Tesla, Inc. Slashes the Price of Model S

By Daniel Sparks Markets Fool.com

Just asTesla (NASDAQ: TSLA) is discontinuing the 60-kilowatt-hour variant of its Model S, which was its cheapest and lowest-range version of the all-electric vehicle, the automaker is significantly lowering the price of the Model S version with a 75 kWh battery. Here's a closer look at the aggressive pricing move, and what it might mean for Tesla's business.

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An aggressively priced entry-level Model S

When Tesla announced last month it would be discontinuing its 60 kWh Model S in April, it looked like there would be a large gap between the $68,000 starting price of the 60 kWh variant and the $77,000 starting price of the 75 kWh variant -- Tesla's next-cheapest Model S version. But with the 60 kWh variant now officially discontinued, Tesla has dropped the price of the 75 kWh Model S by $7,500, giving it a starting price of $69,500.

Model S. Image source: author.

While $69,500 is still $1,500 more than the price of Tesla's previous entry-level Model S, there is relative value to be found when the vehicle's features are taken into consideration. The Model S with the 75 kWh battery, for instance, has significantly more range than the 60 kWh one did. The 60 kWh base Model S had about 210 miles of range, while the 75 kWh version can drive up to 249 miles. In addition, Tesla now includes its all-glass roof as a standard option. Previously, the glass-roof option would cost customers an additional $1,500.

Along with the price decrease for its 75 kWh Model S version, Tesla has decreased the price for its dual-motor 75 kWh and dual-motor 90 kWh versions. But Tesla says it will be increasing the prices for its flagship 100 kWh models later this month.

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Why these pricing moves make sense

The net impact of these pricing changes will likely be positive for Tesla. The changes could potentially increase demand for Model S while also helping the electric-car maker maintain its profit margin -- two key areas for the company right now.

Tesla could use a boost to Model S demand for several reasons. First, Tesla's lower-cost Model 3's July launch is approaching fast; its availability could cannibalize some Model S sales. Second, while Tesla's overall vehicle sales have continued to climb, rising sales recently have primarily been driven by Tesla's newer Model X SUV; a lower price for Model S, therefore, could help Tesla either prevent a decline in Model S demand or possibly even catalyze higher demand for the sedan.

Data source: Tesla quarterly SEC filings and delivery press releases. Chart by author.

While a lower starting price for Model S would drag Tesla's automotive profit margin lower, management seems to believe the upcoming price increase for flagship versions of the vehicle will offset the negative impacts of a lower-priced entry-level Model S, possibly helping Tesla maintain its heady profit margin.

"We expect our total average selling price to remain almost exactly the same," Tesla said in a statement to press on Monday.

Tesla's automotive gross profit margin is particularly important as the company brings its Model 3 to market later this year. With the Model 3's more aggressive $35,000 starting price, Tesla will need robust gross profit margins from its higher-priced vehicles to help it manage the initial steep costs of Model 3 as the company ramps up the newer vehicle's production rate.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.