Our Take on Incentives: A Response to Elon’s Fundamental Premise of Tesla’s Sales Model

Sep 16, 2019   

Elon Musk claims that a fundamental premise of Tesla is that everyone is offered the “same terms” at the “same time.” We think that Tesla could stand to offer incentives as needed. 

His recent Tweet on the matter was in response to Tesla’s (unadvertised) end-of-quarter incentives: anyone who takes delivery by the end of the month receives two years of free Supercharging. Or, alternatively they can opt for two free hardware upgrades (either paint, wheels, or interior) if they take delivery of an in-stock Model 3. 

Tesla has used Supercharging as a way of incentivizing cars when demand is stagnating or quarterly goals need to be met numerous times. It’s the company’s go-to incentive, which is understandable because it doesn’t negatively impact cash flow and it’s a perk that recently only pertains to the car’s original owner: it has some inherent value, but adds no value to resale. Since unlimited Supercharging can’t be purchased outright, it’s a perk that only a lucky few will get to take advantage of — it also works well as prospective owners do see value in it. We should note this in addition to the free Supercharger miles offered in the referral programs, which has been doubled from 1,000 miles to 2,000 miles until the end of the month. 

Where Musk’s frustration comes to light is his belief that everyone who orders at the same time should pay the same price for the same car. Tesla doesn’t offer discounts of any kind, even to friends and family. This is an understandable function of the Tesla sales model as it is a fundamental belief the CEO strongly holds. So by offering free upgrades, even just to move cars that have already been built that are perhaps less commonly-ordered configurations, the company is defying its own sales model. 

However, in our opinion forgoing offering any kind of discount or incentive is a detriment to the company and its overall cash flow. Once Tesla builds a car, they’re negative tens of thousands of dollars until a customer is ultimately matched to that configuration. That’s okay for standard configurations (such as a base color without upgrades) but it also means lesser-in-demand variants will have to sit until a customer orders the exact combination of i.e. blue paint with white interior and 19” wheels. 

Since Tesla doesn’t follow a dealer model, they’re responsible for selling all of their own inventory (it’s not being delivered to dealers who pay all the costs associated with purchasing inventory and storing vehicles) and sometimes that can mean a discount is necessary. This is especially true if a particular configuration is sitting for weeks as even if a customer orders it later on they won’t be happy taking delivery of a car with an older build date so the company may be forced to take it back and resell it, potentially losing more money than a discount or incentive on that inventory car would have cost. 

Tesla’s model is also antithetical to other automakers in that the company makes minor changes on a weekly basis rather than annually with a new model year, meaning its in their best interest to move inventory as quickly as possible.  

Musk followed up his Tweet by stating that “The fundamental operating principle is that prices, while they may change, will change for all equally & should never be a function of bargaining. This is normal for most products, but weirdly not for the auto industry in most parts of the world.” However, prices do fluctuate in most other industries as a result of regional and retailer-specific sales. While bargaining predominantly exists in the automotive industry (to the benefit of those who research prices and to the disadvantage of others who expect to purchase a car by visiting a car dealer unprepared) there are few industries where prices don’t change widely based on formal sales or discounts.

This is honestly hypocritical, as Tesla adjusts prices and configurations frequently (which Musk acknowledged). This can mean that somebody who paid $2,000 for Pearl White Multi-Coat at one point can see it being offered today as a free base color as an incentive to move cars, even if it is transparent and available to everybody who orders a Tesla — unlike the quarterly incentives, which for the most part are only available to those who are aware they exist. We do sympathize with his point in that regard, but Tesla owners are already used to seeing prices drop and more features becoming standard over time. The pricing model already isn’t constant, and if Tesla can offer incentives for the company’s own benefit we don’t view that as an issue that needs to be immediately addressed. 

Discounts are a necessary function of the automotive industry to move in-stock inventory and reach sales goals, so we think it would be a mistake to forgo them entirely. Musk wants the company to become more transparent in that regard, so we could see incentives being handled differently in the future. 

Want to keep tabs on the used Tesla market so you can snap up a good deal before anyone else? Bookmark our listings page.

Want a 100% free Net Present Value estimate on your Tesla? Contact me directly at contact@onlyusedtesla.com