Musk: Advertising won’t work for Tesla until cars are ‘more affordable’

Tesla has embarked on a series of price cuts since the beginning of the year, however CEO Elon Musk says this has not been enough to drive demand.

TeslaTesla CEO Elon Musk has indicated the company is contemplating more price cuts to drive demand for its electric vehicles.

The company introduced a series of discounts at the beginning of this year as it attempted to deal with growing competition. In an earnings call that took place overnight (18 October), Musk indicated the cuts have not been enough to drive demand.

“We have to make our cars more affordable [so] that people can buy [them],” he said.

In May, the company had committed to introducing advertising for the first time. This was a marked change for the brand founded by Musk, who once declared he “hates advertising” and has shunned it at Tesla.

Yesterday, he confirmed the company was now doing advertising but said it could not work to generate demand unless the brand could make its prices more affordable.

“I know people want us advertising,” he said. “We are advertising… there is something to be gained on the advertising front. I don’t think it’s nothing, but informing people of a car that is great but they cannot afford doesn’t really help.”

Tesla is about to experience the seven perils of discounting

In particular, Musk drew attention to rising interest rates. Most customers pay for their cars in instalments, he said, adding that rising interest rates have essentially offset the benefit of price cuts for these customers.

These rising interest rates have “required [Tesla] to adjust the price of [its] vehicles to keep the monthly cost in parity”, he said.

While for its most recent quarter, Tesla’s revenues were up 5% to $19.63bn, the price cuts it has made have not come without cost for the business. Total gross profit was down by 22% versus the same period in 2022, with earnings per share down 44%.

When Tesla implemented its first round of discounts in January, Marketing Week columnist Mark Ritson said the company risked entering into a price war, which he warned can prove to be an “intractable and often existential situation” for manufacturers.

In major markets such as China and the US, Tesla has faced tough competition from cheaper rivals. Some financial analysts are now calling on it to make further price cuts, suggesting a price war is already well underway.

Ritson also warned that price cuts “commodifying” Tesla’s hitherto impressive brand equity.

“This very strength is now Tesla’s vulnerability. With each significant discounting event, Tesla could hurt itself,” he cautioned.

According to YouGov’s BrandIndex tool, Tesla has seen a notable decline in its brand health in the last year. Its index score (a general measure of brand health) has dropped from 2.2 this time last year, to -2.0 as of 18 October 2023. While other factors, such as Musk’s fraught takeover of Twitter (now called X) may have played a role in this decline, the brand is in notably poorer health versus last year.

Musk himself appears to be less confident about the company’s prospects than he was in 2022.

Around the same time last year, he told investors that Tesla was “recession-resilient” and that he was confident that, in any macroeconomic scenario, it would “generate meaningful cash”.

Yesterday he struck a more cautious tone: “Even a great ship in a storm has challenges,” he said.