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Tesla's $78,000 Model 3 Is a Bargain. Here's Why

The Twitterverse is going nuts after Tesla Inc. (TSLA - Get Report) CEO Elon Musk tweeted over the weekend that the performance version of the Model 3 will end up costing around $78,000 - not including Autopilot.

What happened to the $35,000 Model 3?


The people who seem to think that the existence of a $78,000 Model 3 has any bearing on Tesla actually producing a $35,000 version of the car seem to not understand how car models work. Tesla isn't pulling a bait-and-switch here. Heck, it's not even doing anything that pretty much every other car brand on the planet hasn't been doing for decades.

Here's what Musk had to say:

Cost of all options, wheels, paint, etc is included (apart from Autopilot). Cost is $78k. About same as BMW M3, but 15% quicker & with better handling. Will beat anything in its class on the track.

— Elon Musk (@elonmusk)

In his tweets, Musk specifically takes aim at the BMW M3, the performance model of BMW's 3-series, a car that starts right around $35,000. The 3-series has always been Tesla's gas-powered yardstick when developing the Model 3.

That's even how the then-unnamed Model 3 was described to investors at the Tesla factory back in 2012 when the very first Model S sedans were rolling off the assembly line.

The performance version of the BMW 3-series is the M3. The cheapest version of the M3 sitting at my local dealer right now is a base sedan that costs $75,189. In other words, it's more than twice the price of the lowest-cost 3-series, and around the same price tag as the comparable performance version of the Model 3.

Just about every carmaker offers high-performance variants of their lower-priced models that retail for multiples of what the base model costs. That's not a new business model.

Heck, even Kia's new top of the line Stinger GT2 sedan bases for around $50,000. And some dealers have reportedly even been selling it at a markup to MSRP.

Musk actually points out that the performance version of the Model 3 will be significantly quicker than the BMW M3 - maybe, in the scheme of things, that makes the $78,000 Model 3 a bargain?

One of the biggest criticisms of Tesla's Model 3 program has been that it's currently impossible to buy a $35,000 Model 3 today. And that's true. Like with the Model S and Model X launches, Tesla has started production by launching higher-optioned cars in order to make up for the lower margins that the firm experiences as it scales up production.

If you tried to price a Model 3 today, you'd have to buy a long-range version that starts around $44,000, plus get a $5,000 premium upgrades option.

Thing is, that's actually not far from where the average 3-series ends up after options, particularly when you factor in the value of tax credits on electric vehicles. According to car buying website TrueCar, the market average for a new BMW 3-series is $42,851.

In other words, current selling prices for the Model 3 aren't out of line with the most successful model in its class.

Tesla is guiding for the $35,000 Model 3 to be available in late 2018, once the company is consistently producing 5,000 vehicles a week at its Fremont factory. As many analysts have pointed out, that timeline for the cheaper base model car likely coincides with the start of the phase-out of the $7,500 Federal tax credit once Tesla reaches 200,000 vehicles delivered in the U.S.

But, as recent polls and comparable vehicle sales show, Tesla isn't likely to be demand-constrained on the Model 3 any time soon, even with an average net selling price above $40,000.

Ultimately, the $35,000 Model 3 may indeed be a rare sight on the streets. Just about as rare as the $35,000 BMW 3-series, in fact.

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