model 3 - Pricing Analysis
- 1. MODEL 3’s Pricing Strategy Presented By Lucas J. Shin
- 2. ContentModel S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation
- 3. Electric Vehicle Market Source: Bloomberg New Energy Finance Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation • Electric Vehicle Market is Expanding • Electric Vehicle Sales by 2040 will 90 times sale in 2015;
- 4. Tesla Model S Era Source: EV Obsession Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation • Tesla LEADS the electric vehicle industry • Supported by traditional model S in premium market Nissan Leaf 27% Tesla Model S 37% BMW i3 16% VW e-Golf 6% Chevy Spark EV 4% Others EV Market Share
- 5. Model 3 Era is coming Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Model S Model X Sales continue Increasing Profits are Negative Model 3 • An AFFORDABLE EV with sufficient performance • Will be PROFITABLE
- 6. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation
- 7. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Market perspective Company’s perspectivePremium manufacturers are moving down price segment Other brands are preparing for launching EVs Tesla’s Strategic growth Better infrastructure support
- 8. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation EV Competitors: Nissan Leaf $29,000 Ford Focus Electric $29,200 1.Premium manufacturers moving down price Tesla $35,000 Luxury Competitors: BMW 3 series $34,145 Benz CLA $35,300 Tesla needs to be cheaper to gain market shares, and therefore maintain competitiveness.
- 9. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation 2.Other brands are preparing for launching EVs EV Miles on a single charge Price BMW i3 81 $43,300 Mercedes B-Class Electric Drive 85 $42,400 Chevrolet Bolt 200 $37,500 Kia Soul EV 93 $34,500 Fiat 500e 84 $32,600 Volkswagen E-Golf 83 $29,800 Ford Focus Electric 76 $29,200 Nissan LEAF 107 $29,000 Chevrolet Spark EV 82 $26,000 Mitsubishi i-MiEV 62 $23,800
- 10. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Tesla’s long-term goal provide all-electric vehicles for the mass market Tesla’s strategy Entering at the high end of the market, and then drive down market as fast as possible. 3. Tesla’s Strategic growth
- 11. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The rapid growth of Superchargers At the end of 2013, only 50 Superchargers existed in the US. Today, there are 617 Supercharger stations with 3,652 Superchargers. Better infrastructure support The rapid growth of Superchargers will support higher volume of EVs, which means that Tesla can launch its products into mass market without infrastructure support problems. . 4. Better infrastructure support
- 12. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation 4. Better infrastructure support
- 13. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation To conclude, Tesla has the intention, ability, and requirement to introduce its product into mass market, and a direct and reasonable method is lowering price. The next logical step is gaining higher brand awareness and recognition, which demands for higher exposure to public. Conclusion
- 14. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation
- 15. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Chevrolet Spark EV Volkswagen E-Golf Nissan Leaf Ford Focus Electric Mercedes B- Class Electric BMW I3 Tesla Model S $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 0 5000 10000 15000 20000 25000 The EV Market and Model 3 • Model 3 priced in the MIDDLE • Will not cannibalize Model S Price Quantity
- 16. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The EV Market and Model 3 Why $35,000 ?
- 17. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The EV Market and Model 3 The survey • Objectives • To measure and compare Tesla’s brand equity with other brands • Measure how people value negative effects from emissions • High Validity • Most questions are derived from academic studies • High Accuracy • Random assignment and cross validation • Skip logic
- 18. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The EV Market and Model 3 For the purpose of this discussion Normal car manufacturers: Nissan; Ford; Chevrolet; Volkswagen Luxury car manufacturers: Mercedes-Benz; BMW
- 19. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Other EVs Survey’s key finding #1 Most respondents agree to pay more for Tesla’s EV over normal car manufacturers. 74.5% agreed to paying more for Tesla’s EV over other EV 69% disagreed with paying more for Ford’s EV over Tesla 72% disagreed with paying more for Nissan’s EV over Tesla
- 20. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Other EVs Survey’s key finding #2 Overall, Tesla had higher brand equity than normal producers • Tesla had the HIGHEST perceived quality but LOWEST perceived value • Significantly more positive brand association • Tesla is 10 times stronger associated with “Environmental Friendly" than Nissan or Ford • This association is crucial for EV buyers as 87% of all EV buyers are committed to environmentally friendly lifestyle (Kodjak, 2012)
- 21. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Other EVs Survey’s key finding #3 Most respondents were NOT willing to pay more for Tesla’s EV over luxury producer’s EV Conclusion • Tesla’s Model 3 should be priced above EVs from normal manufacturers but below EVs from luxury manufactures • Exactly what Tesla did ! • To an existing EV customer, Model 3 is a reasonable deal, but not a good deal
