Teslas are cheaper than ever — and that's creating a headache for the entire auto industry

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Tesla Model Y now costs less than the average vehicle. The new lower-cost strategy is eating into
Tesla’s profits, but it seems to be working
Patrick Pleul/Getty Images

You can now get a Tesla Model Y for cheaper than the average car.
Tesla is making big moves into the mass market this year.
Price reductions hurt Tesla’s profit margins slightly in the first quarter, but they’re boosting sales volume.

Tesla’s price war is spilling over out of the electric vehicle market as Elon Musk’s car company continues to slash prices.

Musk has dropped the prices on Tesla models six times since the start of the year, kicking off a price war with mainstream car brands like Ford and GM. 

So far, Tesla’s pricing strategy has been seen through the lens of the EV market and Musk’s efforts to protect Tesla’s spot as the number one seller of electric vehicles in the US, but now Tesla’s vehicles are priced more comparably with the entire vehicle market.

For example, after Tesla’s latest price reductions last week in the U.S., the Model Y now starts at $46,990. Add on the $7,500 EV tax credit, and you can now purchase a Model Y for around $42,500. That’s about $5,200 cheaper than the average price paid for any vehicle in the US in March, according to car-shopping website Edmunds.

To make things even worse for competitors, all Model 3 and Model Y vehicles now qualify for the full tax credit, too. 

“For so long people have seen price and infrastructure as the limiting factors for buying an EV, and Tesla has just blown that out of the water,” Martin French, managing director at consultancy Berylls, said in an interview. “They’ve just said, ‘we can offer you a vehicle at about $40,000, and by the way, you can use our Supercharger network.'”

In addition to price reductions, Tesla has been dangling special offers like free charging for new customers.

It’s the latest move for Tesla into the mass market this year. Musk has said the company is aiming to build 2 million vehicles this year, doubling 2022 production.

Tesla’s sales were up in Q1 — but margins were smaller

Tesla went into 2023 with bloated inventory – the opposite problem most of its competitors were facing. Musk spun this problem into an advantage by lowering the prices at the same time others were still charging well above sticker price on dealer lots.

As a strategy for boosting demand, Tesla’s price cuts appeared to be working in the first quarter, reporting a 36% increase in deliveries during that period. 

The move had some analysts and investors worried that Tesla could cede its industry-leading profit margins for bigger sales volumes. And their fears proved to be true: Tesla reported lower margins for the first quarter. 

“We’ve taken the view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin,” Musk told analysts as they grilled him and other executives about the softness. 

For now, he seems to have calmed their nerves. Tesla shares are up more than 131% since January 1, easily outpacing the benchmark S&P 500 index.