Advances in Economics, Business and Management Research, volume 652

Proceedings of the 2022 7th International Conference on Social Sciences and

Economic Development (ICSSED 2022)

Tesla Pricing Strategy Analysis: Take Model 3 as an

Example
Jiangxi Ding1, †, Yuting He2,*, †
1
School of International Education, Wuhan University
2
School of Financial Management, Shanghai University of International Business and Economics
*
Corresponding author. Email: guanghua.ren@gecacademy.cn
†
These authors contributed equally.

ABSTRACT
With the aggravation of climate warming and air pollution, the development of new energy vehicles has become an
inevitable choice for every country. As the leader of new energy pure electric vehicles, Tesla has opened up a new
automotive market segment. Tesla's success can be a reference for domestic companies that are about to enter the new
energy vehicle market. This article takes Tesla as the research object and analyzes the transition from skimming pricing
to penetration pricing and possible factors affecting its pricing based on Model 3. The research results show that Tesla
adopts skimming pricing to transform into penetration pricing, and finally puts forward that Tesla may adopt prisoner
pricing combined with digital transformation in the future, which has important reference value for domestic new energy
vehicle enterprises.

Keywords: Tesla; Model3; Pricing of strategy; New energy vehicle.

of continuous efforts, the development of China's new

1. INTRODUCTION
energy vehicle industry has a certain foundation.
1.1. Research Background
1.2. Research Significance
The development of new energy vehicles is an
By reason of global warming, in recent years,
important strategic measure to cope with climate change
countries because of stress, such as energy saving and
and promote green development. In recent years, due to
emission reduction are introduced new energy car
the pressure of energy strategy, energy conservation and
subsidy policy, led to new energy car sales growth,
emission reduction, various countries have introduced
China's new energy car companies are at the start-up
new energy vehicle subsidy policies, driving the
stage, and tesla has gradually gain a foothold in the
significant growth of new energy vehicle sales. The
Chinese market, its pricing strategy to keep falling
global new energy vehicle industry has entered a new
domestic new energy enterprises in China have greater
stage of accelerated development, and the market has
impact. Therefore, this study takes Tesla Motors as the
ushered in a blowout. According to statistics, China
research object and tries to explore its pricing model
imported 191 million tons of oil in 2019, and its
through case study and analysis, which can provide some
dependence on foreign oil was as high as 72% [1]. As an
decision-making suggestions for Chinese local new
important organic chemical raw material and fuel oil raw
energy enterprises and provide some help for China to get
material, the demand of crude oil is highly correlated
rid of the traditional automobile development model.
with vehicle ownership and average fuel consumption. In
terms of fuel oil consumption, more than 65% of the Simon Huang (2016) pointed out that tesla on pricing
annual increase in oil consumption is consumed by newly strategies, used the global unified pricing strategy, on the
added vehicles, and the proportion of automobile fuel same models of China and the United States, just add
consumption continues to rise. New energy vehicles are artificial transportation costs, tariffs and other standard in
mainly driven by electric energy, which can greatly other traditional luxury cars, in different parts of the price
reduce the consumption of automobile fuel. After years difference is big, the low price transparency, fair to each
region of the consumers [1]. Zhang Boshun (2013)

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 Advances in Economics, Business and Management Research, volume 652

