Executive Summary
Marketing distribution and pricing are part of the marketing mix strategies often referred to as the 4Ps of marketing. Distribution determines how consumers access the products while pricing influences their affordability to the clients and profitability of the producer. Companies may sometimes perform poorly in the market because of the wrong choices of pricing strategies and distribution channels. Tesla is an example of a company that needs to select better practices in these areas. Owning the entire distribution may help the company create the desired consumer experiences. However, such a move strains resources which has a knock-on effect on other operations.
Introduction
Marketing is a vital business function that directly affects the customer experience, satisfaction, and loyalty. Firms with the best marketing practices are those that keep their consumers happy through effective engagement and quality products and services. According to Fayaz and Azizinia (2016), marketing can be said to have a cultural nature in the sense that the practice requires a deep understanding of the buyers, recognizing and meeting their needs and desires. Pricing and distribution can be the marketing areas that pose great challenges majorly because prices determine profitability and affordability while distribution affects the accessibility of the products to the consumers. This report examines the pricing and distribution problems at Tesla. An overview of the company, pricing and distribution challenges, and recommendations will be discussed in detail.
Background to the Company
Tesla, Inc. is an automotive company that designs, develops, produces and sells fully electric cars and energy storage systems. Additionally, Tesla maintains and operates energy and solar storage products (Reuters, 2020). The firm serves two primary segments: energy generation and storage division and the automotive sector. The automotive segment is the one responsible for the production and sale of electric vehicles. The energy division is a minor one that focuses on the production and sale or lease of energy and solar storage products for commercial and residential use. The sector also sells surplus solar energy produced to consumers.
With the automotive being the core business for Tesla, the report presented here focuses on the pricing and distribution problems the company faces. Tesla released its first electric car in 2008 and called it Tesla Roadster. The model sold over 2100 units in about 32 countries. The company released Model S in 2012 which was designed as a luxury high-performance sedan. It received great reviews by the public as manifested by the over 8,000 pre-orders (Tiwari, 2017). The Model S has so far been Tesla’s main product, with other such as Model X (a utility SUV vehicle) and Model 3 (sedan made for the mass market) deemed as promising prospects.
Distribution Problems
Tesla’s production levels are yet to match those of other global automotive manufacturers. The relatively smaller scale production means the company can handle most of the marketing distribution directly without the use of intermediaries such as dealers and distributors. In a market analysis of the company presented by Tiwari (2017), Tesla sells and markets electric cars directly to the end-users through the firm’s stores in North America, Europe, and Asia. The company sells unique products meaning that most of the after-sales services can only be provided by the company.
Therefore, Tesla has established several service locations across the United States, for example, Florida, Illinois, and California. Such service facilities are designed to be highly visible premium outlets intended to further improve the company’s presence, especially in the metropolitan areas. It can be expected that as the company grows and gains greater market share, its presence will also be enhanced.
Even though Tesla has designed its distribution to suit the company needs, several problems emerge. An article by Marshall (2019) revealed that Tesla indeed is good at making cars, but the same cannot be said about delivering them. The slackening sales recorded by Tesla are the consequence of its failure to deliver the products. In the first three months of 2019, for example, Tesla delivered only 63,000 of the Model 3, which represented a 30.5% decline in the previous quarter. In the Luxury models X and S, the deliveries were almost down 50%. Tesla explains that the declines in these figures are caused by challenges faced due to an increase in deliveries in China and Europe.
The same issues were described in detail by other news articles discussing Tesla’s never-ending problems with distribution. According to Supply Chain Game Changer (2020), the firm is having to cope with fast-growing demand for the products forcing it to strive to increase the production levels to meet the demand. However, issues arise in the supply chain thus restricting the company’s ability to transport the vehicles to their users. In 2016, for example, the corporation came under scrutiny after it hired 140 workers from Eastern Europe with an hourly wage of $5. The efforts to increase production have also led to the emergence of faults in the cars made, which further delays the distribution. It can be argued that the company’s distribution problems have a knock-on effect on both production and profitability.
