Price increases are famously difficult to do well, because customers understandably dislike them. However, if executed well, customers will not only tolerate price increases but actively embrace them and even thank you for them.

Needless to say, that's not how the recent increase for the Tesla Model 3 is playing out. 

Ironically, the problem started when Musk apparently tried to avoid a price increase after he discovered Tesla could not sell the Model 3 at the much-touted $35,000 price point and still make a profit. Rather than increase the price, Musk announced a new channel strategy (online purchases only) to reduce Tesla's cost-of-sales. 

Unfortunately, Musk didn't realize Tesla had retail leases that couldn't be easily jettisoned. As a result, Musk has been forced to backtrack (keeping some of the retail stores) and announce a price increase anyway.

The mainstream business press has predictably jumped all over his case, creating bad publicity for Tesla (and Musk) at a time when both can least afford it. The off-again-on-again store closings in particular make Musk look as if he's a half-cocked loose cannon who's shooting from the hip. As it were.

Anyway, based upon pricing best practices (as defined by yours truly), here's how Musk should have handled the situation:

First, Musk should have said something like this:

"Due to economic conditions outside of our control that have increased manufacturing costs, we won't be able to hit the $35,000 price point. That's the bad news. The good news is that we're only raising the price by 3 percent, which comes out to the same amount of money you'd spend on an extra cup of coffee each day for a year. I'm really sorry we couldn't hit that mark, but we came damn close--for an automobile that's at least a generation ahead of everything else."

Since they've really promoted that $35,000 price point, Musk and Tesla would have taken some heat, but the story could have been easily spun as "Trump makes innovation more difficult!" I'm not saying that story makes economic sense, only that the mainstream business press would just as soon write about Trump screwing up as write about Musk screwing up. Probably more so, with the possible exception of the WSJ.

In any case, most prospective Tesla buyers would probably shrug and eat the extra $1050, which seriously isn't all that much money when you're already spending $35,000.

Second, Musk should've said (at a different time and venue) something like this:

"Hey, I have very cool news. The buzz about the Model 3 is so good that customers are simply ordering them online... without a test drive. This is the first time that's ever been true of ANY automobile and it's an incredible honor for Tesla and the Tesla team.

Because of this, we've decided to gradually phase out our retail showrooms. There will still be a few scattered around the country for people who REALLY want to test drive, but it just doesn't make sense to keep the showrooms open when our customers are ordering a Model 3 just like they'd order a Dell computer.

Oh, and by the way, as you drive around town and see all those huge car lots, ask yourself this: 'Why do they need all those pushy salespeople?' After all, if their cars were as good as the Model 3--yeah, right--wouldn't they be selling them exclusively online, too?"

I haven't successfully caught Musk's "voice" in those examples, but you get the idea. Take the hit on the price increase but cushion it with a distraction. Then position the change in channel strategy as a proof point of your product's superiority.

Easy peasy.

That said, it's not fair to expect Musk to be an expert in pricing and channel strategy. But I do think he'd be well-advised to listen more to his marketing professionals, because I'll bet there were some inside the company that saw this train wreck coming but were helpless to stop it.

Published on: Mar 11, 2019
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