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Why Tesla keeps cutting and raising prices

One overlooked reason why Tesla keeps cutting prices

Published May 15, 2023 |

Much has been written and said about why Tesla keeps cutting prices. Bears say it is indicative of demand issues. Bulls say it is just another lever that Tesla uses in its sales strategy. Car shoppers are hesitant on whether to delay their purchase until the next price cuts. Some recent buyers have even expressed disappointment at buying at a higher price only to watch the price drop.

Here is something you’ve probably not heard already on these price cuts.

Is this AI-led pricing?

Only Tesla knows why it is cutting prices, but here’s our educated guess. We may be witnessing the first use of AI-led pricing in the car industry. The use of AI in business is not new. These machines can analyse data faster than we can, and finance specialists are increasingly relying on them to set prices. The keyword here is ‘assisting.’ The seemingly haphazard way in which the recent Tesla price cuts have been announced suggests that the AI may be doing more than ‘assisting’ in this case.

Very few companies out there will use their AI model for anything more than ‘assisting’ in pricing. Things such as airline tickets and other mass market, demand driven items may rely on AI-led pricing more than other things. We definitely haven’t seen it in car pricing, perhaps until now. If this is to become the future of car pricing, then Tesla is the kind of company that will pioneer it.

Tesla knows AI

With a CEO that is recognised as a thought leader in AI, Tesla knows AI. It has the largest fleet of semi-autonomous driving cars in the world. Its approach to autonomous driving is unlike any of its competitors who see the use of HD maps, geofencing, lasers and radars as essential to creating autonomous driving vehicles. Tesla has put most of its eggs in the AI basket, allowing its computers to make complex driving decisions using data from the cameras only – a so-called vision only approach.

It is the only car company that is building a humanoid robot for use in its factory and beyond. Having made gains in autonomous driving technology, why not use the same base for a humanoid robot that can navigate our world as we do. And while at it, why not build a supercomputer (Dojo) that can train AI models among other uses.

If any car company will pioneer this seemingly haphazard but probably comprehensive AI-led pricing strategy, it would be Tesla.

Something only a company like Tesla will do

There are very few companies out there that are run like Tesla is. There are even fewer that are critiqued like it. Everyone has got an opinion on it and the way it is run. This is the company whose CEO’s appetite for risk taking is legendary – a real life example of the benefits of failing fast and doing it again.

At one of his other flagship companies, SpaceX, its employees cheered loudly as their rocket (spaceship) exploded minutes into its maiden launch. The media had a filled day, of course, but the team simply vowed to try again in a few months. That is the team that blew up several rocket boosters whilst trying to land them for reuse. The landing and reuse of rocket boosters is now so routine that no one sees it as a big deal any more even though no one else seems to be able to do it.

The Tesla team’s appetite for risk taking and pioneering the hitherto unconventional is legendary. If you’re still in doubt, wait until they start shipping the Cybertruck.

More pricing ups and down to come

Tesla has indicated that it will continue to vary prices to respond to market conditions, some of which are significant macroeconomic factors that affect the entire car industry. The company has also indicated that pricing variations will continue to be in line with its mission of scaling production whilst maintaining operating leverage.

In its 2023 Q1 update, it stated that ‘Our near-term pricing strategy considers a long-term view on per vehicle profitability given the potential lifetime value of a Tesla vehicle through autonomy, supercharging, connectivity and service. We expect that our product pricing will continue to evolve, upwards or downwards, depending on a number of factors’

With no dealer network to worry about, a culture of failing fast and redoing things, its prowess in AI, and its approach of not taking Wall St or the media too seriously, we are likely to see more price cuts and price hikes in a manner that doesn’t fit any pricing model we have seen before in the car industry.

Analysts and investors will have to add "product pricing" to the list of things that keep the bulls up at night and excite bears about this company.