Case Study #4

4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Target Market Segmentation:
How Tesla Pulled o� a Billion
Dollar Pricing Strategy in the
Automotive Industry
(https://taylorwells.com.au/target-market-segmentation/)

by Taylor Wells (https://taylorwells.com.au/author/taylorwells/) December 19,

2018 (https://taylorwells.com.au/target-market-segmentation/)

Tesla has a record of beating the odds with their prestige pricing

strategy and data-driven target market segmentation. Their Model S

(https://www.tesla.com/en_AU/models) sells for circa AUD 120,000

and their Model X sells for AUD 107,650 (excluding taxes or other

costs). They have tested di�erent ways to segment a market and

positioned Tesla �rmly in the premium sports car market despite being

a newbie with an alternative o�er in a well-established automotive

industry.

However, it wasn’t always like this. Before 2008 the Tesla brand was a

relatively unknown, techy brand. Tesla Motors Inc was predominately

an engineering �rm (not the fun-loving, Tesla technology brand we

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https://taylorwells.com.au/target-market-segmentation/

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https://www.tesla.com/en_AU/models

4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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have all come to know). Their target market segmentation and price

positioning were vague and unde�ned, and their ideal target

customers had barely heard of them.

Then, in 2008 everything changed. Elon Musk
took over the company as chief executive
and transformed the Tesla brand.

Their brand went from geek-sheek to Hollywood glam in a fairly short

space of time. They re-positioned their brand as Tesla the ‘new

technology for clean energy,’ rather than a premium electric sports car

with gadgets and bene�ts. They created demand for an entirely new

premium, all-electric sports car segment using a prestige pricing

strategy, clever storytelling, and target market segmentation.

From 2008 onward, Tesla attracted the demand and attention of their

ideal target audience: i.e., An elite group of customers and private

investors with lots of money to spend on a product that propped up an

underlying belief or fantasy that successful individuals could change

the world.

However, despite Tesla’s impressive turnaround situation (and ability to

capture our imaginations with space travel and Elon’s glitzy parties

with Hollywood celebrities and models

(https://www.smh.com.au/business/companies/elon-musk-threw-a-

�amethrower-party-on-the-weekend-20180611-p4zkp5.html)), Tesla

has been posting consistent de�cits and continues to be a pro�tless

company (https://taylorwells.com.au/pricing-for-pro�t/).

Tesla doesn’t have much cash compared to other
industry giants – just over $US3 billion – and a debt-
heavy balance sheet.

In this article, we will argue that although Tesla target market

segmentation and price positioning is a huge potential source of

revenue for Tesla, it is also an area which is likely to impact their mid to

long growth plans if not handled correctly.

We will explain Tesla’s target market segmentation process, including

an analysis of their pricing strategy, price positioning and customer

segmentation to date. Followed by an evaluation of a Tesla target

market segmentation case example.

(https://taylorwells.com.au/talent-management-

teambuilder360/)

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4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Tesla’s target market
segmentation

A lot of people are intrigued about Tesla market segmentation

because the brand and story of Tesla (post-2008) is so powerful. But

Tesla target market segmentation is and always has been quite simple.

Tesla only really serves one target market. The one they created: i.e.,

the premium all-electric sports car market. They are currently working

out their plans to cross over into the everyday market with their model

X series. However, this is going to take another couple of years to

achieve. And, a lot more private investment funding if they can get it

(discussed later in this article).

Tesla, therefore, uses mono-segment positioning. Which means they

focus on one segment in detail. However, they pay close attention to

understanding customer sub-group activity (or micro-segments) within

this one market segment.

Their target market segmentation
incorporates di�erent types of segmentation.

It includes geographic, demographic, behavioural and psychographic.

Their target market segmentation criteria include multiple variables:

i.e., region, density, age, gender, life-cycle stage, occupation, loyalty,

bene�ts sought, personality traits, social class, and lifestyle.

Tesla also uses an anticipatory type of positioning within their target

market segmentation process. They position Tesla’s products and

services for a market segment that has low turnover based on

forecasts that the turnover will increase in the future as clean energy

becomes a societal norm.

Tesla’s pricing strategy

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4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Tesla’s new product pricing strategy is created using psychological

theory but informed by a data-driven target market segmentation

process.

