Written by Miguel Van Damme
Last March, Tesla realised a spectacular increase of its Belgian sales figure by 210% compared to March of last year. In the same period, Audi and BMW, Tesla’s direct segment competitors, observed a decrease in sales of respectively 10,3% and 7,7%. How is this to be explained? We think the answer is simple: for the same price, the customer will get significantly higher benefits. In other words, Tesla skilfully used a value-based pricing strategy.
Part of Tesla’s success can be explained by the launch of its Model 3 in February 2019 and by the recent increase in environmental awareness. But electric alternatives have been available on the market for quite some time now, without having the same success as the Model 3. Tesla seems to have designed and priced its new model so that it becomes a reliable alternative and, above all, a more profitable investment than the other models offered by competing brands in the same price range.
Slightly higher cost, significantly higher benefits
The Model 3 hits the market at nearly 50.000 € for its basic model up to 80.000 € for the full option model. One of the market leaders in this segment – in technical terms the Next Best Alternative (NBA) – is most certainly the BMW 5 series, which remains slightly cheaper than the outsider: 47.950 € for the basic model and 78.775 € for the full option. But customers do their homework – helped by the simulations they can do on the Tesla website – and they perceive that for slightly more money, they get significantly higher value.
The following table attempts to quantify the benefits and disadvantages of the Tesla car for the customer:
The main feature of a Tesla – compared to a BMW 5 series – is the fact that the vehicle is 100% electric. This implies fuel savings estimated at more than 2K€ a year. Legal benefits and reductions in maintenance costs add nearly another 2K€ a year (the former without taking into account the fiscal reduction for companies: 120% vs. 70% for the BMW 5, depending on the CO2 emissions). In the past, the higher price of electric cars implied higher insurance premiums. This is no longer the case; the insurance premiums are now similar for both vehicles.
On the downside, the time required to fully charge the Tesla is estimated at around 30 minutes versus 5 minutes for refilling a classic car like a BMW. We value this loss of time at 50€ an hour, which boils down to approximately 800 € per year. The low autonomy of electric cars, aggravated by the low number of recharging stations, used to be and still is an important disadvantage for the customer. Tesla has worked hard to improve the autonomy of their latest model (530 km) and has significantly increased the number of charging points in Belgium. We did not quantify the remaining disadvantage but it is hard to imagine that it would outweigh the important benefits for the customer.
Indeed, by considering the above-mentioned benefits and disadvantages over a period of 5 years, we can estimate that the perceived value of a Tesla Model 3 for a customer is more than 15.000 € higher than the price of a BMW 5.
Even if these are ballpark estimations, and the autonomy of the car still remains an issue for the customer, it is clear that Tesla’s skilful value-based pricing strategy is paying off and that they will continue disrupting the European car market in the coming months and years.
What we can learn from Tesla is that being aware of the added value of your product over its Next Best Alternative (NBA) allows you to accurately determine your pricing and to assess whether all the characteristics of your product add sufficient value for the customer, compared to those of your competitors.