Tesla Doesn't Price Based On Costs & Neither Should You

May 08, 2016

 

By charging different prices for the same battery Tesla illustrates that a cost-plus formula is much less important than a willingness to pay.

 

The new Tesla entry level Model S comes with a 70 kWh battery. An new option, with a 75 kWh battery, costs $3000 more.

Makes sense from a cost-plus perspective right? A bigger battery must cost more to make, so the manufacturer has to charge more for it...

Except in this case both cars ship with exactly the same battery. It's actually cheaper and more efficient for Tesla to concentrate on just producing a single battery, and hide the extra capacity behind what is often referred to as a "paywall".

 

That’s right, whether you spend the $71,000 for the entry level 70 kWh refreshed Model S, or an $3,000 more for the new 75 kWh option, you’re getting the same battery pack. The only difference is that Tesla will be limiting the capability of the 75 kWh battery pack to a lower performance for the 70.

The Tesla Model S 70 kWh Battery Pack Is Now Just A 75 kWh Behind A Paywall

 

A traditional cost-plus approach would dictate that, all things besides the battery being equal, both models should cost the same. In fact there shouldn't even be two models because they are the same.

But Tesla understands that some customers will happily pay a premium for the larger battery, and they are happy to charge accordingly. And if at some point you want to upgrade your battery you can – for a fee of $3,250 Tesla will remotely unlock the extra capacity.

Assuming they at least break even on the base model any extra money they get for the higher capacity battery is pure profit, profit that would have been missed had they used a cost-plus formula.

It also provides truly meaningful value about what customers truly value in their product. Forget surveys, if people are willing to pay for the extra capacity that means they must really value it –making additional R&D investment in that area wise.

Paywalls are nothing new. For many, many years the Microsoft X-Box required users to pay to unlock access to Netflix and other streaming services. Prior to that they charged for unlocking access to the existing DVD player for the purpose of watching movies.

Similarly the Tesla Autopilot feature is secured behind a paywall and can be “unlocked” for $3,000 (just $2,500 if you ordered it at time of purchase). And Telsa isn't alone when it comes to cars – both BMW and Mercedes use paywalls to control access to increased performance in models that are limited by speed or horsepower from the factory.

 

 

What Does It Mean For Florists?

Here is one example. Using a designer attribute to increase price and margin is a great idea. For example – offering people the choice of having their arrangement prepared by an AIFD designer and then charging a higher price/margin.

But what if you are a small shop and it's likely that ALL arrangements will be prepared by the same designer, whether the customer chooses to pay for an upgrade to the designer attribute or not?

That is just fine. In such a case the customer is choosing to pay for the assurance that their flower are prepared by an AIFD designer.

Another example is charging a premium for trendy flowers or styles that appeal largely to people that really value flowers. You don't have to charge the same markup on everything based solely on your costs.



Category: Examples

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Beyond Cost Plus is sponsored by FloristWare: Fully-featured flower shop software that saves you time and money while increasing sales – without costing you an arm and leg or tying you to a wire service.

FloristWare – flower shop software/POS system.

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