Thread by @Coyoteblog

1/ Hey $TSLAQ, I wanted to show the power of small price changes in a manufacturing company's financials. This may be old hat for some of you, but after years of lecturing companies on price I find people's intuition is often wrong about the large impact of small pricing changes

2/ This is obviously a big deal at Tesla, as it has pursued a strategy over at least the last 12 months of cutting prices multiple times, both on like for like models and by introducing low-priced products that cannibalize its higher-price offerings.

3/ So let's consider the very simple example of a company with revenues of 100, true variable Cost of Goods Sold (COGS) around 60% of this, and fixed costs of 35. In this example, they would have a net income before taxes of 5 (very very simplified of course).

4/ Note that the COGS of many companies includes costs that are probably not truly variable. $Tsla has been running around 75% to 80% COGS. Saying that the true variable COGS for $tsla is 60% might not be a bad guess (I defer to the auto experts on this)

5/ But the exact assumptions do not matter because the bottom line is that small changes in pricing can have large effects on net income. Let's look at our simplified company after a 10% price increase and 10% price decrease.

6/ To do this we have to assume a price elasticity of demand, meaning how much demand changes with a change in price. We will start with an elasticity of 1, meaning a 10% price increase will cause demand to fall by 10%, and vice versa.

7/ This is what results. You can see that in our simple example the 10% price increase causes a doubling of net income! And the 10% price decrease causes net income to fall by over 100%. That is a lot of leverage from small changes in price.

8/ It turns out that these results are not very sensitive to the initial assumptions. For example, the 10% price increase still increases net income for elasticities up to 2. Only for elasticities greater than 4.5 will the price decrease case result in increased total net income

9/ For Tesla, particularly in the pre-M3 super enthusiast phase, the elasticity was almost certainly <2 (ie less than a 20% demand change from a 10% price change).

A different starting cost structure changes the results slightly be not the overall conclusions.

10/ Since at least 2017, Tesla management has operated under the assumption that unit volume is its ultimate metric and what drives the company's valuation. All of its actions have been to drive reported unit volumes higher.

11/ From this example, I think we have see that this drive for unit volume has been pursued to the long-term detriment of its shareholders. Tesla has made massive pricing cuts to drive small additional increments in volume, and...

12/ It has cannibalized high price products with lower priced options (M3 for S and X; Lower priced M3 for higher priced M3). The results has surely been a huge loss on the bottom line.

13/ This is one reason why many in $tslaq have argued Tesla should have pursued a niche strategy of selling fewer higher priced and higher margin cars.

This very simple probably-not-good-enough-for-ARK spreadsheet is here: coyoteblog.com/wp-content/upl…