- 22. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Combustion Engine Cars But what about combustion engine cars ? 0 50000 100000 150000 200000 250000 Ford Focus Ford Focus Electric Bmw 3 series BMW I3 Total EV from six manufacturers Sales Figure for Year 2015 Tesla Model S Sales for 2015 Source: Zach, 2015; Cain, 2016
- 23. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Combustion Engine Cars Sales of combustion engine competitors in 2015 Source: Cain, 2016 Acura TLX BMW 3-Series Audi A4 Lexus IS Tesla Model S $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 • Price of Model 3 is very close to its competitors • Entry level luxury car had an average price of $34,321 Price Quantity
- 24. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation The logic behind $35,000 Model 3 versus Combustion Engine Cars For existing EV users • A reasonable deal is sufficient to attract them Non-EV users are unwilling to switch from combustion engine cars to EVs • 65% of people are UNWILLING to pay more for EVs (Kodjak, 2012) • Psychologically, people are unwilling to switch from majority to minority Thus, to incentivize existing combustion engine users to switch to EV • Tesla needs to give people a really GOOD deal • Good deal = priced significantly lower than EVC
- 25. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation EVC calculation Reference Value average entry-level luxury car price = $34321 Differentiation Value Tax credits Ranges from $7500 to $17000 Saving on energy costs Non-EV competitors need $0.093 of fuel per mile Model 3 only needs $0.033 of electric per mile Average drivers drive 13476 miles per year 5 year savings = ($0.093 - $0.033) * 13476 * 5 = $4043
- 26. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation EVC calculation Differentiation value (continued) Increased utility due to zero emissions. 78% of people are willing to pay to offset the negative effects of their emissions On average, these people are willing to pay $0.039 per mile. Tesla’s EV had no emission, and result in $2628 utility increase in 5 years
- 27. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation EVC calculation Tesla’s Total EVC = Reference Value + Differentiation Values = $34321 + $7500 + $4043 + $2628 = $48492 Model 3 is a good deal, consumer pay $35000 and receives $48492 in value !
- 28. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation EVC calculation Penetration Pricing • Priced 28% lower than EVC • Sales quantity skyrockets • Nearly 400,000 orders in three weeks (Huddleston, 2016) Tesla’s long-term goal: to replace combustion engine with electric engine • Model 3 is the driver of this movement • More quantity sold = more road presence = more brand exposure !
- 29. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation
- 30. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Why the pricing Strategy would succeed? 0 10000 20000 30000 40000 50000 60000 70000 Chevrolet Spark EV Volkswagan E-Golf Nissan Leaf Ford Focus Electric Tesla Model 3 Mwecedes B-Class Electric BMW I3 Tesla Model S Price (MSRP) This Price has touched the price segment of those so-called AFFORDABLE Cars
- 31. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Why the pricing Strategy would succeed? 0 100 200 300 400 500 600 Tesla Model 3 Tesla Model S Chevrolet Spark EV Nissan Leaf Ford Focus Electric Mecedes B-Class Electric BMW I3 Cost of Per Mile of Range Because of the High range of one charge, Model 3 have tremendous competitive advantages over its competitors
- 32. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Why the pricing Strategy would succeed? $260 per kWh $200 per kWh $140 per kWh Cost of Producing Battery Other EV manufacture Tesla’s Gigafactory would reduce the cost by 30%
- 33. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Why the pricing Strategy would succeed? Same Price SAME in function, mile range of one charge, etc. MORE in cost LOWER Of course succeed!!
- 34. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Why the pricing Strategy would succeed? 400,000orders in three weeks (Huddleston, 2016) 70,000 Total numbers of sales of EV in 2015 • Help boost the EV market, and squeeze market share from Combustion Engine Cars • Keep dominating the Market
- 35. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Recommendation
- 36. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Recommendation Neutral Pricing strategy by lowering Tesla’s price from its true EVC allows Tesla to greater penetrate market and provide EVs to consumers Penetration pricing - communicate value to customer by their LARGE CONSUMER SURPLUS. ($48,492 - $35,000 = $14,492 or 28% Surplus)
- 37. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Trade-In Trade-in for smoother transitions from Model 3 to higher series. So if someone buys Model 3, they can turn it in and buy Model S by paying $35,000
- 38. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Switching costs to capture market Create higher switching cost for consumers who decide to purchase charger, but needs to pay to return the charger to Tesla. Chargers need to be purchased. Different plans are needed to be flexible towards consumers: Three plans (see slide below)
- 39. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Bundle Pricing More chargers need to be distributed to develop EV infrastructure. Thus, it is recommended that charges be bundled with cars into a single price.
- 40. Model S&X Era Reason for Model 3 Model 3’s Pricing Strategy Evaluation& Recommendation Pricing Plans A Switching Cost B Bundle C Separate Total Price $35,000 $37,000 $35,000 + $3,500 Charger Price FREE but return $2,000 $3,500 Condition of Charger $2,000 removal cost Keep Charger Keep Charger
- 41. Model 3