Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Tesla Priced Its Way to the Top and Back Again
Transcript
- Lucas: So here's a number I've been thinking about: in January 2023, a Tesla Model Y Long Range cost about sixty-six thousand dollars in the US. By April of that same year, it was under fifty thousand. That's a twenty-four percent price drop in three months. Luna: And that wasn't even the biggest swing. The Model 3 went from around forty-eight thousand to under forty thousand in the same window. Lucas: Right. And what's fascinating is that this wasn't a fire sale. Tesla was still making money on those cars. Their automotive gross margin in 2022 was nearly thirty percent. After the cuts, it dropped to about eighteen percent in 2024. But the volume surged. Luna: So they traded margin for market share. The question is, was it worth it? Lucas: That's exactly the question. And to answer it, we need to look at what Tesla was up against. In 2022, they were the dominant EV player in the US, with about sixty-five percent market share. By early 2024, that had fallen to around fifty percent as legacy automakers and startups finally started shipping competitive models. Luna: So the cuts were defensive, not just aggressive. Lucas: Partly. But also, Elon Musk has always said that Tesla's mission is to accelerate the world's transition to sustainable energy. That implies volume. If you're serious about replacing combustion engines, you need to sell cars at scale. And price is the biggest lever. Luna: But there's a tension there. Investors buy Tesla stock because they expect high margins, not just high volume. The stock took a hit in 2024 when margins compressed. Lucas: It did. And that's the core of the pricing debate around Tesla. Can you be a high-volume automaker with premium margins? No one has really done it before. Toyota has high volume and decent margins, but not thirty percent. Luxury brands like Porsche have high margins but tiny volume. Tesla was trying to have both. Luna: And the price cuts signaled that they were prioritizing volume over margin. Which is fine, but it changes the narrative. Lucas: Exactly. And it's not just about the price tag. Tesla also changed what you get for that price. They removed ultrasonic sensors, they simplified the interior, they moved to a structural battery pack that's cheaper to produce. So part of the price cut is cost reduction, not just margin sacrifice. Luna: That's a key point. A lot of people see the headline price drop and think Tesla is losing money per car. But their cost per vehicle also fell. In 2022, the cost to produce a Model 3 in Fremont was about thirty-six thousand dollars. By 2024, it was around thirty-two thousand. Lucas: So the margin compression was real, but manageable. And Tesla had another lever: regulatory credits. In 2023, they booked nearly two billion dollars in revenue from selling emissions credits to other automakers. That's pure profit. Luna: Which is a nice cushion. But it's not a sustainable pricing strategy. Eventually, other automakers will have enough EV credits of their own, and that revenue stream dries up. Lucas: Right. So the question becomes: what is Tesla's pricing strategy now, in mid-2026? They've stabilized prices. The Model Y is back up to about fifty-two thousand. The Model 3 is around forty-three thousand. And margins have ticked up a bit to around twenty percent. Luna: So they found a floor? Or is this just a pause before another round of cuts? Lucas: I think it's a pause. The competitive landscape has shifted. Ford cut prices on the Mustang Mach-E several times in 2024 and 2025. GM did the same with the Chevy Blazer EV. But now, many of those competitors are losing money on every EV they sell. Ford's Model e division lost about four and a half billion dollars in 2024. Luna: So Tesla's pricing power comes from being the only EV maker that's consistently profitable on a per-car basis. Lucas: Exactly. And that's a huge strategic advantage. They can afford to cut prices because their cost structure is better. They've got the scale, the vertical integration, the software revenue. Most other automakers are still building EVs at a loss, hoping to make it up on volume later. Luna: But there's a risk: if Tesla keeps cutting, they train customers to wait for discounts. That's what happened in the auto industry for decades. People stopped buying in September because they knew December would have bigger deals. Lucas: And Tesla has definitely created that expectation. In 2023, if you bought a Model Y in January and then saw the price drop by sixteen thousand dollars in April, you'd be pretty upset. Tesla had to offer retroactive discounts to some customers just to manage the backlash. Luna: That's a classic pricing problem: you can't keep changing the price without eroding trust. Especially