described tesla's pricing strategy with "three steps"[2]. the causes and results of the transition. This is followed
The first step is to target high-income groups and price by an analysis of the reasons for Tesla's continuous price
luxury sports cars with high gross profits; the second step reduction. Finally, the conclusion and prospect are given.
is to develop family electric cars of luxury brands with The main method used in this paper is case analysis.
sub-level pricing and standard pricing, such as Mercedes
Benz and BMW. The third step is to create civilian 2. ANALYSIS OF TESLA’S PRICING
models with the most cost-effective models in order to STRATEGY
meet the needs of most people.
When Tesla set up its first factory in Shanghai,
Taking Model 3 as an example, according to Jiemian
investors focused more on investment opportunities in
News data, as of October 2020, the price has been
Tesla's supply chain. Unfortunately, Tesla's supply chain
reduced 9 times, and the current price on the official
is dominated by Japanese and Taiwanese companies and
website is 249,900 yuan. The cumulative price reduction
supported by American companies. The four major
is up to 290,000 yuan, and the price has been reduced by
components of a battery are the positive electrode, the
54%.In fact, Tesla's sales innovation is not only the sales
negative electrode, the isolation film and the electrolyte.
channel, but also the very special pricing method. Tesla
In terms of material cost BOM, positive electrode
has officially told the public that tesla's profit model is
accounts for about 46%, isolation membrane about 25%,
relatively fixed. Once the upstream price changes or
electrolyte about 13%, and negative electrode about 10%.
changes in other links, price adjustment mechanism may
Tesla's batteries are exclusively supplied by Panasonic,
be triggered. Qi Fangming (2020) Tesla's product
and LG Chem has been rumored to be a secondary
strategy adopts a sequence of starting from low-end
supplier, but it is only an emergency backup and will not
products to enter the high-end market, contrary to that of
change suppliers unless Panasonic makes a major
traditional car companies. Instead, tesla starts from
mistake. Many people believe that Tesla Model 3 will
luxury sports cars and SUVs to create high-end luxury,
use permanent magnet motor, but the motor power of
fashionable technology image for itself, and then enters
Tesla Model 3 is 300kw, which is very small compared
the low-end market. Gain customer recognition [3].
with the 310kw of Model S. The motor is the most
Simon Huang (2016) tesla on pricing strategies, used the
obvious advantage of Tesla, and Tesla does not control
global unified pricing strategy, on the same models of
the motor. And the motor is controlled by Taiwan. If we
China and the United States, just add artificial
follow the mass route of permanent magnet, Tesla is
transportation costs, tariffs and other standard in other
unlikely to have a performance advantage. Tesla will not
traditional luxury cars, in different parts of the price
be able to make an outstanding place in the field of
difference is big, the low price transparency, fair to each
permanent magnet motor in the short term. Of course,
region of the consumers. Set up a good image. At the
Tesla's Model 3 will have a dual motor version in the
same time, he also pointed out that in terms of promotion
future, and it is possible to use permanent magnet motors
strategy, although Tesla did not invite spokespersons, a
as secondary motors. Secondly, permanent magnet
series of famous people such as Silicon Valley bigshots
materials are widely used. For example, magnets are
and Hollywood movie stars use their products and name
widely used in speakers. Tesla does not have the ability
them after Tesla, the first great Physicist in The United
to manufacture motors, so it will not directly purchase
States, to increase popularity and increase attention [4].
permanent magnet materials. Tesla uses Infineon's IGBT
At the same time, Liu Jing (2016) Tesla adopts a multi-
and uses it in large quantities. Tesla uses the
product portfolio strategy, from the first edition of the
unconventional to 247 packages, which is very rare.
luxury Roadster to the current model S and Model X,
Among all the electric vehicle manufacturers in the
whose prices range from 200,000 to 300,000 yuan,
world, only Tesla adopts the IGBT with TO 247 package
meeting the consumer needs of different consumers, but
in the 1980s. The mainstream is the IGBT with module
there are still few models at present. In addition, In terms
package. The main reason for doing so is cost. Tesla
of channel strategy, Tesla adopts a direct selling model
motor power is too high, so there is no suitable choice for
different from that of traditional car companies. After
general IGBT module. We can only customize it. With
setting up minimalist experience stores in high-end
Tesla's shipment quantity, the customized price will be
blocks to offer customers practical experience, it adopts
very high. An estimated savings of $500- $800 can be
online ordering to purchase, saving the price difference
achieved with the TO 247 package. The disadvantages of
for DEALERS™ in 4S stores, reducing sales costs and TO 247 are also obvious, such as low reliability and poor
benefiting customers [5]. heat dissipation, which leads TO a short life and fire
hazard [6].
1.3. Research Contents
2.1. Tesla’s Skimming Pricing Strategy
This paper will take model3 as an example to analyze
tesla's pricing strategy. The first is skimming pricing, and Tesla entered the Chinese market as a high-end
then the transition to penetration pricing. We also study luxury sports car, so the price is relatively high. As can

