Tesla is about to experience the seven perils of discounting

By discounting for the first time, Tesla is not only starting an electric vehicle price war, it is communicating its weakness to existing and future customers.

Source: Shutterstock

Tesla is on sale. Fill your boots! Starting this week, you can save over five-grand on a Model 3, which drops from a starting price of £48,490 to £42,990. You can do even better on the Model Y Performance, which drops from £67,990 to £59,990. These double-digit percentage discounts on both models reflect the increasingly competitive nature of the electric vehicle (EV) category and the precarious state of Tesla’s brand, given the distracting and damaging antics of CEO Elon Musk in recent months.

In this tipsy-turvy, two-second social media world of polarity and hyperbole, it’s all too easy to change the diagnosis of a brand from “all powerful” to “all but fucked” overnight. In reality, Tesla was never that strong a brand at its zenith. And it’s still a formidable force within the EV category now, despite its current travails. But, as the new discounts demonstrate, Tesla is not quite the brand it once was. And that’s a rather delicious moment for those of us who have continually pointed to the company’s lack of advertising investment as a tactical mistake.

Making this point over the last five years brought out a frat house of automotive commentators and Elon-lovers who pushed back with two recurring counter-arguments. First, bro, look at the waiting lists for Tesla cars! Why advertise when you have, like, a 12-month wait to even own one?

Second, who needs advertising when you have walking billboard Elon Musk making headlines, being awesome and generally proving the point that advertising is a tax you pay if you make a bogus product. Dude.

Tesla is not quite the brand it once was. And that’s a rather delicious moment for those of us who have continually pointed to the company’s lack of advertising investment as a tactical mistake.

The anti-advertising argument ran long, strong and wide. So much so that a friend who teaches at Harvard Business School lamented her marketing communications class on the MBA programme had shifted from ‘how to advertise’ to ‘should you advertise?’. Even at HBS, an assortment of social media-educated influencers held court and pointed to Tesla as evidence that advertising was overrated.

But these anti-advertising arguments never held water, no matter how many times they were pushed or how vehemently Elon’s dude army made them online. Sure, there had been unmistakable demand for Tesla despite a total lack of advertising. And, in recent years, that demand was also driving significant profitability. Tesla did indeed have long waiting lists and an impressive profit of around £7,800 per car sold. But that was the short of it, not the long.

Why brands advertise

You advertise cars not just for the next 12 months of demand but – quite literally – for a lifetime beyond that point. The late, great Jeremy Bullmore once wrote about a 40-something friend of his who sold his agency and bought an Aston Martin with some of the proceeds. While the mighty Bullmore was being given a test drive, the car’s new owner admitted he had bought it because of an advertisement. “But that’s not the interesting bit,” the driver admitted, navigating a hairpin turn. “What’s interesting is that I saw that advertisement when I was 14.”

That experience formed the basis for Bullmore’s essay ‘A 20th-Century Lesson for 21st-Century Brands’. But he might as well have mailed it to every Tesla apologist who ever took to Twitter to make the point that you don’t need advertising when you have demand. Stimulating immediate sales is one of the reasons to run an ad campaign. But just one. There are many, many other reasons to advertise and they run the gamut of business advantages, from internal buy in to salience, brand image, customer confidence, price insensitivity…

Yes, price insensitivity. As research firm Kantar has repeatedly demonstrated, brands perceived to be different on the attributes that matter to the market are in a much better place to charge more. A beautiful, brilliant daisy chain emerges in which brands that advertise enough and about the right things build both their salience and perceived differentiation. As a result, most consumers are prepared to pay more. And, provided you have a marketing team involved in pricing, you end up with higher prices and better profitability as a result.

Source: Kantar

It is no coincidence that Telsa, the brand that was proud to run zero ads and hire virtually no marketers, is now sheepishly cutting prices. And the other counter argument to Tesla’s lack of advertising – that you don’t need an ad campaign when you have Elon Musk running the brand – also looks very wobbly at this point. Wobbly because, unlike strategically focused advertising messages, human figureheads have a nasty habit of veering off course and taking the brand with them. Wobbly because enigmatic, mercurial founders have a habit of losing focus in very enigmatic, mercurial ways.

The smartest people in the room looked at Musk’s Twitter acquisition not as right-wing insurrection or a personal mission to become a social media baron. They saw it for what it truly was: a relatively pointless but incredibly dangerous distraction from the main game – building the world’s most important 21st-century car brand.

Musk is clearly a man of enormous energy and processing power. But even he cannot squeeze missions to Mars, Tesla and the 24/7 savagery of Twitter into one lifetime. Something will have to give. And when you juggle multiple brands, as Musk is now attempting, you usually drop all of them on the floor.