Let me explain…

In 2008, the all-electric sports car was a novelty product in the

traditional gas fuelled automotive industry. People were unfamiliar with

the concept of an all-electric sports car. The “uncool” Toyota Prius

formed people’s knowledge of all-electric vehicles. Hardly a sports car

image Tesla wanted to be associated with.

Most people back then were also pretty new to the idea of clean

energy – i.e., Tesla’s mission statement. Tesla didn’t know if people

would buy their novelty products because they didn’t have enough

data on demand. They couldn’t set pricing based on capacity levels

because they hadn’t sold any cars. Their product was new. And, their

futuristic mission statement was quirky/odd.

They also didn’t want to set prices on their costs either because this

would cap revenue. The cost of production is a relatively small

percentage of the overall pro�t value of the Tesla brand. Cost based

pricing would limit their pro�tability. Investors and executives would

not like this. It would be harder to increase prices in the future.

See our blog here on 4 common pricing strategies to grow pro�ts in

your business. (https://taylorwells.com.au/4-common-pricing-

strategies/)

They then looked at people’s willingness to pay set
prices for their products.

But found this approach was lacking too. Because when they

launched in 2008, people hadn’t heard of them or didn’t know what

they were buying. There would be little point setting prices based on

what people said they were willing to pay when the customer didn’t

know what they were buying.

So instead, Tesla created a pricing strategy that leveraged their

ideological brand using a mixture of psychological and pricing theory

and data-driven target market segmentation (discussed in more detail

below). They looked at their target market segmentation research and

found common pricing and psychological principles were driving sub-

group activity to the brand and products.

Below listed are some basic psychographic pro�les Tesla has created

to develop their prestige pricing strategy for their Model S and X series:

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https://taylorwells.com.au/4-common-pricing-strategies/

4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Hardcore loyal users – Status. Wealthy. Socially responsible.

Cares about the environment. An early adopter to trends and

intellectual concepts. Successful in life. Self-concept as a thinker

and activist. Guilty about mass consumption and consumerism in

general.

Fad users – Likes novelty and being on trend. Socially compliant

(will strive to keep up with the group). Mid to late majority of

adopting trends. Limited commitment to clean energy.

Embraces mass consumerism. Self-concept as fun-loving and

rich prefers the lifestyle aspects of Tesla.

Switchers – Limited loyalty to clean energy and the

environment. Would switch based on price and if competitors to

Tesla o�ered a low-cost alternative.

Tesla’s target market segmentation research showed customer groups

(as pro�led above) within their target segment were conforming to

fundamental psychological and pricing principles. Namely: Social

Identity theory, social compliance theory, and loss aversion.

They found that some customers would pay a lot of
money to show how socially responsible they were.

They called this segment their hardcore loyals. Their target market

segmentation process revealed that hardcore loyals within their target

market wanted to buy a fun, all-electric sports car as opposed to a gas

guzzling alternative like Bentley or Mercedes, etc. because they

identi�ed with Tesla’s mission or saw themselves as activists (Social

Identify Theory).

Their target market segmentation process also revealed that other

customer groups within their target market behaved and valued

di�erent things from the group above. They called them fad users

because they would eagerly comply with a popular trend or identify

with status and celebrity (social compliance theory).

Next was a series of price trials to test di�erent price points for their

prestige pricing strategy for their Model X series

(https://www.news.com.au/technology/innovation/motoring/tesla-

releases-luxury-suv-model-x-in-australia/news-

story/371f5046c3cde5805509dd0e2e610ebc). They produce

segmented prices for the Model X and S range based on the most

prominent customer value drivers emerging from their ongoing

segmentation research.

(https://taylorwells.com.au/talent-management-

teambuilder360/)

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4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Tesla target market segmentation case
example

Tesla’s approach to pricing and target market segmentation is a huge

potential source of revenue for the business and its investors. However,

their current business model and operational capability are impacting

their future pricing power and mid to long business growth plans.

First, there’s the increasing number of new players entering this

marketplace. This includes di�erent processes, customer channels,

and product life cycles. Tesla needs to update operations quickly. They

are the ones are being disrupted in a market segment they created.

Second, the arrival of new SUVs from other manufacturers will

highlight production and pricing problems for Tesla which target

market segmentation alone cannot �x. Tesla plans to produce a

second SUV, the mass-market Model Y, in the next few years. However,

other competing electric brands have cheaper SUVs available now.

