Tesla's price cuts lead to billions in lost sales, prompting investors to urge Elon Musk to increase advertising spending.

• Despite rarely investing in advertising, the EV maker's slowing unit growth and price cuts are causing concern among some investors.
• This year, billions of dollars may be shaved off Tesla's revenue due to the price cuts.
• Annually, more than $20 billion is spent by auto makers, including GM and Ford, on major media campaigns.

Gary Black, a Chicago fund manager, has consistently ranked Tesla as one of his top holdings since launching his fund in 2021. He frequently discusses Tesla on social media and CNBC, often expressing support. However, Black has recently been concerned that Tesla is cutting prices to maintain high growth rates, which he believes is a waste of money.

Elon Musk should abandon his opposition to spending on major media campaigns, as Tesla's growth in unit sales of its cars and SUVs has lagged and the launch of its Cybertruck pickup has been delayed.

Recently, Tesla's campaign has gained support from social media enthusiasts, including @TroyTeslike, who conducted an online poll that revealed 50% of the 8,000-plus respondents believed Tesla should advertise, surpassing other growth strategies such as price cuts and advanced technology for high-end Model S and Model X.

The investor pressure that Musk faced during Tesla's annual shareholder meeting in May was not unexpected.

Kevin Paffrath, who runs The Meet Kevin Pricing Power ETF in southern California, stated that 525 bucks off of every car this year is half of Netflix's ad budget, and 1000 bucks is the entire Netflix ad budget. He also mentioned that he sees their ads everywhere. He specifically referred to safety features including airbag deployment technology as Tesla advantages that might appeal to consumers through advertising.

Musk expressed openness to the idea.

Musk stated that there are many hidden features and capabilities of Teslas that are not widely known, although many people who follow both the Tesla and his accounts are already aware and convinced.

"I agree with your point and I value taking advice, so we'll give advertising a try and see how it turns out," Musk stated.

To which Musk responded, "I wasn't anticipating such fervor from the shareholders."

Tesla has not spent much on online and social advertising since the shareholders expected a major advertising push, and instead relies on price cuts as Musk's primary strategy to increase interest in Teslas.

Tesla's goal is to make electric transportation accessible to the masses, as Musk stated at the annual meeting. In the U.S. market, many Model 3s can be purchased for less than the average cost of a new passenger vehicle, as Musk also mentioned.

Since August 2022, the average price of most Teslas has decreased by approximately 20%, according to Cox Automotive. However, this does not account for the restoration of the $7,500 federal tax credit for Teslas under the 2022 Inflation Reduction Act.

The recent round of price cuts, announced in the past month, is estimated to cost Tesla an annual $2 billion in revenue, according to Black. However, Ives believes that the price cuts over the past year have resulted in a much greater reduction in revenue.

Musk should reconsider Tesla's reliance on price cuts versus advertising to promote features such as the declining cost of EVs and safety features like over-the-air software updates. This is especially important given that Tesla's stock has risen about 140% this year but is still one-third below its 2021 peak and has underperformed the S&P 500 over the past year.

""Instead of a $2,000 price cut, let's do $1,800 and try advertising more," Black said."

CNBC reached out to Tesla multiple times. The company did not respond.

Tesla's share losses among EVs this year suggest that price cuts alone are not enough to offset the company's losses.

Despite Tesla's price cuts, its U.S. market share among EVs has been declining. In the third quarter, Tesla delivered 435,059 units, up from 343,830 units in the same period last year but below the second and first quarters' sales. Tesla attributed the lower-than-expected third-quarter deliveries to planned factory upgrades, as stated in a press release.

Ives stated that Tesla's gross margins decreased from 25% in the second quarter of 2022 to 18% in the second quarter of 2022, which was due to the lower prices. This implies a potential $1.5 billion drop in gross profit unless it is made up by higher sales volume.

What a Tesla ad campaign might look like

According to Allen Weiss, CEO of MarketingProfs, an effective Tesla ad campaign should focus on more than just safety features, as consumers also care about other aspects.

"To effectively market to customers, it is important to identify the benefits they are seeking, which may include performance, luxury, and symbolic values. Once these benefits have been identified, it is crucial to target a specific segment of buyers and create a compelling theme around these benefits. This approach will allow for creative ideas while also resonating with customers on what truly matters to them."

Tesla faces competition from experienced marketers as it grows, with companies like Ford and General Motors already spending heavily to promote their electric vehicles. Additionally, Swedish EV maker Polestar and BMW have also advertised on the Super Bowl, with Polestar spending an estimated $20 million this year. According to Ives, about a quarter of 2022 car ad spending was for EVs, a trend he predicts will continue to grow.

"Tesla is the only carmaker that doesn't prioritize customer benefits, while other carmakers like Ford and BMW focus on design, performance, and luxury."

At the annual meeting, Musk acknowledged that he frequently encounters individuals who argue that EVs are priced too high.

"Teslas are not as expensive as people think, as their average selling price is lower than the average in the U.S., according to Musk."

Ives argued that Tesla doesn't need to spend as much as Ford or GM on advertising, and a focused campaign could highlight specific Tesla or EV advantages.

"Tesla's luxury brand image can be maintained through advertising, even as the average cost of its cars decreases, according to him. This can shift people's perceptions."

Tesla's "name of the game" as it scales up is achieving high volume and operating margins, according to Ives. Black suggests that it's important to determine if advertising more can help, and even Musk may be swayed. The irony of Musk's longstanding aversion to advertising wasn't lost on him during the annual meeting.

"It's ironic that my company, which I founded on the principle of never using advertising, is now heavily reliant on it. Perhaps I should reconsider my stance and embrace advertising as a powerful tool."

A Tesla Model X is displayed in a showroom in this story. A previous version of this story contained a Getty Images photo caption that incorrectly identified the Tesla model.