Five lessons on how not to do pricing from Elon Musk’s Twitter

At the very least, the way Musk has become politically vilified by the half of the market most attracted to EVs means that his role as human advertising campaign is not just failing, its now working in reverse to tarnish Tesla’s appeal. When Musk was symbolic of the future, technology and brilliance, his very presence at the helm of Tesla was a huge branding boon. I’d still have been running ads. But his new (possibly unfair) status as a flaky, vulnerable oddball hurts Tesla, just as it faces the renewed might of an automotive status quo finally getting their EV S-H-I-T together.

And, in the spirit of its new promotional approach, Tesla is also offering a second marketing lesson for free. At no extra charge. We aren’t just witnessing a perfect case-study demonstration of the long-term value of advertising. Tesla is also about to generously illustrate the manifest pitfalls of price discounting too. Count them with me:

1. Negative signalling

When Tesla announced its global price reductions, it did so with a robotic, nonsensical explanation that even ChatGPT would have been ashamed of. The company explained the cuts by referring to “a partial normalisation of cost inflation” that they could now pass on to customers. No one bought this message. Instead, analysts, journalists, consumers and owners united in an interpretation of a company with problems.

Perhaps the single simplest argument for advertising is that a company is signalling to customers, irrespective of the actual ad message, that they have blown a fuck-load of money on a 30-second movie with a celebrity that they are now running 40 times a day. “Look at us,” goes the signalling theory, “we are so bullish about our future and our product that we do this kind of shit all the time.”

Price discounts send the exact opposite message. “Please try not to notice,” reverse signalling theory suggests, “that we think our products are worth less now than we once thought and that we are prepared to accept a lot less for them.”

Suddenly, there is blood in the water. Suddenly, you aren’t so sure if this company is sure about its products. And that lack of advertising, and all the positive signalling that would have come with it, means the reservoir of confidence was half-full even before Tesla started draining it.

2. User disillusionment

A price is a bond of trust between company and customer. That’s an ancient, boring, super-stuffy idea. But that does not stop it from being true. When the magic of a purchase occurs, two things happen: a company agrees to supply its product and the consumer agrees to pony up the agreed money. But a corollary to that exchange is that the consumer then expects this price to be honoured for other customers at other times.

The ridiculous addiction to discounting among most marketers has conveniently ignored this point for decades. A discounted price fucks off the one segment of the market you never want to fuck off, those that believe in you and your product and your pricing promise so much they actually bought from you.

Ironically, the best exponent of the ancient law of price as a bond of trust was… err, Tesla. In a famous and incredibly impressive incident of best pricing practice, Musk found out in 2016 that his salespeople were offering discounts on new Tesla cars and got medieval about it.

“There can never – and I mean never – be a discount on a new car coming out of the factory in pristine condition,” Musk wrote in a blazing internal message to his sales teams. “The acid test is that if you cannot explain to any customer who paid full price why other another customer didn’t without being embarrassed, then it is not right.”

I still use this ‘Musk Test’ with clients when we debate discounting and invariably it pulls them back from the brink. It’s a core part of the pricing class I teach on my Mini MBA in Marketing. Elon at his commercial best. And yet now Musk is failing the Musk Test. Hundreds of Tesla customers are rightfully up in arms because the car they purchased a few weeks ago can now be bought for much less and its resale value has declined too. In China, there were protests. In America, former Tesla lovers took to Twitter to air their disillusionment.

3. Questionable top-line impact

Faced with these not-inconsiderable negatives, one might expect the incremental value of large discounts to be suitably tempting. When analysed properly, however, the impact of a discount on unit sales is often not as impressive as it first appears. Too many marketers look at the bump in sales volumes and conclude that 100% of those sales are incremental.

Kantar recently completed a significant analysis of the impact of price promotions on household consumption of food and drinks high in sugar for the UK Government. The point of the research was to examine whether price promotions resulted in families consuming more unhealthy foods, but the size and rigour of the research also shed some fascinating light on what sales spikes really consist of when you start dropping the price for a bag of chips.

Source: Kantar

It’s easy to see how managers might look at the sudden volume that a price promotion generates (the green iceberg) and rub their hands with glee. But only 47% of these grocery sales are truly incremental – deriving from extra trips to buy promoted product, expanded purchase numbers of promoted items and ‘stolen’ sales as customers switch from competitor brands. The other half of the sales surge comes from those that cannibalised the company’s other products, displaced sales that would have happened later or subsidised sales that would have happened anyway at the previous price.

And this is data from the fast-moving, low-involvement world of soft drinks and sweets. Transpose this kind of price promotion and unit-sales boom onto a car company like Tesla and subsidised, displaced and cannibalised sales are likely to account for a lot more than half the unit sales growth. All too often with price promotions, marketers are pulling forward a sale that would have happened in the future or would have happened anyway at the higher price point. And this invisible ratio of non-incremental sales blinds managers to the true value and significant cost of discounting and price promotions.