There’s the new Jaguar I-Pace all-electric crossover,
for example, which is cheaper than the Tesla Model X
and �ts into a di�erent segment.

The cheapest car Tesla has is the Model X is still about $10,000 US

more than the I-Pace. After this, they’ve only really got the Model S to

sell.

Third, they are now �nding they cannot easily serve all their customers

needs in their target market segmentation. Some customer now wants

a smaller sedan or a smaller SUV and Tesla simply doesn’t have one

yet.

Fourth, Tesla is losing market share. Existing players are reclaiming

potential buyers with all-electric crossovers and sedans, but Tesla only

really has the Model S and Model X. People are looking for all-electric

Tesla’s New Pricing StrategyTesla’s New Pricing Strategy



https://www.youtube.com/watch?v=zg07SFLFOdk

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4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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luxury crossover versatility in Tesla’s target market segment, including

the good range in an appealingly designed package. They like the Jag

and the less expensive price tag of $US70,000. The latest all-electric

Jag is an extremely attractive o�er to switchers and fad buyers looking

to move to an exclusive electric car segment. Tesla may not be able to

compete.

Tesla has only one car factory.

They build three vehicles: the Model S mid-size/full-size sedan, the

Model X SUV, and the Model 3 compact sedan.

Fifth, unlike other car manufacturers, Tesla lacks a variety of o�erings

in their target market segmentation. Apart from drivetrain variations

and some appointments. It also completely lacks competitive vehicles

in other segments.

Finally, Tesla doesn’t have a mass-market EV on the market, in the

compact sedan target market segmentation. Chevy does have a mass-

market vehicle in the compact hatchback segment, which is adjacent

to the sedan segment.

Critics of the traditional industry say that people will
continue to buy Tesla simply because it’s Tesla.

But, even their data-driven target market segmentation process will be

telling them a di�erent story. Some people will be willing to switch to

something just as good or better then Tesla if its o�ered to them at the

right price point (i.e., the Jag).

People within Tesla’s target market segmentation are looking for

cheaper o�ers with bene�ts in this segment and Tesla just can’t o�er

them now. Also, the strength of Tesla’s loyal customer base has not

been tested up to now. Will an everyday all-electric car and price point

diminish a brand when their data-driven target market segmentation

indicates their business and brand is largely built on exclusivity, ideals,

and status? 

4/17/2019 Target Market Segmentation: Tesla’s Billion Dollar Pricing Strategy

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Tesla may get away with idealistic storytelling and “stretching” fewer

vehicles across more segments for a couple more years. However, this

approach tends not to work for longer very well. Or potentially, they

could increase their range to appeal to more segments. However, this

means more factories, and in turn more capital investment.

Tesla can’t go into the everyday market using a penetration pricing

strategy without a huge upfront investment. And, they’re facing serious

competition from existing players with scale, heritage and the money.

Industry car manufacturers have entered Tesla’s target market

segment. What’s more, they have the money to compete and

penetrate this niche target market with lower cost alternatives.

Conclusion

In this article, we showed how Tesla’s business strategy uses four

strategic pillars:

1. product innovation (https://taylorwells.com.au/global-pricing-

objectives-and-strategies) (i.e., a premium all-electric car)

2. A prestige pricing strategy

3. Personality-driven PR advertising

4. Substantial private investment.

We discussed how Tesla invests heavily in their target market

segmentation process to inform and update each pillar of their

business strategy.

We argued that Tesla leverages a data-driven

(https://www.marketing91.com/marketing-strategy-of-tesla/) target

market segmentation process to develop a prestige pricing strategy

based on psychological and monetary value drivers, as opposed to

cost-based pricing.

A clear implication from this article is Tesla has a serious business

model and operational issues to deal with now. Their pricing and target

market segmentation strategy is no longer enough to �x these issues.

The fun technology Tesla may end up being a bottomless pit for

private investors and just another car for customers. Tesla ideological

brand might be enough to stave o� competitive pressure and

disruption. Then, again it might not. Tough times for Tesla ahead.

If you would like to learn more about how world-class pricing teams

generate more revenue and margin for businesses like yours,

download our complimentary e-book �ve ways to double EBIT or free

pricing recruitment guides (https://taylorwells.com.au/resources-

downloads/).
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https://taylorwells.com.au/resources-downloads/

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Don’t waste another dollar on the wrong pricing team strategy

(https://taylorwells.com.au/pricing-videos/).

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