According to news on October 16, Tesla rarely spends money on advertising, but as sales growth slows and it adopts a price-cutting strategy to boost car sales, many investors are uneasy. Price cuts in particular could cost Tesla billions of dollars in revenue this year. General Motors, Ford and other automakers spend more than $20 billion annually on advertising in major media.
The following is the translation:
In many ways, Gary Black can be called a Tesla fan. Since establishing the fund in 2021, the Chicago fund manager has always regarded Tesla as his largest holding and often expresses his support for Tesla on social media. But Black has been thinking recently about whether Tesla is wasting money by cutting prices to maintain high growth rates.
With sales of Tesla cars and SUVs lagging and the electric Cybertruck pickup truck set to go on sale, Black insists Tesla, or Elon Musk, should drop his long-standing opposition to spending money on advertising in big media.
Black's claims have drawn support from allies on social media. An online survey by @TroyTeslike, another active Tesla social media fan, found that half of the more than 8,000 respondents believed Tesla should start advertising in lieu of growth strategies such as further price cuts and adding new technology to the high-end Model S and Model X.
When a shareholder questioned Musk on this issue at Tesla's annual shareholder meeting in May last year, the latter looked surprised and even a little amused, but most Tesla fans present cheered.
"Even if each Tesla spends $525 on advertising this year, it's still only half of Netflix's advertising budget, and spending $1,000 is only equivalent to Netflix's entire advertising budget, and I see the latter's advertising everywhere. Musk, why don't you promote these things you told us here?" said Kevin Paffrath, who runs TheMeetKevinPricingPowerETF in Southern California. He specifically pointed out that safety features such as airbag deployment technology are Tesla's strengths and may attract more consumers through advertising.
In fact, Musk is open to the idea of advertising. He once said: "Tesla has a lot of amazing features and capabilities that people just don't know about. Even though there are obviously a lot of people following the Tesla account, you know, in a way, my personal account is already preaching to the choir, and the choir is already convinced."
Then Musk made a promise. He said: "I think what you said does have some truth, and I believe it is necessary to adopt these suggestions. We will try to do some advertising and see how it works." Shareholders burst into cheers, and Musk responded: "I didn't expect them to be so enthusiastic about advertising."
However, if shareholders are expecting Tesla to advertise heavily, they may be disappointed. Wedbush Securities analyst Dan Ives said Tesla spent very little on online and social advertising in the months since. Meanwhile, steep price cuts continue, Musk's main strategy to get more people interested in Tesla.
Musk has been a staunch supporter of cost reduction. As he said at this year's annual shareholder meeting, one of Tesla's goals is to bring electric transportation to mass-market consumers. In the U.S. market, many Model 3s are already priced below the average price of new passenger cars.
Price cuts impact Tesla's gross profit
In fact, the average price of most Tesla models has dropped by about 20% since August 2022, according to data from Cox Automotive. These figures do not include the $7,500 federal tax credit restored under the 2022 Inflation Reduction Act.
But Black said the latest round of price cuts announced last month is costing Tesla $2 billion a year. Overall, Ives estimated, price cuts over the past year had a greater impact on Tesla's revenue.
In fact, Black came up with the estimate because he thinks Musk should reconsider the extent to which Tesla relies on a price-cutting strategy instead of spending money on advertising touting falling electric vehicle costs and safety features like over-the-air software updates. That's especially pressing given that Tesla's stock price, despite rising about 140% this year, is still a third below its 2021 peak and has consistently lagged the S&P 500's gains last year.
Black said: "I don't think reducing the price of Model Y from $55,000 to $48,000 will get that much elasticity of demand. Instead of reducing the price by $2,000, it would be better to reduce the price by $1,800 and increase advertising."
Black also believes that Tesla's price cuts are actually a strategy to increase marketing expenses. He said Tesla's market share decline in electric vehicles this year shows that price cuts alone won't work.
In fact, Tesla's share of the U.S. electric vehicle market has been declining despite lowering prices. Tesla delivered 435,059 vehicles in the third quarter, well up from 343,830 vehicles in the same period a year ago, but down from 466,140 vehicles in the second quarter and about 423,000 vehicles in the first quarter. Tesla blamed “planned shutdowns for factory upgrades” for third-quarter results that fell short of analysts’ expectations.
Ives said the negative impact of the price-cutting strategy was also reflected in Tesla's gross profit, which fell to 18% of sales in the second quarter from 25% in the second quarter of 2022. This means Tesla's potential gross profit will be reduced by $1.5 billion, unless part of it can be made up through increased sales.
How does Tesla advertise?
Allen Weiss, CEO of MarketingProfs, a market research and training company, said we can guess how effective Tesla's advertising campaign may be. He pointed out that consumers are concerned about many aspects besides safety features.
“I would start by identifying what benefits my customers want,” he said. “Some of them may be more focused on the performance improvements of Tesla cars, some may prefer it as a luxury product or a status symbol, and some may see themselves as helping save the planet. After that, I would figure out what those benefits represent, target a segment of those buyers, and come up with good ideas around those benefits. That way, you can get interesting ideas but also connect with the buyer about something they really care about.”
The challenge for Tesla, Weiss believes, is that as the company grows, it will compete more directly with experienced marketing firms. Ford is already heavily promoting its F-150 Lightning pickup truck, and General Motors has been running Super Bowl ads for the past three years.
Swedish electric carmaker Polestar is also advertising, spending an estimated $20 million this year. Polestar and BMW also both promote electric vehicles during the Super Bowl telecast, even though it is the most expensive telecast in the United States. Industry data firm iSpot estimates that about a quarter of automotive ad spending in 2022 will be targeted at electric vehicles, a trend Ives calls a "wave" that he expects will continue.
Weiss said: "Other automakers are used to focusing more on customer interests, but Tesla is not. Open Ford's website, click on the 'Electric Vehicles' page, and you will immediately see stunning design, impressive performance and exciting words. Go to BMW's electric vehicle page and you will see descriptions such as 'cutting-edge performance and luxury.' On Tesla's website, you will only see prices."
Even Musk himself admitted at the annual meeting that people often tell him that Tesla’s electric cars are too expensive. "I've talked to a lot of people and they still think Tesla is super expensive," he said. "But I don't feel that's the case. The average selling price of a Tesla is lower than the average selling price of a new car in the United States."
Ives said Tesla doesn't need to spend as much money on advertising as Ford or General Motors, and he believes a targeted ad campaign could focus on the specific benefits of Tesla or other electric vehicles.
"There's something different about Tesla that people don't know about," he said. Even as the average cost of a Tesla vehicle drops, advertising can be used to maintain its luxury brand image and "start changing people's perceptions."
Ives also said that when Tesla reaches its maximum scale, the most interesting things are sales volume and operating profit margin. Black thinks people will soon find out whether more advertising helps.
Even Musk has begun to believe in the power of advertising. He once said at the annual meeting of shareholders: "I think it is ironic that X is highly dependent on advertising, but I personally 'never use advertising', and now I have a company that is highly dependent on advertising. I guess I should say advertising is great, everyone should advertise." (Xiao Xiao)