Leasing vehicle batteries as two-part pricing with customer lock-in

The Dangerous Economist (Cyril Morong) had a post earlier this month about pricing strategy, linking to this Wall Street Journal article (paywalled), which says:

The EV company, established in 2017 in Vietnam, plans to sell two all-electric sport-utility vehicles in the U.S. to start: a midsize SUV, called the VF 8, that starts at $40,700, and a larger VF 9, starting at $55,500. U.S. buyers can place orders now with deliveries expected to start at the end of 2022.

Unlike other EV rivals in the U.S., VinFast has a unique business model in which buyers pay one price for the vehicle, but then lease the battery for a monthly fee. The company offers two battery-subscription plans, costing anywhere from $35 to $160 a month, depending on how much the owner wants to drive, the model purchased and the type of battery.

The fee includes maintenance of the battery and replacement when charging capacity drops below 70% of its original capacity.

In his post, Cyril notes that:

This sounds like insurance companies charging you a lower premium if you accept a high deductible (that is the amount of, say, medical costs you have to pay before the insurance pays anything).

What the VinFast example brought to mind for me was two-part pricing, as I discussed in this post on Thursday. A firm uses two-part pricing when it splits the price into two parts: (1) an up-front fee for the right to purchase; and (2) a price per unit.

The two-part pricing strategy adopted by VinFast is unusual compared to the theoretical two-part pricing strategy (as shown here and here) for two reasons. First, with two-part pricing the up-front fee usually only gives the consumer the opportunity to purchase the product and nothing else. However, in VinFast's case the first part of the two-part price gives them the vehicle, but not the battery (the second part of the price is the per-month subscription fee for the battery).

Second, it usually makes sense for the seller to increase the first part of the two-part price, and lower the second part. This has the effect of creating value (through a lower price per-unit) for the consumer, and then capturing that value back as higher profits (through charging the consumer for the opportunity to purchase in the first place).

However, there is another element of this pricing strategy that explains how its unusual features make sense. Without a battery, the cars might be useful as a storage shed (I guess?), but in order to be used as a vehicle they need a battery. So, VinFast's customers are essentially locked into subscribing to VinFast to make their vehicle operable. If VinFast is smart, they will be using custom batteries that are not compatible with those provided by any other supplier, so that they can be assured that their customers are locked in.

As I discussed with my ECONS101 class this week, locking in customers can be very profitable for firms. VinFast sells the vehicle at a cheaper price (by US$15,000 to US$20,000, according to the Wall Street Journal article), and this lures the customers in and locks them into paying a high monthly subscription fee for the battery. And VinFast laughs all the way to the bank.