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Tesla's Pricing Power in the Market - YouTube
Channel: Tesla Economist
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welcome to the tesla economist please
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hit the thumbs up and remember to
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subscribe you can follow me on twitter
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and talk to me on patreon
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we talk about tesla's mind-blowing
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margins and insane levels of profit
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these tend to be the sorts of things you
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look for in a business as well as an
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insane level of growth of course
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companies like this don't come up often
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so when they do my advice is to jump all
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over them well tesla has such good
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margins because they simply price their
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cars so high in the market the higher
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you raise your prices the more profit
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there is assuming your costs remain
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equal and your quantity of sales and it
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appears that tesla are able to raise
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their prices and maintain the same
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quantity of sales now i did say sales
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not profit with a typical supply and
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demand curve the higher you raise prices
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then it reduces the quantity of sales
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the more expensive an item becomes the
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fewer people there are that can afford
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it but supply and demand curves are only
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valid on the basis that you have almost
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unlimited supply if prices go up then
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you'll supply more because profits are
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likely so much better however as we know
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tesla are supply constrained now due to
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tesla having a waiting list this is
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evidence that tesla are selling below
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the market clearing price in other words
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tesla are purposefully choosing
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not to make as much profit so that more
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consumers can actually afford a tesla so
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bear that in mind when you complain
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about the high prices tesla are still
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giving you a discount from the value
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they are offering you how do i know
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because people wouldn't order and wait
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for a year or so otherwise i was
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speaking to tesla the other day even and
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they said my plaid is still going to be
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a couple of years away and i ordered the
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first one coming into my country
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customers are willing to wait and tesla
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chose waiting as the additional cost
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rather than higher prices or now
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somewhat a combination of what is best
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for business while still making efforts
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on keeping prices low but guess what
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more and more people keep buying teslas
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and demand keeps rising faster than
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supply tesla could make even more
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profits with their cars if they just
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raise their prices higher to give you an
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example what if tesla raised the price
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of the model y to 75 000
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what if that then removed the waiting
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list perhaps you receive a brand new
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tesla in just a couple of weeks but the
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cost is 75 000
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you see you don't have to wait a year
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anymore you get your tesla instantly and
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there are enough customers to pay that
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price what does that mean it means the
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true market value of a model y is
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seventy five thousand dollars which
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means that anyone ordering it now at
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sixty six thousand dollars is still
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buying it at a nine thousand dollar
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discount you just have to wait a year or
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so until you receive it on top of that
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though tesla would have released some
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more software features by then so by the
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time you actually receive it it may even
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be an 80 000 car the perceived value of
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the product has increased and will
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continue to
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and amazingly tesla won't stop there
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they will keep adding value like 4680
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models that handle better likely charge
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faster and eventually even more range
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and acceleration or even more value and
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funnily enough it costs less to build
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yeah imagine a long range model y coming
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out of texas in a few years time perhaps
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350 miles of range 300 kilowatt charging
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speed probably even fsd capable well if
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the old model y long range had a market
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clearing price of 75 000
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then what's this one gonna be a hundred
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thousand dollars well that's the issue
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now if there are people complaining
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about the price of the y at sixty six
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thousand dollars well there'll be even
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fewer people who can afford a hundred
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thousand dollars there does eventually
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come a point where it's literally
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unaffordable for people none of this
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well you could afford a tesla if you
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sold your house and ubered every night
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sort of stuff a lot of people have no
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physical way of finding a hundred
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thousand dollars even if it had a
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thousand miles of range and could fly it
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would make no difference to some people
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they still can't afford it for me if it
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flied then you bet i would rather own
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that than a house and that's kind of
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what we've been talking about lately i
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expect to see a paradigm shift on how
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people value teslas when they really
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start to realize they are much more than
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just a car and i'm not even talking
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about fsd i do somewhat kid about how if
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you wanted a tesla you could have a
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smaller house and i mean tesla is more
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than a car but now when you live in your
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house you generally hang out in living
