Tesla Raises Model S Prices—But Reservation Holders Are Home Free

By · November 21, 2012

Elon Musk and George Blankenship

Tesla CEO Elon Musk makes a point as ex-Apple marketing guru George Blankenship looks on. (Jim Motavalli photo)

We knew this was coming. Tesla Motors plans to raise the price on the Model S within the next few weeks, though the company isn’t being specific about the new bottom line. Some features now standard on the car will become options. The increase won’t apply to anyone with a completed reservation as of the announcement date.

Destination: Profits

Tesla’s strategy here is pretty clear—to increase its profit per car, and to stimulate sales. An easy comparison is to the companies now scrambling to shift business to this year, avoiding inevitable tax increases that will go into effect in 2013.

Tesla is scrambling to ramp up Model S production to 400 cars per week, and it’s spending heavily to get there. The company is trying to turn losses into positive cash flow, and it helps if would-be buyers get their reservations finalized “within a fair, predefined timeframe,” as Tesla puts it.

The Model S: higher price coming

Tesla's Model S faces an as-yet unspecified price increase, for a number of strategic reasons. (Jim Motavalli photo)

After winning 2013 car of the year awards from Motor Trend and Automobile Magazine, the company has succeeded in ramping up the Model S desirability factor—chief designer Franz von Holzhausen told me that this quarter’s reservations are the best ever. Obviously, Tesla has decided a price increase won’t turn away people already hooked by the Model S magic.

Nothing to Share

Tesla itself isn’t talking, beyond its blog post. “We don’t have more info to share today,” said spokeswoman Christina Ra. “We will share details within the next few weeks.”

In 2008, Tesla had to put out a firestorm when it announced a price increase that would apply to reservation holders waiting for the Roadster. It learned its lesson, and now the hike doesn’t apply to people with the magic ticket.

Sam Jaffe, an analyst at Pike Research, says companies that bait-and-switch can live to regret it. “I was on the list for the Nissan LEAF, but right before it came out they announced a price increase and so I took my name off the list,” he said. “When you make a deal you’re essentially signing a contract, and raising the price breaks the agreement. That’s especially true with the Tesla Model S, because of how much money you’re putting down [$5,000 for standard cars, $40,000 for the upmarket Signature model].”

Applying the Pressure

Jaffe says, and I agree, that Tesla is using a fairly standard sales pressure technique to get people from “maybe” to “yes.” It’s somewhat at odds with the concept of the low-pressure Tesla stores, which model the Apple approach. Marketing guru George Blankenship, who comes from Apple, told me he doesn’t care if Tesla never sells a car at its stores. The showrooms are basically a forum for showing off the cars, with the customer actually buying online.

“This news is potentially bad news for Tesla’s retail model,” Jaffe said. “Dealers will tell you that if a customer walks off the lot, he’s lost. It’s a lot to expect for Tesla customers to visit the stores and then go home and buy online.”

The bottom line, though, is that raising the price is highly likely to work out fairly well for the company. “Raising the price incentives current deposit holders to convert to sales, which provides more cash to the company,” said John Gartner, also a Pike analyst. “A price increase is not surprising given the high cost of producing electric vehicles, especially given the low volume of the Model S today.”

Interestingly, Nissan is moving in the other direction, announcing a cheaper, stripped-down model of the LEAF for the Japanese market. U.S. plans are so far unclear. Nissan, which badly needs to ramp up sales volume, and can't wave any "Car of the Year" awards, is unlikely to risk a price increase at this delicate juncture.

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