Skip to Content

Why Most People Probably Won’t Buy Tesla’s Model 3

With much fanfare and talk of going mainstream, Tesla recently unveiled its latest baby, the Model 3, with a base range of 220 miles and an accessible starting price of $35,000. The Model 3 sedan’s price is right in line with today’s average transaction price of $34,721 for a new car, according to my employer, Kelley Blue Book. But calling the Model 3 mainstream is a bit of a misnomer, given that the vehicle is, regardless of price, electric. In fact, the only thing mainstream about the Model 3 is the price.

As part of my work on the 2014 report, “Overcoming Barriers to Deployment of Plug-In Electric Vehicles,” for the National Research Council at the National Academies, we applied the innovation curve, as first created by Bryce Ryan and Neal Gross in 1943, to electric vehicle adoption. According to Ryan and Gross, innovators (2.5% of the population) are willing to take risks even if they fail, since they have the resources to withstand an imperfect technology; think Tesla Roadster buyers circa 2008 and first-in-line Model S owners, as well as Model X buyers, due to the falcon-wing doors.

Next on the curve are early adopters (13.5%), who are a bit choosier about the technology they adopt, and are seen as the go-to resource for intel on new tech, providing reassurances about its viability. They are more price sensitive, but still risk tolerant. In today’s world, early adopters are also known as influencers; I would argue these are current Model S owners and Model 3 deposit holders and soon-to-be buyers.

The next set is the early majority (34%). Early majority mindsets need convincing—they’re willing to embrace technology, as long as they understand how it fits into their lives. These are the people Elon Musk and Tesla needs most.

Given that only about 1% of all new car buyers purchase an electric vehicle every year in the U.S., the technology itself is still very much in the innovator class. Even hybrids, in the market for nearly 20 years now, accounted for just 2.2% of new car sales in 2016, down from a high of 3.3% in 2013, according to MotorIntelligence. In fact, IHS Markit reports that hybrid and electric vehicles combined for just 3% of new car sales globally, so it’s taken 20 years for hybrids to move beyond the “innovator” 2.5%. Over 16 million unique shoppers come to Kelley Blue Book every month to research cars. Only about 3% research luxury electric cars and only about 2% research hybrid vehicles.

Tesla faces other challenges to reaching the early majority in addition to the general disinterest in purchasing electric vehicles. One of those is the Model 3’s size and body style, which falls into the compact luxury sedan category, similar to the BMW 3-Series or Audi A4. The Model 3 is a four-door sedan, not even a hatch, in a world where SUV sales are booming as consumers demand more utility from their rides. While the Model 3 does have a front and rear trunk, it doesn’t have anywhere near the cargo capacity of a compact SUV so popular in today’s market.

Another barrier is the $7,500 federal tax credit currently available for buyers of the first 200,000 units a manufacturer sells in the U.S., which started in 2009. Sales of the Model S and Model X, with a few Roadsters thrown in, mopped up more than half of Tesla’s 200,000 unit allotment. By some estimates, Tesla shoppers will no longer be eligible for the tax credit starting in mid to late 2018, just when it needs some financial risk mitigation to move through the innovation curve. While some states are offering incentives, a new trend is for those states to not only apply a salary cap to eligibility for a tax credit, but impose fees on electric vehicle owners to make up for not paying taxes on fuel. This could further stifle adoption, even in the face of decreasing battery costs and increasing availability of charging stations.

The rest of the automotive world is not standing still either. In response to increasingly discordant regulations calling for the complete ban of internal combustion engine vehicles by India, U.K., France, and China by a seemingly arbitrary 2030 or 2040 deadline, nearly every luxury and non-luxury brand will have an electric vehicle in its stable by 2020, whether consumers want them or not. Most if not all will have a 300-plus mile range, along with a well-established dealer body for sales and services. GM and Nissan will probably lose their tax credit sometime around 2018, but many other companies will be able to sweeten the pot with state and federal credits, providing additional competition to Tesla just as the current backlog is fulfilled.

There’s a lot of well-justified angst over the highly aggressive production curve Musk outlined for Tesla for the Model 3, and ramping up a vehicle plant is no small feat. There’s also a lot of skepticism about its charging network, dealer franchise laws, and servicing the vehicles. But many—if not all—of these issues fall within the circle of Musk’s control. What falls outside that realm is the consumer’s willingness to accept the notion that an electric vehicle—and a Tesla in particular—fits into their lives better than an internal combustion engine does. That’s the real challenge to Tesla going mainstream.

Rebecca Lindland is an executive analyst at Kelley Blue Book. She has placed an order for a Tesla Model 3, which is due for delivery in 2018.