Toto Wolff conceded Mercedes had a "bruising day" at the Austrian GP after seeing their recent progress checked at the Red Bull Ring.
After securing podium finishes in Barcelona and Canada, the Silver Arrows lacked performance on Sunday in Austria as Lewis Hamilton came home seventh, after starting fifth, and George Russell finished eighth as Max Verstappen won again for Red Bull.
Hamilton and Russell would then swap places in the final classification after the seven-time world champion received a 10-second time penalty post-race for track limit infringements.
Sunday's performance came on the back of Russell and Hamilton finishing eighth and 10th in Saturday's Sprint.
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Wolff told Sky Sports F1: "The car had no pace today.
"It's a bruising day I would say because we had such a good upward trend and you have to take such a day.
"There was no pace and no inkling why yet."
Russell: Mercedes 'substantially worse' than expected
The result was even more painful for Mercedes in that they finished behind customer teams McLaren and Aston Martin with Lando Norris fourth and Fernando Alonso fifth after Carlos Sainz was demoted on Sunday.
Both Hamilton and Russell expressed their surprise at how poor the W14 performed around the Red Bull Ring in the wake of their previous two races.
"Didn't expect to be as bad as we were today. I don't really have an answer for it really. It was definitely surprising," Hamilton said.
"The feeling of the car was very much the same feeling I've had all last year.
"It was definitely different than the last two races, the last two races were way, way better. In terms of the characteristics of the car, it was fundamentally the same (as last year)."
Russell told Sky Sports F1: "I'm sure we will get to the bottom of it, but we still have the same car from two races ago in Barcelona when we were flying so the only thing that is different is the tyres, something we need to understand.
"A few surprises out there, Lando and McLaren did a really great job so well done to them. We need to understand what went wrong on our side.
"It definitely doesn't feel how we want it to, the car is moving around a lot, a little bit worse than all of the other circuits but the pace was substantially worse than we were expecting. We need to get to the bottom of it."
Mercedes will be bringing a large upgrade at the British GP next weekend and Russell hopes Silverstone will prove a happier hunting ground for the W14.
"(The upgrades) are another step in the right direction it's just another step.
"It's clearly circuit dependent because we were nowhere here and with the same car we were good in Canada and fast in Barcelona.
"That bodes well for Silverstone because Silverstone is more in line with Barcelona than it is this circuit."
Wolff explains Hamilton in-race radio call
Hamilton was among several drivers to also receive a time penalty for track limit infringements during Sunday's grand prix.
The seven-time world champion was regularly on the team radio asking about whether other drivers were receiving penalties also.
At one point, Hamilton's comments prompted Wolff to respond: "Lewis the car is bad, we know, please drive it."
Explaining his reasoning for the response, Wolff said: "We had a lot of discussions about track limits and whether they were enforced or not.
"I wanted to just make sure that we were doing the best out of the package that didn't perform and just drive and give it the best shot that we had.
"For the best of the drivers and the best interests of the team, there is a certain moment when you have to calm things down. I mean well."
Next on the F1 calendar is the big one, Silverstone. Don't miss the British GP live on Sky Sports from July 7-9