Cutting prices has brand consequences

Nick Bull
Tesla price

When Tesla decided to cut the list price for its new electric cars by up to 20% earlier this year, many of us were worried. What impact would this have on the Tesla brand and how would those who had recently paid top dollar feel about the fact that one of their most valuable assets had just taken a hit?

Well, the consequences are now being seen. Last week the FT reported that Tesla cars now lose value faster than rival models. The article cited pricing agency CAP HPI as saying the value of a new Model 3 with a long-range battery bought in January this year in the UK for £57,435 is forecast to fall 46 per cent to £31,300 by January 2024.

When you cut prices for reasons that consumers don’t understand or don’t like, you can destroy brand value overnight. Something that takes years to build has been quickly eroded because Tesla moved faster than the market could take.

It’s also damaged customer goodwill and loyalty, not just among recent purchasers, but amongst all those who have paid a premium at any time. Elon Musk’s decision to disregard traditional business behaviour has made him the entrepreneur that he is today, but this time around, he appears to have made a poor decision.

It may come down to following the wrong metrics

In seeking to drive volume share (sales) rather than value share (profitable sales), the decision-making process has taken Tesla down the wrong road. Value share is always a much better commercial objective.

It’s certainly true that the electric car market was due for a price reset, with new competitors such as MG and Kia coming in with sophisticated vehicles at a fraction of the premium price charged by Tesla. In the long-term the Tesla premium was always going to come under pressure.

We are in a moment when potential car purchasers are already looking around and asking ‘what’s the best electric car brand for me?’ (and in a recession they are also looking more strongly at the right price too).

In reducing its prices, Tesla has created questions about whether it’s the most stable brand on the market at a time when many car brands are driving themselves up the aspirational brand funnel, offering innovation as well as cheaper motoring.

Alternative sales models for cars

The good news for Tesla and its electric vehicle competitors is that there is an alternative business model that could have avoided this hit. Flexible subscription models, where consumers pay so much every month to lease a vehicle, allow car brands to avoid the unflattering depreciation calculation when the market price is in decline.

One brand that’s mastered this extremely well is Volvo. It’s Car Subscription Flex provides all the essentials needed for the Volvo of your choice. One simple payment covers insurance, servicing and roadside assistance. And you can change or cancel the subscription with just three months’ notice.

It gives Volvo the flexibility to cut prices when the market demands but the customer benefits because they pay less each month. In the absence of car ownership, people’s relationship with the Volvo brand is about the experience rather than residual value.

Innovation isn’t just about how you build your products and services. It’s about how you market them, and how you sell and price them. All of which contributes to the brand value that people buy into when they chose your brand.

For a major purchase decision like a car, brand value is built over years and decades. And while VW’s success post Dieselgate demonstrates that it’s possible to rebuild, it takes years to do so. Tesla’s road to recovery will be no different.

Sales and marketing decisions like these have a huge impact on how people feel about brands. Get them right and you open up a world of customer centric growth. Get them wrong and you can quickly undo even the best brand-building activity.

At Hall & Partners, we help brands connect with consumers across different touchpoints during the purchase journey and have advanced modelling tools to help you evaluate the impact of different pricing options. How far can prices be stretched? What do your consumers feel about it? What impact will it have on purchase and brand loyalty?

Click above to watch our recent 30-minute pricing webinar and learn how to accurately simulate and predict the impact of proposed price changes on your brand(s).

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