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areas or bedrooms i.e you don't tend to
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spend too much time in the garage unless
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it's some sort of hobby but now you have
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a tesla in your garage there is an
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additional living room my kids go in
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there and play games and hang out and we
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have a reasonably sized house if you had
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a smaller house and there was nowhere
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else to go to watch netflix on your own
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a tesla acts as an additional room in
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your house i hope that doesn't sound
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like i'm reaching too much there i'm
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just trying to illustrate that testers
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bring more value than just a car
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eventually the value of a tesla is just
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going to be too hard for many people to
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ignore a lot of customers might also get
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fomo as they start realizing the value
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and may be worried tesla hikes the
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prices yet again tesla's demand is
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increasing just because more people are
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discovering the vehicle more owners are
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convincing everyone they know to buy one
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and every day there are more owners
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adding to this zero cost grassroots
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marketing strategy but like we said
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there has to be a limit to the price
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even if there isn't for desirability the
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result is going to be that tesla are
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just going to have insane value i think
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the world will just accept we have an
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additional expense in life that is worth
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paying for i mean 20 years ago most of
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us didn't have to pay for internet a
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phone plan netflix youtube spotify etc
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but we accept they improve our living
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standards and justify the expense as
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they offer such amazing value a million
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dollars or so worth of movies and music
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for just ten dollars a month that's a
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good offer just like we might accept 200
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or 400 a month for fsd or we might
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accept that we buy a tesla more like a
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house than a car and perhaps have to pay
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it off over 10 years or so with all the
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additional value tessa had added and
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when tesla finally start reaching some
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decent levels of supply well eventually
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there may be a time when the prices
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actually come down by this stage like we
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say the model y long range may be of
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about a hundred thousand dollars of
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value yet costing an insane thirty
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thousand dollars to produce possibly
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even less so if the prices started
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coming down to under 60 000
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then consumers are going to look at
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teslas as incredible value whereas now
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they still haven't gotten their heads
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around the value they bring and are
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still on the mindset of valuing a tesla
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like an ice car that low cost of
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production is the other part of the key
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first add value to the product with
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technology then reduce the cost of the
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car with technology you end up with a
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lower cost and higher price and
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increased margin there is a lot of
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margin there and we often look at it as
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a buffer for in case we get into
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recession or if demand starts to drop
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then tesla can reduce their margin
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slightly and the demand comes right back
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and that is the pricing power tesla has
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right now they have inelastic demand and
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can raise their prices to increase
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profit however they also have these huge
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margins which are only getting larger
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for the time being the margins mean that
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tesla can lower prices if they ever need
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more demand margin is stored demand
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tesla could lower their prices by about
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twenty thousand dollars on some vehicles
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and still make a profit can you imagine
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what tesla's demand would be then in
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fact when fsd is complete despite these
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huge margins tesla actually stand to
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profit more from fsd subscriptions in
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other words again despite these margins
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tesla could sell the vehicles at break
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even and still make a lot more profit
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per vehicle than they do today over its
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lifetime wow imagine trying to compete
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with a company like that tesla are
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saving costs at unprecedented levels
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with unfathomable amounts of vertical
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integration that is creating a moat like
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no one else has ever seen no one is
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coming for tesla no one is taking
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tesla's market share tesla will sell
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every car they make and do what they can
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to make as many cars as possible no one
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else is even making a profit whereas
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tesla can afford to drop their prices as
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much as necessary if recessions or
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markets ever get too bad remember tesla
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has this pricing power where they can
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control the level of demand they want at
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any time and if it's ever that bad for
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tesla then it's significantly worse for
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everyone else tesla automatically has
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this enormous buffer of margins to get
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through any bad times and if they are so
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bad for the competition then the
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competition will go under before tesla
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and if the competition go under then
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they're fewer competitors or less supply
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which means the demand just returns back
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to tesla anyway tesla's pricing power is
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unassailable thanks for listening please
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hit the thumbs up and subscribe you can
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follow me on twitter and talk to me on
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patreon
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