Less is more. That's the strategy that Tesla Inc. (TSLA) is taking with the Model 3's pricing following a surprise price cut to some trim levels this week.

Electrek reports that Tesla changed up its Model 3 options and pricing Tuesday, among other things cutting the base cost of a Performance model from $84,800 to $64,000. Previously, Tesla caused a big brouhaha when CEO Elon Musk revealed ballpark pricing for the Performance Model 3 on Twitter.

Even at a price tag of more than twice the Model 3's base, the big-dollar Model 3 is actually a pretty attractive deal compared against similar offerings from BMW, for instance. And the new price drop makes it even more appealing.

By charging less for the upgrade, Tesla could materially boost its margins on the Model 3.

It may sounds like a contradiction, but it's not.

The pricing change means that the step up to the dual-motor, all-wheel drive Performance Model 3 from the lowest available trim level now costs almost $6,000 less than it did before. That step up also comes from a lower starting price, making the final cost of driving home a minimally equipped Performance Model 3 a whopping $20,800 less than it was at the start of the week.

Thing is, Tesla didn't achieve that price reduction by squeezing margins. They primarily did it by making more features optional rather than included.

Realistically, the $84,800 high-performance version of the Model 3 was a car that many coveted but a relatively small proportion of Tesla's customer base would actually pull the trigger on it. But selling that performance for $64,000 is a different story.

Tesla's Performance model is a 6-9 month wait for reservation holders who put up a $1,000 deposit today, according to the company's website.
Tesla's Performance model is a 6-9 month wait for reservation holders who put up a $1,000 deposit today, according to the company's website.

Anecdotally, many reservation-holders have been talking on social media in the last 24 hours about their decisions to upgrade to a Performance model following the price change.

That Performance upgrade is almost all margin for Tesla - if the changes are anything like the Model S and Model X, they'll primarily be in the form of a slightly different drive unit with a larger inverter that can deliver power to the motors more quickly.

But a lower entry price with fewer other frills is likely to result in a meaningfully higher take rate for the upgrade that translates into much higher margins on the Model 3.

Customers still have the ability to price their Performance Model 3 even higher, with options like enhanced auto pilot, full self driving and premium paint.

But, in the meantime, Tesla's new pricing strategy for the Model 3 looks as if it will almost certainly have a positive effect on automotive gross margins. The timing is key, too. With Tesla guiding for profitability in the second half of the year, and rapidly scaling up its Model 3 production as the second quarter ends this week, bigger margins are a very big deal for Tesla investors right now.

Meanwhile, shares of Tesla remain in a distinct uptrend on all major timeframes heading into this summer.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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