Tesla Launches Cheaper Version of Model 3: What You Need to Know

Tesla (NASDAQ: TSLA) took investors by surprise Thursday afternoon when it announced a new, cheaper version of Model 3. The lower price was achieved by launching a Model 3 variant with a smaller battery.

The automaker ultimately expects the Model 3's more affordable starting price compared to its Model S and X will help the electric-car company sell hundreds of thousands of units every year -- crushing the approximately 100,000 Model S and X units combined Tesla is delivering on an annualized basis. But the Model 3's starting price is going to need to come down for the automaker to keep increasing the vehicle's quarterly deliveries as it moves toward its goal of selling 500,000 Model 3s per year. Thursday's move to launch a version of a Model 3 with a slightly lower price is progress in this direction.

Here are the key things investors should know about this new Model 3 variant, as well as a look at some other changes to Tesla's Model 3 lineup.

The specs

Tesla's new version of Model 3 starts at $45,000 -- $4,000 below the previous starting price for Model 3. Tesla achieves this lower price by selling the vehicle with a slightly smaller battery that gets 260 miles of driving range on a full charge instead of the 310 miles of range the long-range version boasted.

Tesla is calling the new variant a mid-range Model 3 -- a nod to the fact that the automaker is still planning to bring to market a $35,000 version of the Model 3 with 220 miles of range.

Other changes to Tesla's product lineup

Along with the announcement of its mid-range Model 3, Tesla also rolled out a few changes to its current product lineup. First and foremost, Tesla dropped the rear-wheel-drive version of its long-range Model 3 and now only sells the dual-motor and performance variants of the long-range vehicle. This means the long-range version of the vehicle now has a starting price of $54,000.

In addition, Tesla also removed the ability to pre-purchase the promised and yet-to-be-released full self-driving software update. Now customers can only purchase the company's driver-assist system, Enhanced Autopilot. Giving customers the option to pre-purchase Tesla's unreleased full self-driving feature was "causing too much confusion," Tesla CEO Elon Musk said on Twitter Thursday.

This isn't the promised $35,000 Model 3

While the electric-car maker was always expected to announce a less expensive variant of the Model 3, there's been no discussion of a mid-range version that would come in between Tesla's long-range and promised standard-battery versions. Until this week, Tesla had indicated a version with a smaller battery wouldn't go into high-volume production until the first quarter of 2019. Of course, the version that Tesla is promising will go into high-volume production next year is an even cheaper $35,000 variant with only 220 miles of range. This new mid-range version of the Model 3 gives Tesla a way to lower the vehicle's price slightly while expanding its addressable market to a wider audience.

It makes sense that Tesla is rolling out a cheaper version of the Model 3. With Model 3 production nearly doubling in Q2 compared to Q1 and a further increase in production volume expected during the remainder of the year, Tesla's going to need cheaper versions of the vehicle in order for demand to keep up with supply. A mid-range version of Model 3 for only $4,000 less can appeal to a wider audience while Tesla prepares to bring to market the cheapest version of the vehicle.

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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.