New details emerge about Tesla Inc (NASDAQ:TSLA) Model 3 sedan, the new mass-market electric vehicle expected to be available by the end of this year. Hype for the car is like free advertising for Tesla, and reservations are already estimated to be around 400,000 without Tesla spending a dime on marketing.
In fact, instead of touting their new vehicle, Tesla is actually “anti-selling” the Model 3 to protect the market for their other offerings. While the popularity of the Model 3 will help Tesla meet its lofty sales projections, the new car could have a negative impact on the rest of Tesla’s lineup, particularly the Model S which may face challenges due to confusing nomenclature and lack of differentiation.
The Model 3 vs. the Model S
The issue of nomenclature was brought up in the first quarter earnings call where Elon Musk addressed consumer confusion about the difference between the Model 3 and Model S. Many buyers assume the Model 3 is an upgrade to Tesla’s higher-end Model S line when it is actually intended to be a mass-market, lower-end option.
There is real concern that the Model 3 will hurt Model S sales because not only does the nomenclature and hype make the Model 3 look like an upgrade over the older S line, but the departure from “letter” names to “number” names makes it harder for consumers to know where the cars stand in relation to each other. In comparison, BMW sedans, for example, are clearly differentiated with higher numbers (3-series, 5-series, and 7-series) to mark higher end cars while Tesla’s naming system now appears random.
If Tesla’s Model 3 cannibalizes the market for the Model S, and this is bad news for the stock. The Model 3’s reservation list is already so high that consumers will have to wait over a year to receive their cars, and it would be easier for Tesla if some of these buyers simply went with the Model S. To help clear up the confusion, Tesla has provided a comparison between the two vehicles on its website to help differentiate them for potential buyers.
At almost $70,000, the Tesla Model S is over double the expected $35,000 base price of the Model 3. But does the Model S actually offer double the value? That is a decision for consumers. But while Tesla cars have unparalleled brand cachet, safety, and social value – they are not known for providing the raw luxury and interior finish of other vehicles in their price ranges.
The problem for Tesla is that the Model 3 offers practically everything the base Model S offers for a cheaper price. And it looks like a significantly better value. Both cars will go from 0-60 in around 5.5 seconds, both have a battery range of above 200 miles and full self-driving capabilities. The Model S has the advantage of more seating and space, but buyers who prioritize space would probably be more drawn to the Model X SUV.
So, what is the biggest differentiator between the Model S and the Model 3? Charging. Tesla has chosen not to offer free unlimited supercharging for buyers of the Model 3, and this seems to be the biggest difference between the two lines mentioned in the website’s comparison page. But is this really a big deal? Tesla’s charging isn’t particularly expensive, and by offering this option only to Model S/X owners, the company may be wasting a major selling point for, presumably, more cost-conscious Model 3 buyers.
Tesla’s new Model 3 sedan is surging in popularity, but the hype for the new mass-market vehicle may put the value proposition of the more expensive Model S in doubt. Many consumers have incorrectly assumed that the newer car is an upgrade over the older line, and Tesla will have to work hard to change this perception.
But to be honest, consumers who think the Model 3 is an upgrade over the Model S may be right – at least when it comes to bang for the buck. The Model S simply may not provide the same value for money as the Model 3. And to change this, Tesla may have to dramatically improve the luxury finish of its higher end car to bring it in line with other vehicles in its price range.