Elon Musk has to somehow find ways to make his purchase of Twitter for $44 billion work as a business deal as opposed to an ego trip. He has borrowed $13 billion from banks, and analysts are saying that he and the banks are going to take a financial bath on this deal because Twitter is simply not worth the price he paid unless it can drastically cut costs and greatly increase revenues. This article lists the revenues and expenses from 2012 until 2021, and since Musk has taken it private, this may be the last chance we’ll get to look at the books.
The company, launched in 2006, has shown a loss for every year since 2012 except for 2018 and 2019, with 2021 having a $221 million loss. Its revenue has grown over the years and was $5 billion for 2021, with $4.5 billion coming from advertising and 0.5 billion from other sources such as data licensing. About half of its revenue comes from outside the US.
As for cutting costs, Musk has reportedly cut about half of the 7,500 workforce, reducing costs by about $1 billion. On the revenue side, the turmoil at Twitter has caused some major advertisers, its main source of revenue, to flee. If the cutting of staff results in Twitter becoming even more toxic than it currently is, as seems likely, that may lead to more advertisers leaving. The revenue side is volatile since the $5 billion in 2021 was a high water mark, with previous years never going above $3.7 billion.
In order to find another source of revenue, he has decided to charge users a monthly fee of $7.99 to get the blue ‘verified user’ check mark that guarantees that the user’s Twitter handle is genuine and not a fake. There are 206 million users worldwide, of whom 37 million are in the US. It is not clear how many of them will decide to fork over almost $100 per year in order to get the check mark. For most people, it may simply not be worth it. Currently there are 423,000 people with such verified accounts. If they all opt in, then that would generate about $40 million.
I was amused that he fixed the monthly price at $7.99 and not $8. This idea for this gimmick is the belief that psychologically this makes the product seem cheaper because the number before the decimal is supposed to be the anchoring value that sticks in people’s minds. This belief is widespread and used by retailers everywhere.
The reason is marketing. Retail experts have long known that goods prices slightly less than those priced at a whole number sound far less expensive. Something that is priced at $9.99 seems a lot less expensive than something priced at $10.
Really? People think it is far less expensive? I routinely round up to the nearest whole number because it is easier to remember and compare integers than those that are specified to two decimal places.
The most extreme version of this can be found at gas stations in the US where the price of a gallon is specified to 1/10th of a cent.
Gas prices that end in 9/10th of a cent may look odd, but it’s a standard practice. Eighty years ago a one-cent change in the price of gas was a big jump, and fuels dispensers were able to measure precise volumes. Intense price competition, plus some regulation, institutionalized the practice. Today, anything other than 0.9 cent pricing is unusual in the United States.
Pricing to the 1/10th of a cent is legal in the United States. It was part of the original Coinage Act of 1792, which standardized the country’s currency. Among the standards was one related to pricing to the 1/1,000th of a dollar (1/10th of a cent), commonly known as a “mill.” A year later, the half-cent coin was introduced, which was minted through 1857.
Hence purchasing 10 gallons at $4.999 costs nine cents more than if the price is $4.99, and one cent less than if the price was $5. It appears that the 9/10 of a cent prices are usually ignored by people until they are made aware of it.
A Palo Alto, California, retailer experimented with full-cent pricing in 2006, and the results were surprising. Jim Davis of Jim’s Texaco set his price at $2.99 a gallon instead of $2.999 a gallon. He told the San Jose Mercury News that he did it as an experiment—and it cost him. By lopping off the 9/10th of a cent, he saw about $23 less a day in profits based on his 2,500 per day in gallons sold. And no one noticed the difference.
When Jim’s Texaco customers were alerted that prices did not feature 0.9 cent pricing, they reacted negatively, assuming that Davis rounded up the price. Others questioned why he didn’t reduce the price by more, such as by 99 cents per gallon. Davis quickly abandoned his experiment.
So rather than realizing that they were benefitting from eliminating the 0.9 cent markup, the customers actually complained, thinking that the price was being rounded up rather than down. People can be so innumerate.
Maybe this gimmick of pricing things just below the dollar value works on many ordinary consumers but the celebrities and other people who covet getting the blue check mark on Twitter are usually wealthy people for whom $8 is peanuts. So is the idea of saving one cent a month really sufficient to make them stay? Or is Musk hoping that ordinary people might be interested in getting the check mark too and thus may be lured by this marketing gimmick? If he gets one million people signing up for the check mark, that still only works out to about $100 million a year in new revenue.
Back to Twitter, I do have an account on that platform that I only use to send out a tweet with the link to new blog posts. Not surprisingly, I have only 133 followers, unlike celebrities who have followers that run into the tens of millions. I am actually surprised that I have as many as I do considering how boring my tweets are.