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.
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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