4. Bullwhip effects on supply

If the proportion of displaced sales rises above a certain threshold, meaning that a year’s worth of likely customers is incentivised to buy now rather than later, the impact on a company’s supply chain is significant. In the short-term, Tesla will probably sell out most of its repriced models, as customers who were considering a Model 3 for nearly 50-grand snap one up at just over 40-grand. But as Tesla replenishes that stock at its normal pace, the sell-out of new cars will slow to a trickle.

The price discount pulled most of the potential EV buyers down through the lower-purchase funnel and into purchase. But that bottom of the funnel is now bereft of new prospects as Tesla becomes a victim of its discounting success.

And it’s at this moment that three cruel coincidences intersect. Tesla has now seen the apparent impact of running a price promotion on unit-sales growth. It now sits with new units to sell, but low to zero demand. If Tesla is as bad as most companies, it now adds two and two together and makes minus four. Price promotions drive demand. We have zero demand. Ergo, we need another price promotion.

A discounted price fucks off the one segment of the market you never want to fuck off, those that believe in you and your product.

A vicious cycle of discounting begins. One in which Tesla thinks price discounts are solving the demand problem when they are actually exacerbating it. And, as the cycle repeats, consumers come to expect regular discounts. They reach what I call the ‘Ralph Lauren Moment’. Unless you are on crack, you would never pay full price for anything by Ralph because it will always, always be eventually offered to you with a banging discount.

Dumb companies train the market to wait for the discounted price. They pass their addiction on to their customers. If Tesla is not careful, these three factors combine to lock the company into a cycle of discounting, as its misplaced belief in the power of price cuts intersects with overstocked inventory and a customer that won’t buy until the sale ‘event’ begins.

5. Profit evisceration

And if the impact on unit supply and sales revenue is questionable, the argument for price discounting really falls apart when you examine the profit implications. I truly believe that one of the main reasons we see so many profit-eviscerating discounts of 25% or 30%, or worse, is because marketers fundamentally fail to understand basic gross profit.

If you discount a product by 30%, you are not taking this proportion from the bottom line of your brand, it comes from the top. A 30% price discount does not mean you will still achieve 70% of former profits. Marketers must understand the cost structure – both variable and fixed – of their product to calculate what a giant discount really does to the profitability of their brand and ultimately the organisation that employs them.

Take Tesla. You might look at the Model 3 dropping in price from £51,090 to £42,990 and assume that only about 16% of the company’s profits have been shaved off with the new price. That’s nonsense. Tesla made around £7,800 profit per car sold last year under its original pricing structure. These new discounts mean that most of the company’s profit has effectively been wiped out or diminished to a level that the business is now in a very different strategic place.

“There will be a significant impact to Tesla’s near-term gross margin,” Evercore ISI analyst Chris McNally explained this week, “and the math depends on how long these new price levels last.”

6. Starting a price war

Tesla’s initial discounting has already had an impact on competitor strategy. Tesla cut prices in China earlier this month and – sure enough – one of the biggest domestic EV producers, Xpeng, immediately followed suit. The story will be repeated globally as Tesla’s discounts reverberate around the market and cause other EV manufacturers match or beat Tesla’s discounts.

“This is a clear shot across the bow at European automakers and US stalwarts that Tesla is not going to play nice in the sandbox with an EV price war now underway,” analyst Daniel Ives wrote in a note. “Margins will get hit on this, but we like this strategic poker move by Musk and Tesla.”

Ford CEO Jim Farley has already suggested that pricing pressures around EVs will be dramatic, as many companies with too much to lose fight for market dominance. “Our industry is definitely heading to a huge price war,” Farley predicted last year. “You’re going to start to see democratised EVs.”

Price wars are, at least in the short term, great news for customers. But they are an intractable and often existential situation for manufacturers. A little discount can often result in global, category changing conflict.

7. Commodifying brand equity

Finally, and perhaps with most importance, the use of price discounts can significantly damage brand image. Academic research suggests that the more premium, the more valued and the stronger the brand, the more it has to lose from the overuse of price discounting.

Tesla was and is a strong and much-loved brand. Musk has worked wonders with a combination of advanced products, newsworthy announcements and a clever brand architecture in which its Roadster continues to represent the flagship product. But this very strength is now Tesla’s vulnerability. With each significant discounting event, Tesla could hurt itself.

Brand equity is the difference between a brand and its commodity equivalent. Never forget this. Or that discounting literally reduces that difference. With every discount, Tesla will communicate to its customer base: “Don’t buy Tesla because it is the future, because it is green, because of innovation. Buy it not for those brand reasons, buy it because it is cheaper now than it was last week. Buy it for a commodity reason.”

That reason can be persuasive. It certainly works in the short term. But it also leads the brand on a longer-term path away from true brand strength and towards the undifferentiated meat market that is generic, commodity EV vehicles. And the Chinese are all over that end of the market.

The next few months are crucial ones for Tesla. It needs to start advertising. It needs to stop the destructive cycle of discounting before things become problematic. It needs to regain the brand focus that was once a core competence. It needs separation between Musk and the Tesla brand. It needs marketing.