Tesla to continue discounting cars despite profit margins falling

Tesla will continue to offer price discounts on its vehicles despite its profit margins falling to 18.2%.

The electric car manufacturer has undertaken a series of steep price promotions in recent months in a bid to squeeze rivals out of the market and to shield against the effects of a “turbulent” economy.

This tactic, however, has caused its profit margins to slump from a high of 29.1% in Q1 2022 to 18.2% now – its lowest point in four years. CEO Elon Musk shrugged off the hit to margins during a conference call with investors and analysts overnight (19 July) saying the company doesn’t control the “macroeconomic conditions” which it finds itself operating in.

“If macroeconomic conditions are stable, prices will remain stable. If macroeconomic condition are not stable, we would have to lower prices,” he said.

Welcome to IMGFUCK: Seven steps to kicking your price-promotion addictionThese double-digit discounts (its Model Y fell from £67,990 to £59,990, for example) have protected sales and seen them rise 7% to $25bn (£19.34bn) when compared to the first quarter. Profits, too, have continued to grow hitting $2.7bn (£2.1bn) in Q2, up from $2.3bn (£1.8bn) in the quarter prior. Time will tell whether these short-term gains could cause long-term brand damage for the company.

Musk continued to rail against the state of the world’s economy saying that “one day it seems like the world is falling apart” and the next “it’s fine”. He dubbed it as living in “turbulent” times.

These comments caused the company’s shares to fall by nearly 5% in after hours trading despite being relatively stable up until then.

In the past Musk had been a critic of offering discounts on new cars off the line, saying if a brand can’t explain why one customer paid full price while the other didn’t without being embarrassed then it’s not a good strategy. He now seems to be breaking his own rule.

He once too dismissed advertising and the company famously resisted it for many years hoping instead to rely on word of mouth. But at Tesla’s annual shareholder meeting in May, Musk said Tesla might “try a little advertising” in the near future after being inspired by his purchase of Twitter.

Elon Musk confirms Twitter’s ad revenue has halvedMarketing Week columnist Mark Ritson has been a long-standing critic of Musk’s stance against advertising believing the company is too focused on the short-term and ignoring the long-term in its marketing strategy.

He said: “You advertise cars not just for the next 12 months of demand but – quite literally – for a lifetime beyond that point.”

Ritson went on to say that Tesla needs to embrace marketing if it is to survive the oncoming wave of contenders to its throne in the EV market.

“The next few months are crucial ones for Tesla. It needs to start advertising. It needs to stop the destructive cycle of discounting before things become problematic,” he said. “It needs to regain the brand focus that was once a core competence. It needs separation between Musk and the Tesla brand. It needs marketing.”