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be seen from the market positioning analysis, tesla's fascinated by high-tech cars. Because the high price
target customer groups are mainly the rich, influential limits Tesla’s consumer group, Tesla decided to change
people and car fans who are obsessed with high-tech cars. its pricing strategy, seize market share and expand the
Tesla takes advantage of consumers' enthusiasm for its mass market. Taking the pricing of model 3 in China as
high-end electric sports car to price its products. When an example, Tesla announced the estimated price in
traditional luxury automobile brands are sold in The August 2019. The price of model 3 standard endurance
Chinese market, their prices are much higher than those upgraded version was increased from 366900 yuan to
of other countries except for tariff and other influencing 363900 yuan, and the price of high-performance version
factors, and the price transparency is low. Tesla has was increased from 499900 yuan to 509900 yuan [7]. On
formulated the same price strategy according to different November 6 of the same year, Tesla officially announced
markets in different countries, aiming to fairly treat that the model 3 standard endurance model with basic
consumers in different countries and regions. After driving assistance function was officially opened for
entering the Chinese market in 2014, Tesla changed the reservation, and the price before subsidy was reduced to
pricing strategy of other auto brands in the Chinese 355800 yuan. In late April 2020, Tesla responded to the
market and chose to make the pre-tax price of its cars call, and the price of model 3 was reduced again to
consistent with that of other countries. In 2016, Tesla 291800 yuan, and the price after subsidy was 2715500
motors introduced the Model3, an economical car, at a yuan. In the same year, on October 1, it was lowered from
much lower price than its previous series. The pricing to 269700 yuan, and 249900 yuan after subsidy. On July
strategy adopted by Tesla Is similar to the skimming 30, 2021, Tesla's official microblog announced that the
pricing method. It first uses a higher price to obtain a price of model 3 standard endurance version was reduced
higher profit margin from high-end customers, and then by 15000 yuan and the subsidized price was 235900 yuan.
launches low-price electric cars to seize market share and In 2020, Tesla adjusted the price of domestic Model 3 to
finally maximize profits. less than 250000yuan after two price cuts. Due to the
limited affordability of consumers, price reduction could
2.2. Penetration Pricing Strategy stimulate consumers’ demand for Tesla cars [7].
Different from skimming pricing, penetration pricing
Skimming pricing means that a products entering a allowed Tesla to quickly open the mass market and
certain market at the first, adopts a high fixed price to expand it. The pricing method combined with consumers’
obtain thick returns. Many enterprises have applied demand and afford ability promotes sales. By virtue of
skimming price, some succeeded and some failed. Tesla automobile’s excellent performance and unique
Therefore if an enterprise wants to adopt skimming new energy positioning, Tesla better promote the
pricing, it should do various investigations, on the basis expansion Tesla automobile market.Tesla has voluntarily
of macro-economic environment and its own to make lowered prices several times, which may be more aimed
correct decisions. Conditions of use of skimming pricing: at grabbing market share in its home market. Mr. Musk,
firstly, there are some people that have strong purchasing CEO of Tesla, has repeatedly expressed his opinion that
power and insensitive to price in the market; secondly, the most important issue at this stage is to bring down the
the products of this enterprise are stronger competitive price of Tesla. “Our cars are still too expensive.” For
with the counterparts; thirdly, the brand of the enterprise Tesla, they need to keep lowering prices to make it
has deep influence for consumers in the market. affordable for white-collar workers.If we can make an
Skimming pricing is a pricing method that entering electric car that everyone can afford, everyone will want
market initially at a deserved price compared to other to buy it." On October 17, 2018, Tesla's Shanghai
products. Every product has its own life circle, and Gigafactory was practically launched in The Port area. It
skimming pricing enters the market at a low price, which is expected that the price in China will be further reduced
accelerates the market’s maturity, and shorten products’ with the decrease of vehicle cost in the future.
life circle to attain high sales and market share. However
skimming pricing is relatively cheap rather than Through the analysis of Tesla's supply chain, this
absolutely cheap compared with the same type of paper finds that Tesla adopts direct sales mode in sales
products. In the production process, it continuously mode, but adopts a large number of outsourcing mode in
compresses the cost to reduce the sales price. Applicable production. A large number of outsourcing businesses
conditions of skimming pricing: firstly, large market enable Tesla to focus more on the development of core
capacity; secondly, consumers’ price demand elasticity is parts. Battery technology is the core technology for the
large; thirdly, the unit manufacturing cost decreases with development of electric vehicles. However, due to the
large-scale production. insufficient development of Tesla's battery technology,
the production and development of electric planning is
Tesla entered the Chinese market as a high-luxury limited to superior suppliers, and the battery purchase is
sports car, so that price is also high. From the market expensive and the profit is low, so Tesla needs to adhere
positioning analysis, Tesla’s target customer groups are to the development of core technology. Tesla adopts
mainly the rich, influential people and fans who are different pricing strategies for different target markets. In

