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Tesla's Base Version of Model X Gets the Axe -- Is This Why?

By Markets

Model X. Image source: The Motley Fool.

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Last week, electric-car maker Tesla Motors (NASDAQ: TSLA) suddenly removed the cheapest version of its Model X SUV. With this version of the late 2015-launched vehicle announced just three months ago, its disappearance from Tesla's website was surprising. But a close look at Tesla's change-up in its base offering for the falcon-winged SUV provides two likely reasons for the version's disappearance from the automaker's website.

Aiding margin

The July-introduced base version of its new Model X marked an aggressive move for Tesla. Priced at $74,000, the version sported a 75 kilowatt hour (kWh) battery but was software limited to a 60 kWh capacity. Access to the full battery pack's capacity was available anytime after delivery for a $9,000 fee.

Priced $6,000 less than Tesla's previous base Model X base version, which included a 70 kWh battery but wasn't software limited to a lower capacity, the new 60 kWh Model X gave customers a way to buy the vehicle for a more affordable price. Further, the new $74,000 price point brought Model X closer to the $66,000 starting price of the company's Model S sedan.

When Tesla scrapped this vehicle last week, it suggested the new version of the vehicle may have been priced two aggressively. The new base model offers the same 75 kWh battery but does not give customers an option to buy a less expensive, software limited version. Further, the new version includes Tesla's Smart Air Suspension as standard. After these changes, Model X now starts at $85,000 -- a meaningful $11,000 jump from the previous base model.

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After selling its $74,000 base version for three months, Tesla may have decided the vehicle's profit margin was too low. While a $74,000 price point still might seem high enough for Tesla to garner a meaningful profit margin, Model X is notably packed with complex technology and is still early in its product lifecycle. Tesla specifically noted in its first-quarter shareholder letter earlier this year that its Model X "carries a lower margin during its ongoing production ramp phase." As the vehicle's suppressed margins improve along with increasing production, Tesla may be finding it more difficult than expected for certain costs related to Model X to decrease to target levels.

Emphasizing range

Another likely reason for the elimination of Tesla's 60 kWh version of its Model X likely has something to do with range. Sporting just 200 miles of range, the entry-level Model X was Tesla's lowest range option for both Model X and Model S. The company may have simply found customers weren't satisfied with only 200 miles of range on a single charge when buying Model X.

Model X. Image source: The Motley Fool.

Indeed, a Tesla spokesperson told Car and Driver the change to its base model was part of an effort to better serve "the needs and desires of customers looking for a longer-range all-electric SUV." So, there's a good chance the 60 kWh Model X's 200-mile range just didn't resonate with Tesla customers.

Currently, Tesla's base Model S has 218 miles of EPA-rated range when software limits it to a 60 kWh capacity, but it boasts a meaningful 259 miles of range when upgraded to its full 75 kWh pack. The new base Model X, with its 75 kWh pack, sports 237 miles of range -- a significant jump from the 200 miles of range its software-capped 60 kWh predecessor could achieve.

Going further, even Tesla's upcoming Model 3 would have undermined the previous base version of Model X. Tesla says Model 3 will boast at least 215 miles of range and start at just $35,000.

By eliminating the 60 kWh base version of Model X, Tesla gives investors insights into two key efforts at Tesla to maintain strong profit margins and emphasize meaningful driving range across the vehicle line-up. Further, the move suggests Model X pricing likely won't rival Model S anytime soon.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.