The Behavioral Pricing Principle that Made Tesla Possible
I was just reading Rolling Stone's excellent profile of Elon Musk. And it got me thinking about the magic of Tesla and how Musk was able to break-through in electric cars.
Electric cars have been around for decades as novelties. In the 90s, The Simpsons parodied green vehicles as the obscure novelties that they were at the time. So, how did Musk do it? Two things:
1. He understood different potential segments in the green car market. Desire for a "green car" was not just a desire for value as most thought. Desire for a green car was also driven by a desire for a more sustainable planet. But, what is a predictor of environmental concern? Education. And education is still the greatest predictor of income. So, the people most likely to seek out a green car were more likely to be more educated and have a higher income.
2. The additional cost of an electric car over a gas-powered would not seem like that much if it was put in a more expensive car. Daniel Kahnemann and Amos Tversky won a Nobel Prize for discovering the principle of "diminishing sensitivity". What that principle states is that people judge price changes relative to the original price. So, if you are paying $1 for a beverage, and the price goes up fifty cents, that will seem like an outrage. But if you are paying $10 for a beverage and the price goes up fifty cents, you might not even notice. SO, instead of trying to take a $20,000 gas-powered Honda Civic and make it into a $27,000 electric Civic, those buyers are going to be really struck by the price increase. But, if you take a $70,000 gas-powered car and make it a $77,000 car, they aren't going to think twice about it.
It's the reason why, as smartphones have become more expensive people have started blowing out their options for those phones--more memory, bigger screens, etc. These options seem less expensive relative to the overall higher sticker price of a phone.
So, to recap: there was a desire among high-income people for a green car. At a high price point, these consumers might not even notice the price difference between a a gas vehicle and its electric alternative. That is what Michael Porter would call "fit" between a company, it's resources and the market.