To allow it to make the price cut without compromising on profits, the US electric carmaker is to close almost all of its showrooms over the next few months and switch to an online-only sales model.
Shutting physical stores, except for a handful of ‘galleries’, will allow the firm to cut its costs by around 6%, savings it will pass on to customers through lower prices across its range of vehicles.
“This is the only way to achieve the savings for this car and be financially sustainable,” said chief executive Musk.
“It is excruciatingly difficult to make this car for US$35,000 and be financially sustainable.”
In January, the price of a Model 3 was cut to US$42,900.
Wedbush Securities analyst Daniel Ives said the price cut was a “potential game changer” for Tesla’s growth.
“While there are still questions that need to be answered around logistics and delivery... we believe this strategic shift was the right move at the right time for Tesla,” he said in a note to clients.
But investors in New York haven’t reacted too well to the news, with shares down 3.9% to US$307.45 in pre-market trading.
Over the past year, Tesla has shrunk the Model 3 battery, tweaked the manufacturing process and axed thousands of jobs in a bid to deliver the promised US$35,000 price tag.
Tesla needs Model 3 to be a success
More than 400,000 customers put a deposit down on the car when it was first announced, but production issues, higher prices and other delays have caused troubles following its launch.
Despite the teething troubles, Musk reckons there is still enough pent-up demand to sell around 500,000 Model 3s annually at the US$35,000 starting price. Last year it sold fewer than 140,000.
Tesla is trying to balance its books after years of – often hefty – losses. It scraped a profit in the final two quarters of 2018 but is expected to fall back into the red in the opening three months of 2019.
Model 3, which opens up a much bigger market for Tesla than its other, more expensive cars, is vital to that effort.