...and what you can do to improve your pricing strategy
This week we received a great thought provoking piece from Ron Wood, Founder and Managing Director of Pricing Insight. He highlighted the email shared with the world for a very specific and clever reason by TESLA’s Elon Musk on TESLA’s pricing strategy.
There are important points to note from his email that can be applied to your own business. It is important, however to appreciate the nuance to his email and the business model and industry dynamics at play.
What is important in reading his email is the thinking and the context behind the message. Here is Elon Musk’s email to all TESLA dealerships.
First, I’d like to congratulate you on an excellent quarter so far! This is likely to be the best ever in Tesla history thanks in large part to your efforts.
That said, it is absolutely vital that we adhere to the no negotiation and no discount policy that has been true since we first started taking orders 10 years ago. This is fundamental to our integrity and we maintain this policy even through the terrible depths of the great recession of 2008/2009.
It is fine to have a discount on cars that have been floor models, or used in test drives or were damaged before delivery. All we are doing there is assigning an accurate price to the vehicle.
However, there can never – and I mean never – be a discount on a new car coming out of the factory in pristine condition, where there is no underlying rationale.
This is why I always pay full price when I buy a car and the same applies to my family, friends, and celebrities, no matter how famous or influential.
The acid test is that if you can’t explain to a customer who paid full price why another customer didn’t without being embarrassed, then it is not right. We either win in a way that is fair and right or we lose with our honour intact and accept the consequences.
Also, I have asked our finance group to make sure that we only count a car as delivered in a quarter it if it is actually delivered. Title transfer alone is irrelevant. Finance will also be reporting every case of a car sold for less than list price, along with the reasoning for doing so which I will be reviewing personally.
Although this appears to be limited to a small number of cases worldwide, it needs to be zero cases stop
I’m sorry for the draconian language as I am super grateful for your hard work, there is nothing that matters more than our integrity as a company. Customers need to know with absolute certainty they can always trust Tesla to do the right thing.
In this one email, we have the basis for a pricing strategy framework that you can use to guide your pricing strategy.
Pricing strategy is CEO concern
Pricing strategy and tactics are a primary concern of the CEO and Founder of a $30Billion company. Jeff Immelt CEO General Electric also reviews pricing outcomes. There are a limited number of progressive CEOs who will take such an active and personal interest in pricing strategy and outcomes. Gross margin and EBITDA contraction, coupled with increasing scale of revenue under management make pricing a highly leveraged instrument of earnings growth.
In my view, any CEO who leaves the development of pricing strategy to the discretion or the Sales or Marketing Director has a death wish. in 2017 alone we have seen multiple CEOs depart under a cloud and almost always, poor pricing decisions were a primary driver of that departure.
CEOs that take a presidential or Chairman style role in running their companies almost always get burnt by strategic pricing decisions made by mid-level management where there is no oversight and control leading back to the CEO in some form.
This does not mean the CEO becomes cc'd on an email chain of daily spot pricing discussions or weekly tactical meetings to evaluate the wisdom of offering X% discount to a customer. The CEO needs to be across the guide rails and rules of racing that have been established by a pricing strategy council sponsored by the CEO.
The CEO arrests the problem early.
Musk arrested the issue of price discounting early. Many executives wait until their house is truly on fire in every room before calling the fire brigade. What is different in this example from Musk's involvement, is his identification of the critical inflexion point for his company's strategic direction.
Most companies I see with margin erosion problems have discounting behaviour that is out of control. It is not isolated to one or two rogue sales reps, but endemic from the newest most junior sales rep to the Sales Director. The discounting behaviour often goes hand in hand with a cultural belief that the "industry has been commoditised."
The TESLA pricing policy is built on a fundamentally sound strategy of pursuing customer and marketplace integrity. Discounting new cars affect the resale value of cars and so devalues the installed base of cars already in the market. By protecting the new car price, Musk is also protecting the investments of early adopters who bought TESLA cars.
This then builds brand loyalty and goes a long way to ensuring those TESLA owners will make their next car purchase a TESLA. By forgoing a few sales generated by discounting, TESLA is playing a longer game looking at Lifetime Value of a Customer as they may well buy 1, 2 or 3 TESLA cars over the next 10 years.
Note that Musk does not state that discounting has no role to play in the TESLA business model, rather he makes it clear that pricing dynamically to reflect value is important and as long as discounts have some context, are controlled and connected to a clear set of value drivers, they play a part in the pricing strategy management mix.
Analysis and control
In this email it also apparent that all discounts will be evaluated and controls implemented with finance to make all pricing decisions transparent and accountable.
No negotiation policy
All customers want a deal. All salespeople want to make a deal happen. It feels good to negotiate. It sounds as though we have an aggressive culture of successful salesmanship to say we negotiate hard. But what is actually happening here? A customer demands a price reduction when the product appears to be commoditised, the value of services and technical support is discounted to zero and there is no accountability on the buyer’s part to own the outcome of purchasing inferior product & service package.
This is a fundamentally different problem that negotiation cannot solve.
This is a marketing value communication problem.
# 1 Sales challenge
In fact, the #1 challenge all salespeople face today is ensuring their company, brands and products are positioned to solve the specific problems identified by a customer segment of one. In simple terms, showing up to a sales meeting to negotiate without ensuring all the elements of a high-value sale are in place prior to physically showing up will result in a price negotiation and margin erosion.
Pricing is your most powerful profit lever.
If pricing is not a primary concern of the CEO, the business has a major problem.
There must be a set of policies and guidelines backed up system controls to make any pricing strategy or policy effective.
If your value proposition is not clear to each market segment you have a pricing strategy problem and a no doubt a margin erosion problem.
How can you apply this strategy to your furnishing industry business?
Courtesy Ron Wood, Founder and Managing Director of Pricing Insight, Sydney Australia