A closer analysis of the distribution problems at Tesla reveals that the company has made several poor supply chain management decisions. First, Tesla cannot handle all the marketing functions in addition to the manufacturing activities. According to Tiwari (2017), Tesla decided to fully own the distribution channels to allow it control over customer experience and to help it achieve the operational efficiencies.
The company also hopes to capture the sales and services not enjoyed by the traditional franchised distribution used by the current automotive producers. Such a decision may have a strategic perspective, but the argument here is a company the size of Tesla is yet to develop the necessary capacity to pursue the move. Instead of offering improved customer experience as hoped, the company’s distribution outcomes have only led to frustrations among the consumers.
The second major problem with Tesla’s distribution decisions is that they fail to acknowledge the importance of intermediaries. Besides the fact that distributors come with certain capabilities that allow them to handle distribution better, it can also be argued that the use of third parties can free up a company’s resources which can be reinvested in more pressing areas. In Tesla’s case, the primary concern, at least in the short term, should be to improve the operational efficiencies in manufacturing.
As a new company offering new services, the first customers’ perceptions are shaped not by the distribution and delivery, but by the quality of the product. Tesla is, therefore, overstretching its limited resources by investing in the distribution resulting in diminishing efficiencies. Lastly, the company does not have vast networks that are considered a necessity for a successful distributor (Fayaz & Azizinia, 2016). The company’s customers are situated across the globe and with only a few service centers in the United States, it means the company cannot reach out to most of its clients.
Pricing Problems
Pricing decisions are critical because they affect two aspects: the profitability of the company and the affordability of the product. As such, the executives charged with managing a commodity’s prices has to address four major concerns. These are:
- what the price should be,
- when discounts should be granted,
- the level of profits generated from the price structure,
- how the competition affects the prices (Smith, 2012).
At Tesla, the major concern during pricing decisions is the level of profits. The competition in the electric car market is not still as Tesla is a pioneer in the industry. However, that may change when multinationals such as BMW and Mercedes Benz among others enter the industry. The pricing for Tesla cannot, therefore, be significantly affected by gas-fuelled cars.
Tesla’s pricing decisions are intended to help the company grow in the new niche market. According to Tiwari (2017), Tesla uses a value pricing strategy to maximize both profits and demand. The focus for Tiwari’s (2017) industry analysis is on the Model S, but it can be argued that the vehicle is among the company’s major products and the decisions seen in its production and marketing may be replicated in other models. The price for Model S was set at $65,400, a price that not only made it relatively affordable but also allowed it to compete better with the luxury and hybrid car market. The company, even though serving a unique market, is aware that its niche is not as developed as the traditional automotive market. Its success depends on the ability to lure customers and to convince them that electric vehicles are the future of a green planet.
To lure customers, Tesla needs to offer them value greater than other car manufacturers. The value pricing strategy as described by Tiwari (2017) ensures that the costs of operating a Tesla Vehicle are lower than those of gas-powered vehicles. It is important to acknowledge that the Model S has several variations with each offering greater worth than the previous. For example, the second tier of the model has a battery size of 60KWH which pushes is the price to $67,400. The third tier has a battery size of 85KWH and costs $77,400.
The performance model boasts of upgraded interior and suspension and a price of $92,400. The signature series goes for $95,400 (available with a signature red) while a signature performance attracts a price of $105,400, including performance upgrades and the red color. Additionally, the consumers in the United States can enjoy a tax rebate of $7,500. Operational costs of a Tesla Model S is 3.1 cents per mile as compared to Toyota Prius and Porshe Carrea whose costs are 5.7 cents and 13.2 cents per mile. Tesla intends, therefore, to make the cars affordable and efficient in terms of their operation.
Just like the marketing distribution, Tesla faces several problems with pricing with most of them revealed through the news media. A news article in the Business Insider by DeBord (2019) indicates that Tesla cut its prices by $2,000 in 2018. However, the author is quick to emphasize that the price cut does not reflect a problem in the demand, rather it was intended to make up for an expiring tax credit estimated at $7,500 per car.
