Investors advise Musk: Tesla should spend money on advertising instead of reducing prices to promote sales

On October 16th, it was reported that Tesla rarely spends money on advertising, but as sales growth slows and price reduction strategies are adopted to boost car sales, many investors feel uneasy. Especially the price reduction may result in Tesla's revenue decreasing by billions of dollars this year

On October 16th, it was reported that Tesla rarely spends money on advertising, but as sales growth slows and price reduction strategies are adopted to boost car sales, many investors feel uneasy. Especially the price reduction may result in Tesla's revenue decreasing by billions of dollars this year. General Motors, Ford, and other automakers spend over $20 billion annually on advertising in large media outlets.

The following is the translation content:

In many ways, Gary Black can be called Tesla's "iron fan". Since the establishment of the fund in 2021, this Chicago fund manager has always regarded Tesla as his largest shareholder and frequently expressed support for Tesla on social media. But Blake has been thinking about a question lately: is Tesla wasting money by lowering prices to maintain high growth rates.

Due to the sluggish sales growth of Tesla sedans and SUVs, and the upcoming launch of the electric pickup truck Cybertruck, Blake insists that Tesla, or Elon Musk, should abandon its long-standing opposition to spending money on advertising in large media.

Black's claim has received support from allies on social media. Another active Tesla social media fan, @ TroyTesla, conducted an online survey and found that out of over 8000 respondents, half believed that Tesla should start advertising as a replacement for growth strategies such as further price reductions and adding new technologies to high-end ModelS and ModelX.

Last May, at Tesla's annual shareholders' meeting, when a shareholder questioned Musk about this issue, the latter appeared surprised and even a bit funny, but most Tesla fans present were cheering.

Even if each Tesla spends $525 on advertising this year, it's still only half of Netflix's advertising budget, and spending $1000 is only equivalent to Netflix's entire advertising budget. I see that the latter's advertising is everywhere. Musk, why not promote these things you're telling us here? "Said Kevin Paffrath, who runs The MeetKevin Pricing Power ETF in Southern California. He particularly pointed out that safety features such as airbag deployment technology are Tesla's advantages and may attract more consumers through advertising.

In fact, Musk is open to the idea of advertising. He once said, "Tesla has many amazing features and functions, but people don't know. Although there are obviously many people following Tesla accounts, you know, to some extent, my personal account is already preaching to the choir, and the choir has been convinced

Then Musk made a promise. He said, "I think what you're saying does make some sense, and I believe it's necessary to adopt these suggestions. We'll try to do some advertising and see how it works." The shareholders erupted in cheers, and Musk responded, "I didn't expect them to have such a high enthusiasm for advertising

However, if shareholders expect Tesla to advertise heavily, they may be disappointed. Dan Ives, an analyst at Wade Bush Securities, said that in the following months, Tesla had invested very little in online and social advertising. At the same time, the significant price reduction continues, which is Musk's main strategy to attract more people's interest in Tesla.

Musk has always firmly supported cost reduction. As he stated at this year's annual shareholder meeting, one of Tesla's goals is to bring electric vehicles to consumers in the mass market. In the US market, many Model 3 models are priced below the average price of new passenger cars.

Price reduction affects Tesla's gross profit

In fact, according to data from Cox Motors, the average price of most Tesla models has decreased by about 20% since August 2022. These numbers do not include the $7500 federal tax credit benefits restored under the 2022 Inflation Reduction Act.

But Blake stated that the latest round of price cuts announced last month resulted in Tesla losing $2 billion annually. Ives estimates that overall, the price cuts of the past year have had a greater impact on Tesla's revenue.

In fact, Blake made the above estimate because he believed that Musk should reconsider how much Tesla relies on price reduction strategies, rather than spending money on advertising to promote safety features such as reduced electric vehicle costs and wireless software updates. Considering that although Tesla's stock price has risen by about 140% this year, it is still one-third lower than its peak in 2021, and last year's growth has consistently lagged behind the S&P 500 index, this becomes particularly urgent.

Blake said, "I don't think reducing the price of ModelY from $55000 to $48000 would provide that much demand elasticity. Instead of lowering the price by $2000, it's better to lower the price by $1800 and increase advertising

Blake also believes that Tesla's price reduction is actually a strategy to increase marketing expenses. He said that Tesla's decline in market share in the electric vehicle industry this year indicates that price reductions alone are not feasible.

In fact, despite Tesla lowering prices, its share in the US electric vehicle market has been declining. Tesla delivered 435059 vehicles in the third quarter, much higher than 343830 vehicles in the same period last year, but lower than 466140 vehicles in the second quarter and approximately 423000 vehicles in the first quarter. Tesla attributed the reason for the lower third quarter performance than analysts' expectations to the "shutdown in the factory upgrade plan".

Ives stated that the negative impact of the price reduction strategy is also reflected in Tesla's gross profit, which decreased from 25% of sales in the second quarter of 2022 to 18% of sales. This means that Tesla's potential gross profit will decrease by $1.5 billion, unless a portion of it can be compensated for by increasing sales.

How does Tesla advertise?

Allen Weiss, CEO of Marketing Profs, a market research and training company, said that we can speculate on how effective Tesla's advertising campaign may be. He pointed out that in addition to safety features, consumers are also concerned about many aspects.

He said: I will first identify the benefits that customers hope to receive. Some may be more concerned about Tesla's performance improvement, some may prefer to see it as a luxury or status symbol, and some may think they are helping to save the planet. Afterwards, I will identify what these benefits represent, target a portion of these buyers, and propose good ideas around them. This way, you can not only get interesting ideas, but also collaborate with buyers Establish connections at home based on what they truly care about

Weiss believes that the challenge Tesla faces is that with the development of the company, it will compete more directly with experienced marketing companies. Ford has been vigorously promoting its F-150 lightning pickup truck, while General Motors has been advertising the Super Bowl for the past three years.

Swedish electric vehicle manufacturer Polestar is also advertising, spending an estimated $20 million this year. Polaris and BMW also promote electric vehicles on Super Bowl TV broadcasts, despite being the most expensive television broadcast in the United States. Industry data company iSpot estimates that about a quarter of car advertising spending in 2022 will be targeted at electric vehicles, and Ives calls this trend a "wave" and expects it to continue.

Other car manufacturers are accustomed to paying more attention to customer interests, while Tesla is not. Open the Ford website and click on the 'Electric Vehicle' page, you will immediately see amazing designs, impressive performance, and exciting words. Enter 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 he was often told that Tesla's electric cars were too expensive. He said, "I've talked to many people and they still think Tesla is super expensive. But I don't feel that's the case. Tesla's average selling price is lower than the average selling price of new cars in the United States

Ives said that Tesla does not need to invest as much money in advertising as Ford or General Motors, and he believes that a targeted advertising campaign can focus on the specific advantages of Tesla or other electric vehicles.

Tesla has some differences, but people are unaware of them, "he said. Even if Tesla's average cost drops, it can still use advertising to maintain its luxury brand image and "start changing people's perceptions".

Ives also stated that when Tesla reached its maximum scale, the most noteworthy aspects were sales and operating profit margins. Blake believes that people will soon discover whether more advertising will help.

Even Musk began to believe in the power of advertising. He once said at the annual shareholders' meeting, "I think it's ironic that X relies heavily on advertising, but I personally 'never use advertising', and now I have a company that relies heavily on advertising. I think I should say that advertising is great, and everyone should do it