A friend sent me an article describing Tesla’s most recent price hikes as a reaction to inflation. He said, “I thought costs don’t matter to pricing.” (I can hear the snark in his voice as I type that.) Immediately, I launched back with my two most common arguments. Read on to learn more about cost plus pricing.
First, just because a firm uses costs to set prices doesn’t mean that company is doing the right thing. I might argue they are doing the wrong thing, but are still successful. A lot of companies use cost-plus and are successful. I would argue they could be more successful.
Second, just because a press release says they are raising prices because of costs doesn’t make it true. I often coach companies to blame increasing costs when they raise prices. It’s the only excuse your buyers will accept. Can you imagine any company saying, “we are raising prices because we think we can make more profit”?
Then, a new realization struck me. I love it when that happens.
It’s possible the article is true, Tesla is using cost-plus pricing, and it is the optimal pricing strategy for them. In fast-growing markets, like EV cars, there is an aggressive battle for market share. Price is a key driver in gaining share. Once a market hits maturity, it’s very challenging to significantly change market share. Hence, the real battle for share happens in the growth stage.
It’s possible, even likely, that Tesla is keeping their prices as low as possible to cover their costs plus a margin so they can grow as quickly as possible. They can’t allow any other car manufacturer to grab the majority market share. In this case, I can see how driving prices as close to cost as possible while keeping the company afloat is a brilliant strategy. Hence, if costs go up or down, prices will follow. This looks a lot like cost-plus pricing.
Please do NOT take this as my permission to use cost-plus pricing. (Not that you need my permission.) Most companies aren’t this sophisticated. However, seeing Tesla launch the inexpensive Model 3 is a great indicator they are aggressively trying to drive prices down, gain share, and grow the market.
What do you think? Please share in the comments on LinkedIn.
Now, go make an impact!
Related article: Value Based Pricing