for a product that costs fifty thousand dollars. Lucas: So what's the alternative? One approach is to use more opaque pricing. Tesla has experimented with inventory discounts, referral credits, and loyalty bonuses that aren't advertised as a price cut. That way, the MSRP stays stable, but the actual transaction price can vary. Luna: That's what airlines do. The published fare is one thing, but what you actually pay depends on timing, loyalty, and a million variables. Lucas: Exactly. And Tesla has the data to do that. They know exactly who's browsing, who's test-driven, who's abandoned a build. They could dynamically price each car based on demand. But so far, they've kept it relatively simple. Luna: Maybe because Musk doesn't want to overcomplicate the buying experience. One of Tesla's innovations was the no-haggle, online-only purchase. If they start dynamically pricing, they risk losing that simplicity. Lucas: That's a real tension. And it's not just Tesla. The entire auto industry is watching this experiment. If Tesla can maintain decent margins while fluctuating prices, other automakers might follow. If it backfires, we'll see a return to more stable pricing. Luna: So what's your bet? Two years from now, do you think Tesla's pricing will be more stable or more dynamic? Lucas: I think they'll stick with a relatively stable list price but use more hidden levers — inventory discounts, software bundles, financing rate subsidies. That way, they get the demand response without the headline risk. Luna: That makes sense. It's what Apple does with the iPhone. The price stays the same, but carriers offer trade-in deals and installment plans that effectively lower the cost. Lucas: Exactly. And speaking of which, if these conversations about pricing strategy have helped you think differently about your own business or investments, it's worth noting that we deliberately keep this podcast ad-free. No sponsors, no commercials. If you want to support that choice, you can find us at buy me a coffee dot com slash fexingo. It's a simple way to help us keep the episodes focused on the substance. Luna: Yeah, it's a small gesture that makes a big difference. We really appreciate everyone who's chipped in. Lucas: Alright, back to the pricing story. One more angle I want to touch on: the Chinese market. Tesla's pricing in China has been even more aggressive. The Model 3 starts at about thirty-three thousand dollars there, compared to forty-three thousand in the US. Luna: That's a huge gap. Part of it is just lower production costs from the Shanghai Gigafactory. But part of it is competitive pressure from BYD. Lucas: Right. BYD has been slashing prices too. Their Seagull model starts at under ten thousand dollars. In that environment, Tesla can't afford to keep prices high. So they've cut, and they've lost market share — from about ten percent of the Chinese EV market in 2023 to around eight percent in 2025. Luna: But they're still growing in absolute terms. The Chinese EV market is expanding so fast that losing share doesn't mean losing sales. Lucas: Exactly. That's the nuance. Tesla sold about six hundred thousand cars in China in 2023, and about seven hundred thousand in 2024. So even with a lower share, volume went up. The pricing strategy there is clearly working in terms of moving metal. Luna: So the lesson might be that in a hypercompetitive market, price cuts can preserve volume even if they compress margins. But you need a cost structure that allows it. Lucas: That's the big takeaway for me. Tesla's pricing power isn't about having a premium brand that commands a high price. It's about having a cost advantage that lets them set the price wherever they want and still make money. That's a different kind of power. Luna: It's more like Amazon's strategy. Low prices, thin margins, but massive scale and cash flow. Lucas: Exactly. And like Amazon, Tesla uses that cash flow to invest in future growth — new factories, new models, the Cybertruck, the Semi, the next-generation platform. The pricing today funds the technology of tomorrow. Luna: It's a long game. And it's one that most automakers can't play because their cost structures are too high. Lucas: So the next time you see a headline about Tesla cutting prices, don't just think about margins. Think about the strategic logic. They're using price as a weapon to consolidate their position in a rapidly changing industry. Luna: And it's working, at least for now. But the real test will come when the market matures and growth slows. Then we'll see if the pricing strategy can sustain profitability. Lucas: That's a test for another episode. For now, I'll just say that Tesla's pricing story is one of the most instructive case studies in modern business. It's not just about setting a number. It's about using price to execute a strategy.