To illustrate that the issues were not caused by declining demand, DeBord (2019) explains that the company managed to deliver about 250,000 cars in the same year. However, other publications by the same author insist that Tesla’s vehicles are too expensive. For example, DeBord (2020) argues that the monopolistic nature of Tesla has allowed it to sell cars at high prices. The author compares the price of an upcoming car, Toyota Corolla, whose price is estimated at $20,000. Tesla, on the other hand, sells its cheapest Model 3 sedan for $38,000. Such price differences can be an indication that the company’s pricing strategy may fail to achieve its goals.
The effects of the company’s prices on some of its automotive models have been negative. In some cases, Tesla has had to cut charges for some models such as the Model S luxury sedan to lure buyers (Boudette, 2019). Further price cuts have been reported by Lambert (2020) where Model 3 will cost $37,900. However, it is important to acknowledge that these recent price cuts are the result of the COVID-19 pandemic, and it is not clear whether the price cuts will persist after the crisis. The key point here is that the company has not found stability in pricing its products. The fluctuations witnessed are evidence that the company is yet to figure out how much the consumers are willing to pay for electric cars. As explained earlier, the value of the electric cars will reflect both their purchase prices and the operational cost by the consumer. The lower costs of owning an electric car value, but such value can be cancelled out by the higher purchase prices.
SWOT, PESTEL, and Porter’s 5 Forces
To fully understand the pricing and distribution situation at Tesla, a market analysis using SWOT analysis, PESTEL, and Porter’s Five Forces is helpful. In SWOT analysis, the company’s strengths are its abilities to innovate and create new products that appeal to the market. The weaknesses, however, are that Tesal has limited resources to pursue better pricing and distribution strategies. The opportunities are explained in the recommendations below, and they include utilizing third parties with better capabilities. The threats are represented by the ability of traditional automotive manufacturers entering the market and offering a stiff competition.
The application of PESTEL analysis in the case of Tesla does not carry much weight considering that the external environment does not offer significant barriers. For example, there are not many political issues working against the introduction of electric cars. The economic situation is only disrupted by the COVID-19, while society is ready to embrace “green solutions”. Electric cars are environmentally friednly and the company has the technologies to pursue the production. Lastly, there are not many legal challenges facing Tesla’s mode of doing business.
The application of Porter’s Five Forces is difficult because of the fact that Tesla operates in a unique segment where there is not much competition. However, the threat of substitution is great considering that the consumers still prefer gas-fuelled cars. The fact that the company controls much of the supply chain means the bargaining power of suppliers is limited. The bargaining power of buyers is hard to establish as there are hardly any similar product to compares prices. The threat of new entrants is also real, especially the traditional automotive manufacturers deciding to enter the electric car market. The rivalry among the existing competitors is weak and insignificant due to their limited number.
Recommendations
The problems that Tesla faces in the marketing distribution and pricing are majorly the result of the fact that the company is relatively new and serves a new market. Additionally, the firm’s products are yet to be completely embraced by the general automotive market even though electric cars are seen as the solution to the global climate change concerns. Even with changes, it is important to emphasize that the company has not made the right decisions to suit its situation. In some cases, the company can be seen as overambitious considering the limited resources and capabilities.
The recommendations presented here are intended to offer the company short and medium-term solutions. The focus on the short and medium terms, it should be emphasized, is because the company’s future looks promising and the uncertainties in the market make it difficult to outline long term solutions. As it grows, it can be expected that other more viable alternatives will emerge.
Exploit the Capabilities of Intermediaries in Distribution
The first recommendation is that Tesla should utilize those competencies possessed by intermediaries to allow for a more efficient distribution practice. As mentioned earlier on, the company hopes to own the sales and marketing functions to create better and customized customer experiences (Tiwari, 2017). Doing so, however, the company strains its resources the result of which has been inefficiencies in both production and distribution. According to Fayaz and Azizinia (2016), the intermediaries are a critical part of the distribution channels because they have the capacity to add value to a product and ensure that the consumers receive the products more conveniently.
With Tesla’s current capital and financial strength, it is argued that it is not yet time to exploit the benefits of in-house distribution practices. Dealerships and distributors can reach out to more markets more efficiently. Additionally, the costs saved could be reinvested into the production capacity which can further translate into lower prices. Lowering prices allows dealers and distributors room to earn their commissions.
