Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Tesla's Price Cuts Win the EV Market
Transcript
- Lucas: Back in January of 2023, Tesla did something that shocked the auto industry. It cut prices on its best-selling Model 3 and Model Y by as much as 20 percent in the US, and even more in China. It wasn't an incentive or a rebate — it was a straight-up price drop, and it signaled a new phase in the electric vehicle market. Luna: And it sent Tesla's stock down because investors worried about margins. But the strategy worked in terms of volume — sales surged. Lucas: Exactly. In the first quarter of 2023, Tesla delivered over 422,000 vehicles, a 36 percent increase year-over-year. But the operating margin fell to about 11 percent from 16 percent the previous quarter. That trade-off — volume for margin — became the central question for the company. Luna: It's the kind of real-world trade-off that gets people in our audience thinking about their own pricing decisions — whether they're selling software or services or physical products. Lucas: If this show has moved your thinking forward in some small way, the reason we can keep it ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Luna: We're grateful that people find enough value here to help keep it going. Lucas: Alright, so back to Tesla — let's look at why they felt they had to cut prices so aggressively. It wasn't just about boosting sales. Tesla was facing a wave of new competitors: Ford's F-150 Lightning, Rivian's R1T, and Chinese manufacturers like BYD were gaining traction. The Inflation Reduction Act tax credits also shifted the calculus — a lower price meant more buyers would qualify for the full $7,500 credit, effectively lowering the net cost further. Luna: So Tesla was essentially using the price cut to expand the total addressable market, not just steal share from rivals. That's a classic playbook — but risky when your margins are already thinner than a traditional automaker's. Lucas: Right. And the market watched the margin compression closely. In Q2 2023, Tesla's operating margin dropped to around eight percent, its lowest in years. But here's the key: Tesla wasn't just cutting prices blindly. They were also reducing costs. Battery pack costs were falling thanks to lithium iron phosphate chemistry and scale in their factories. Austin and Berlin were ramping up production more efficiently than Fremont. So the price cuts were partly a pass-through of lower costs. Luna: That's an important nuance. Price cuts get all the headlines, but if your cost curve is steep enough, you can maintain or even improve margins over time. Did Tesla's margins recover? Lucas: They did. By the end of 2023, operating margin had stabilized around 10 percent. And through 2024 and 2025, as battery costs continued to decline and production scale reached over two million vehicles per year, Tesla's margin crept back toward the 12 to 13 percent range. That's still below the 16 percent peak of 2022, but it's healthy, especially considering they now sell vehicles at significantly lower average prices. Luna: So the bet paid off. Volume increased enough to offset the lower per-unit profit. And the competition? How did Ford and Rivian react? Lucas: They followed suit, but with less room to maneuver. Ford cut the price of the Mustang Mach-E by up to eight percent in early 2023, and Rivian lowered prices on its R1T by about six percent later that year. But both companies were losing money on every EV they sold, so they couldn't match Tesla's cuts. A few smaller startups like Lucid and Fisker had to rethink their pricing entirely. The result was a shakeout — weaker players got squeezed. Luna: That's the other side of a price war: it acts as a barrier to entry. Tesla used its cost advantage to make the EV market less profitable for everyone else, buying itself time and market share. Lucas: Exactly. And Tesla didn't stop with one cut. Throughout 2023 and 2024, they adjusted prices multiple times — sometimes lowering, sometimes raising — in what looked like a real-time demand management system. They'd cut prices in a market where demand softened, then raise them slightly when inventories thinned. It's a much more dynamic approach than the traditional auto industry's annual incentives. Luna: So we're looking at a combination of strategic structural pricing and tactical demand-driven pricing. What's the biggest lesson for our listeners who aren't in the car business? Lucas: I think it's that pricing power isn't just about raising prices — sometimes the most powerful move is lowering them, if you have the cost structure to support it. Tesla's price cuts weren't a sign of weakness; they were a sign of confidence in their ability to drive costs down faster than competitors. When you can lower price and still earn a good return, you can reshape an entire industry. That's a hard advantage to beat. Luna: As of mid-2026, Tesla's pricing seems more stable. The Model Y starts around forty-seven thousand dollars in the US, down from about sixty-five thousand in early 2022. And Tesla is still the bestselling EV brand by a wide margin. Do you think they'll have to cut again soon? Lucas: It's possible, but probably not drastically. The competitive landscape has thinned. Legacy automakers are pulling back on EV investments because they can't make them profitable at Tesla's price points. Chinese brands are a threat, but tariffs and brand perception limit their impact in North America. So Tesla may have room to hold prices steady and focus on profitability. That said, the day they announce a new model — like the rumored sub-$30,000 car — that will be another inflection point. Luna: Interesting. So the pricing story isn't over. It's just entering a new chapter. Thanks for breaking it down, Lucas. Lucas: Always a pleasure, Luna. If this episode gave you a new way to think about pricing in your own business, consider supporting the show at buy me a coffee dot com slash fexingo. See you next time.