Lowering prices can have several potential drawbacks for a company like Tesla. Firstly, it can lead to a decrease in profit margins if the cost of production remains the same. Secondly, it can create a perception of lower quality among consumers, as people often associate price with quality. Thirdly, it can lead to a price war with competitors, which can further erode profit margins. Lastly, if the price is reduced too much, it may not cover the cost of production, leading to losses.
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When Tesla decided to lower the price of all its North American electric vehicles in May 2020, the market initially saw this as bad news. Traditionally, automakers use discounts as incentives to increase sales during periods of low demand. However, because Tesla is a tech and automotive company, Tesla wanted to reduce costs to increase its product availability. Because price sensitivity is a huge factor to EV adoption, lower prices dramatically increased the amount of cars Tesla sold in the US in the following months.