Outsourcing or Strategic Partnerships in Distribution
The second recommendation to address the distribution issues is to outsource the distribution practices or form strategic alliances with firms with greater distribution competencies. This alternative differs from the previous one in that the company selects who deals with its products based on selected criteria. Supply chain integration involves how much the manufacturers strategically cooperates with other firms in the supply chain to jointly manage the inter- and intra-organizational process. The cooperation is aimed at achieving an efficient and effective flow of information, money, and products and services (Eksoza et al., 2019).
Such collaborations are also essential for the firms to achieve maximum value for their customers. Even though the strategic partnerships are recommended here as a medium-term solution, Tesla may find it necessary to completely outsource the distribution functions to strategic partners who have a greater capacity to reach more markets. The strategic partners can be selected based on their ability to offer the ultimate consumer experience. In other words, distributors with large capital bases and the capacity to undertake comprehensive marketing for electric cars would boost the performance of the company.
Cost-Based Pricing Strategy
Tesla needs a pricing strategy that meets the short and medium-term needs of both financial stability and affordability. For a new product, it can be argued that consumers will infer value from user experiences rather than product expenses. In other words, the value-based pricing for a new product can be difficult because the consumers do not know how to judge the value of the product.
In the case of Tesla, however, it can be argued that the value is relative to that of gas-powered vehicles, in which case competition-based pricing would be more appropriate. According to De Toni et al. (2017), the cost-based pricing is the simplest and most popular method which has historically been accepted because of it sense of financial prudence. It entails adding a standard profit margin that allows the firm to meet its profit objectives. When a manufacturer achieves operational efficiency, the expenses in manufacturing processes reduce and the standard profit margin allows the seller to offer consumers reduced prices.
The emphasis on cost-based pricing is brought about by the fact that the value-based pricing at Tesla has failed to yield the desired outcomes. A new approach, at least for the short to medium term, is needed to stabilize Tesla’s product prices. However, researchers such as De Toni et al. (2017) argue that even cost-based pricing requires the sellers to show the clients enough value to justify the prices. Tesla should try to compete in its market as opposed to fighting with the gas-fuelled vehicles from the more financially powerful companies. Cost-based pricing balances financial performance and demand stability.
Conclusion
Tesla is a unique company serving a distinct product market. As such, the levels of uncertainty are high as expressed by the marketing distribution and pricing problems the company faces. The report has presented a brief overview of Tesla’s planned strategies and practices in distribution and pricing and the challenges herein exposed. In distribution, Tesla lacks the capacity to handle the distribution channels alone. In pricing, the value-based pricing fails to achieve the intended outcomes. The recommendations offered in these areas are deemed to be short to medium-term solutions. For example, outsourcing or establishing strategic partnerships in distribution allows Tesla to focus on other key functional areas while cost-based pricing gives the company greater financial prudence.
References
Boudette, N. (2019). Tesla, facing setbacks and skeptics, tries to get back on course. New York Times. Web.
DeBord, M. (2019). Tesla’s $2,000 price cut doesn’t mean it has a demand problem (TSLA). Business Insider. Web.
DeBord, M. (2020). Tesla’s cars are too expensive, and Elon Musk knows it — here’s why that could be a big problem for the electric-vehicle leader. Business Insider. Web.
Eksoza, C., Mansouri, A., Bourlakis, M., & Onkal, D. (2019). Judgmental adjustments through supply integration for strategic partnerships in food chains. Omega, 87, 20-33. Web.
Fayaz, R., & Azizinia, M. (2016). Current challenges in distribution channels of cultural goods and services. Marketing and Branding Research, 3, 75-85. Web.
Lambert, F. (2020). Tesla cuts prices across lineup, Model 3 now starts at $37,990. Electrek. Web.
Marshall, A. (2019). Tesla is better at making cares. Delivering them? Not so much. Wired. Web.
Reuters. (2020). Tesla, Inc. Reuters. Web.
Smith, T. (2012). Pricing strategy: Setting price levels, managing price discounts, & establishing price structures. South-Western Cengage Learning.
Supply Chain Game Changer. (2020). Tesla supply chain issues and lessons!. Supply Chain Game Changer. Web.
Tiwari, J. (2017). Market research on Tesla Inc. – strategic analysis. [PDF Document]. Web.