Will Tesla's Price Increase Hurt Sales?

Elon Musk, one of the richest men in the world, and the founder and CEO of Tesla Inc. (NASDAQ: TSLA), tweeted that the price of Tesla cars would rise. In his tweet, he simply said “Prices increasing due to major supply chain price pressure industry-wide. Raw materials especially.”

The “raw material” part of his comment is certainly true. While a chip shortage has hurt the sales of most cars, among the other components of cars with sharp price increases are resins and tires, along with some metals. The chip shortage has shuttered assembly lines at many car companies, squeezing supply and driving the average price of both new and used cars to all-time highs.

One advantage Musk has as he increases prices is that almost every other manufacturer has had to do so as well. However, the hurdle the price increase creates is that his competition in the electric vehicle (EV) segment seemingly increases by the day. Price, at some point, matters to many car buyers.

One of Tesla’s models is fairly “affordable.” The entry-level Model 3 has a base price of $39,900. However, with a modest number of upgrades, that price moves much closer to $50,000. The Model S sedan has a base price of $73,990. Once again, upgrades raise that price and easily push the sticker to over $100,000. The Model X crossover has a base price of $84,190, which can rise quickly above $100,000 with additional features.

Tesla had very little competition just a year ago. At the low end of the price range, there are still few significant competitors to the Model 3. The most notable is Chevy’s Bolt EV. It has a base price of $36,500. It has neither the panache nor the brand power of Tesla. Consequently, it has sold poorly. However, every major global car company plans a vehicle aimed straight at the Model 3.

The more immediate threat is to the Model S. First among these is the Porsche Taycan. BMW and Mercedes will soon hit the market with high-end EVs. Within two years, the market will be flooded with both EV sedans and crossovers. Tesla may find itself pinned down like Gulliver by a hoard of Lilliputians.

Musk may get away with a price increase. However, Tesla operates in an industry filled with competitors with decades of experience when it comes to prices, financing and incentives.

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