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Why Most Buyers Will Pay More Than $35,000 for Tesla Motors' Model 3

By John Rosevear - Apr 1, 2016 at 11:00AM

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Elon Musk says that the new Tesla will start at $35,000. But it’s likely that most buyers will pay considerably more, at least before electric-car tax credits -- and Tesla is almost certainly counting on that. Here’s why.

Tesla Motors' long-awaited compact Model 3 sedan will start at $35,000 when it goes on sale, likely late next year. Image source: Tesla Motors

Tesla Motors' (TSLA 6.08%) Model 3 is a big deal for the Silicon Valley automaker -- and arguably, for the entire auto industry. It's the next step in CEO Elon Musk's famous "secret plan" to bring affordable, stylish, fun-to-drive electric cars to the mass market. 

Early indications are that the new Tesla will be a strong seller: The company took an eye-popping 135,000 reservations for the Model 3 on Thursday alone -- most of those before people had even seen the new baby Tesla. Whether you love or hate Tesla Motors, that's very impressive, a testament to the power of the company's brand and Musk's vision.

We learned quite a bit about the upcoming new Tesla at the company's reveal event on Thursday night. But there's a lot that Musk and Tesla haven't yet said about the new small sedan, starting with this: How much will the Model 3 really cost?

How much will the Model 3 really cost?
Bear with me -- this isn't a dumb question.

Yes, Musk said that the Model 3 will start at $35,000 when deliveries begin (hopefully) late next year. But that's a starting price. Here's what we know you'll get for that:

  • A range of at least 215 miles;
  • Top-tier safety ratings;
  • The ability to use Tesla's "Supercharger" network of fast-recharging stations; and
  • A zero-to-60 miles-per-hour time of "under 6 seconds."

That acceleration isn't bad for the price. It's in the ballpark of a BMW 328i and similar gasoline-fueled rivals. Within the world of electrics, the new Tesla should beat General Motors' (GM 1.95%) Chevrolet Bolt in a drag race, with roughly equivalent range. (On the other hand, the Bolt will beat the Model 3 to market by at least a year. Score one for old Detroit.)

The Model 3's glass roof isn't just a cool-looking feature; it also increases rear-seat headroom. Image source: Tesla Motors.

The Model 3's claimed acceleration is solid, and competitive. But it's far from the eyeball-flattening "Ludicrous Mode" acceleration that is available on the big Teslas, and that has been a big selling point for the brand. Of course, it's a safe bet that Tesla will offer something like "Ludicrous Mode" as an option on the Model 3, along with a long list of other compelling performance and luxury options.

That's what raises the question in my headline.

If the Model 3 follows the pattern of the Model S (and of the German luxury brands, for that matter), I suspect that the $35,000 Model 3 will be a relatively bare-bones product. There is sure to be a lot of good stuff on the options list. But if you want the good stuff in your Model 3, whether it's "Ludicrous" acceleration, a version of Tesla's "Autopilot" system, a bigger battery pack that will give the car more range, or just a better stereo, you'll have to pay up. 

How much? Well, let's take a look at what will probably be the Model 3's most significant gas-powered rival.

How Model 3 pricing is likely to play out
Musk has said that he wants us to think about the Model 3 as a competitor to the compact sports sedans from the German luxury brands. So let's consider: BMW says that its 3-Series starts at just $33,150. But according to TrueCar, the average 3-Series buyer pays just over $40,000. That bare-bones $33,150 3-Series isn't the plush car that most people think of when they think of a BMW. 

So it will be with the Tesla, I suspect. But the upper limit might be even higher than it is on the regular 3-Series. For those wanting a "Ludicrous" Model 3, consider this: The high-performance BMW M3 starts at $63,500. (By the way, BMW counts the M3 as a model separate from the regular 3-Series. M3 prices aren't part of that $40,000 average. If they were, the average would be higher.) 

I won't be surprised if the price for the fastest Model 3 is right in that neighborhood. And I won't be surprised if the average Model 3 buyer ends up paying close to $50,000, or even more. 

So what does this mean?
For Tesla, it means the obvious: profits. At $35,000, Tesla probably won't be making much money on the Model 3. (It might even be losing money, at least until battery prices come down). But at an average transaction price of $50,000, it should be a different ballgame. Big automakers make most of their profit on options packages. I expect that to be true for Tesla, too.

One of Tesla's challenges in styling the Model 3 was to balance the need for sleek, low-slung "statement" styling with the need to provide ample rear-seat headroom in a compact package. The compromise chosen by the Model 3's designers appears to be a good one. Image source: Tesla Motors.

But I wonder what it means for the 135,000-plus Tesla fans who have put down $1,000 toward a dream ride they hope to be able to afford. Plenty of those folks can and will pay up for the good stuff, of course. Probably, some will make do with the still-cool bare-bones Model 3. And at least for early Model 3 buyers, federal and (in some places) state tax credits will help offset the purchase price.

Tesla might lose some fans along the way who just can't make the numbers work. But I hope that folks who are thinking about buying a Model 3 take a hard, realistic look at how the pricing is likely to work and proceed with their expectations set accordingly. 

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