Mark Ritson wrote an article for MarketingWeek titled Tesla is about to experience the seven perils of discounting (January 19, 2023).
« 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… 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. »
« Why brands advertise. You advertise cars not just for the next 12 months of demand but – quite literally – for a lifetime beyond that point. »
« 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. »
« It is no coincidence that Tesla, 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. »
« 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 »
« 1. Negative signaling… 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.” »
« 2. User disillusionment. A price is a bond of trust between company and customer… 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.” »
« 3. Questionable top-line impact… 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… 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… 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 vicious cycle of discounting begins… Dumb companies train the market to wait for the discounted price. »
« 5. Profit evisceration… 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…
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. »
« 6. Starting a price war. Tesla’s initial discounting has already had an impact on competitor strategy… 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… 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.” »