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the market with high-income consumers, as these position in the market by continuously adjusting its
consumers are not sensitive to price, Tesla chooses to use pricing strategy and harvesting fans level by level, but it
skimming pricing to gain profits. In the market with low also faces many hidden dangers and challenges. In the
and middle income consumers, they are highly sensitive domestic market, in the face of Xiaopeng, Weilai and
to price, so Tesla adopts penetration pricing to gain ideal, it remains to be seen whether these strong
profits and open the mass market. competitors supported by strong funds from Internet
giants, as well as the traditional automobile
3. ANALYSIS OF TESLA’S PRICE manufacturers gradually catching up with them, with
REDUCTION FACTORS huge dealers and perfect supply chain, It remains to be
seen whether Tesla can build business barriers first and
In the past, Tesla was imported as a foreign car, which maintain competitive. New energy vehicles are the
was relatively expensive in terms of transportation, inevitable choice of low carbon and the development
handling, and customs duties. [6]The expensive price trend of automobile industry. The direct impetus for the
hindered the purchase enthusiasm of Chinese consumers. industrialization of new energy vehicles is the relevant
After Tesla entered China for mass production, which national support policies. The United States, Japan,
saved the intermediate import link. Tesla could enjoy the Europe and other developed countries attach great
same conditions with Chinese cars. The price of Tesla importance to new energy vehicle technology, and have
was also reduced. The guidance of national policies enacted preferential policies and measures from the
forced Tesla to reduce prices. A good example is that in perspective of automotive technology change and
April 2020, after the Ministry of Finance announced the industrial upgrading strategy. China's new energy vehicle
new energy subsidy policy, the price of Model 3 industry has also started to flourish in a healthy direction
increased. The reason is that Tesla can get less subsidies. with the support of the government.
In 2020, under the impact of the epidemic, the new
energy policy sets the red line of 300000yuan or with a 5. CONCLUSION
price less than 300000 yuan or supporting the power
exchange mode can enjoy subsides. Tesla didn’t meet Through the above research, we find that Tesla's
these two provisions, and then decided to increase the pricing is first at a relatively high level. After officially
price. In contrast, the prices of subsidies were more entering China, it adopts skimming pricing, and then
competitive, which forces Tesla to announce a price changes to penetration pricing to occupy the market. It
reduction to within 300000 yuan in that year. The starts from the middle level, harvests step by step, and
guidance of national policies forced Tesla to reduce actively makes pricing strategies that are more suitable
prices. The reduction of Tesla’s manufacturing cost is for development in different periods. It has enlightening
also a main reason a main reason for the price reduction, significance for the development of new energy vehicles
which can be divided into two aspects: localization of in our country. At the same time, Tesla should also pay
parts and technological progress. It can be seen that in attention to the current risks. With more and more
July this year, the price of Tesla’s cars also decreased enterprises announcing to join in car manufacturing, it
greatly. The reduction of price is mainly due to the still needs to think about how to build their own moat and
decline of battery cost. The battery used by Tesla has maintain their position in new energy vehicles. Tesla's
been supplied by Panasonic alone until 2020. After future pricing can adopt the prisoner pricing strategy,
Nindeshidai announced that it had signed an order combined with digital transformation, adopt a data-based
agreement with it on June 28, Panasonic’s share approach to the company's management, further reduce
decreased to 70% [8]. It can be predicted that with the the management cost, understand the personalized needs
increasingly close cooperation between other parts of of customers in various regions in advance, and make
Tesla and domestic parts manufactures, domestic corresponding products and services. Although the price
procurement and transportation costs will be reduced, trend of new energy electric vehicles in the future is
which will further reduce Tesla’s manufacturing costs. inevitable and shows a downward trend, using prisoner
Strong competitors are also a big reason for Tesla's price pricing, making more advanced system supporting
reduction. All kinds of new energy vehicles in China are software settings, or using solar powered charging
rising one after another, and new forces such as Xiaopeng accessories to implement bundle sales may make up for
and NIO are threatening. BYD, an old car manufacturer, the continued low price of electric vehicles.
surpassed Tesla in sales in China in July this year. Xiaomi
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4. RESULTS AND DISCUSSION telecommunications

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