A friend asked for my opinion on this blog – Tesla Model S Service Contract: $600/Year, Or Warranty Voided by David Noland.
David is on the waiting list for a new Tesla and found out the service contract is $600 per year. Worse yet, if you don’t buy the service contract, you don’t get a warranty.
Where to begin.
First, David spends much of the article estimating the true costs of servicing the vehicle, pointing out it is much less than $600. Apparently he thinks Tesla should be pricing service contracts on a cost-plus basis. We’ve mentioned this before, customers think we should use cost plus pricing. If we don’t, they think we are gouging them. David gives us an example of this. Tesla probably wishes David hadn’t pointed out the cost vs. the price. However, as long as this theme isn’t picked up by lots of media, not that many customers will think this way. In the end, Tesla can charge whatever their customers are willing to pay.
Second, hooray for Tesla. It wouldn’t surprise me if we see more high end car companies doing this. Why? They are selling complementary products. Keep the price of the decision product (the Tesla) as low as possible and make profit on the add-ons and accessories. It’s like paying shipping and handling on an Internet purchase, or buying an HDMI cable for your new DVD player, or baggage fees on airlines. These high margin add-on purchases are rarely considered by customers when making the initial purchase decisions.
Finally, hooray for David. He is proactively considering the cost of the add-on, the total cost of ownership. The cost of the service contract may make him change his mind. It may not. Regardless, kudos to him for investigating all the costs so he can make an informed decision. Also, it’s wonderful that he’s sharing his opinion of it with all of his readers. This information may change some minds of readers who were struggling to afford a Tesla, but I would bet most Tesla buyers simply grimace and write the $600 check.
Tesla hasn’t responded to David (and why should they?). It is very possible that they have done extensive analysis on battery failure rates and $600 is a “fair” price.
In the end, companies get to make their own rules on how to sell their products … and for how much. Consumers get to decide whether or not to buy. I’m a strong proponent of informed consumers, but not whiners. On the other hand, if businesses make decisions that cause customers to whine, they are asking for trouble. What happens if a large portion of the media pick up this story? Tesla may find this pricing tactic hurts their brand.
Pricing – sometimes, it’s a balancing act.
Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author
photo by jurvetson
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