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.
I think the more interesting question here (for certain, fairly small, values of “interesting”) is around what verification actually means. As I understand it, under the old system somebody put some non-trivial amount of effort into determining that a given Twitter account was actually controlled by some notable person (for certain values of “notable”). Hence verification held some cachet as a mark of both autheniticity and notability.
The problem is that opening up verification to anyone willing to pay is going to undercut both of those benefits. On the one hand, it’s now completely meaningless as a mark of notability, and on the other, if it becomes popular then the effort made to actually verify the accounts will have to be reduced (very substantially, given the mass layoffs just announced).
It looks to me like he’s completely gutted the value of the thing, as an inevitable consequence of trying to charge for it.
(I may however be entirely wrong -- I am not a Twitter user.)
The average fired Twitter employee makes $133,333 a year?? I’m guessing some of the top blokes getting fired skewed that up a bit, but even so -- Twitter sound like they’re paying a lot out in wages.
FIFY. Entertainingly Musk has said the journalists are the problem on Twitter, in that they think that they are the only source of reliable information. Wow.
“If” is doing a lot of work in that sentence. And $40m is doing NO work in filling a revenue gap measured in billions. It’s a little baffling.
My understanding of the “x.99” pricing dates back to the olden days when we used to use something called “cash”, sometimes in the form of something called “coins”.
Consider: I own a shop that sells widgets. I employ a pimplefaced youth to operate the till. Widgets sell for £10. You come in wanting a widget, and present the PFY with £10. He presents you with a widget, and pockets the £10. You’re happy, so you leave. He’s happy, because he’s £10 up on the deal. I’m NOT happy, but I’m only not happy at the end of the month when the stock take shows I’m a widget down with nothing to show for it, so the PFY probably gets away with it, at least for a while.
On the other hand, if a widget sells for £9.99, you rock up to the desk with your crisp tenner and hand it over. PFY presents you with a widget. You are NOT happy, and are standing there with your hand out. PFY must now grudgingly put the transaction through the till and present you with your 1p change. Now you’re happy, I’m happy because the till and the stock is now reconciled, and PFY is perhaps a little more grumpy because if he’s going to steal, he’s going to have to literally put his hands in the till, which is more readily noticeable.
At least, that was how it was explained to me by more than one retailer to me when I was the PFY.
Musk is, I think, going to break Twitter, as least as we have known it so far. It’s going to be unrecognisable by next summer, if not sooner. Quite a lot of people who can perfectly well afford to pay for a check mark aren’t going to on principle. Against that, who’s going to even want one?
@2: And the PFY is too stupid to supply his own change? Bearing in mind that in ye olden days of cash money, just about everybody had both pockets and miscellaneous containers full of otherwise useless coppers? (At least until their pockets wore out…) I suppose it’s possible, but I’m not entirely convinced.
sonofrojblake @#2,
Actually, the $1 billion saved comes from the 3,750 fired employees so the cost per fired employee works out to be twice your value or $266,666 per year. But the cost of an employee is more than the salary. It includes all the benefits and the overhead which varies but could be as high as 40% of the salary. So the salary would be about $190,000.
That does seem high to me, even in the highly paid tech sector. But the figure of $1 billion savings is just an unsourced estimate by a reporter. Musk may have put that number out to suggest that he is saving a lot. The real number could be a lot less.
On a side note, the mill is still very much used today; in calculating property tax. Hence the term “Millage”.
I’ve regularly had to educate people on how a millage impacts their finances. Many millages are fractional, like 0.1 mill. So if a local school district raises their millage by 0.1 mill, how much does that impact the homeowner? One dollar for every $10,000 of assessed value (which varies state by state). So a person with a $200,000 home pays an additional $20/year in their taxes if a millage goes up by 0.1 mill.
When I was on the township board I recommended that all millages we are asking the public to vote for, should be explained in those terms. The fire department millage was about 3.46 mills, and in Michigan the State Equalized Value (SEV) is 1/2 of the cash saleable value (I’m not certain how that works in other states). So, someone buying a home for $200,000 in our township would have an SEV of $100,000 and pay $346 for year-round service from the fire department. If the township needed to raise the millage, they should put it in those terms. I.e. Current cost for Fire Response Service for a family in a home costing $200,000 is $346/year. Cost for the same family if the millage increases by 0.2 mills is $366, an increase of $20/year.
Huh, I didn’t even know the blue tick was going to cost $7.99 as everything I’ve read about it has just said $8.
Dunc @ 3
Well at least the less intelligent PFY will be stymied. Although when I’ve worked in jobs handling cash you weren’t allowed to have your own cash in your pockets, presumably to prevent just that scenario.
I always figured it was to psych you into thinking you’re getting a deal. But what do I know, eh?
It’s less than $8 per month!
flex @5: when I was in my early teens (I’m 76 now), the mil was still legal tender in Missouri for the purpose of paying the state sales tax. We had a red plastic 1-mil coin about the size of a penny and a green plastic 5-mil coin a bit smaller than a nickel.
@billseymour --
Wow! I’ve never heard of any state issuing mills as actual legal tender! That’s incredible. I’m going to have to dig more up on that. It may be more widespread than just in Missouri, but it’s a new fact for me.
Thanks very much for that tidbit, you just made my day.
😎
Like I said, they were legal, in principle, only for paying sales tax; but in practice, merchants weren’t going to refuse a sale if a customer had more mils than the amount of the tax. (I think we spelled it with just one ‘l’, although that could easily be a false memory.)
If you want to narrow your research, my memory is from the late ’50s. I think they were out of circulation by 1960.
@sonofrojblake
If I tell someone in the Bay area that I make 150K in a tech company working somewhere in IT , the likely reaction is going to be “That is so less!” . IT is overpaid , ridiculously overpaid (and I work in IT , in the bay area but not in a company that pays bay area salaries , so i do get that reaction when they hear my salary)
When you are that rich , there is no way to fail -- Combined with an ego the size of Musks , its obvious that everything will be spun as either a success or someone else’s fault.
Twitter makes profit -- Musk : See I did what no one else do. Twitter makes loss . Musk : This isnt about money -- this is about free speech. Twitter continues operating dysfunctionally . Musk : See I can do the same as what previous management did , with just half the people. Twitter crashes every other day . Musk : See what these useless twits built, they should have been fired sooner and so on…
I thought the whole deal with .99$ was some social scientists did a bullshit study in which they found evidence that people are willing to pay $4.99 for something but will stop and think at a nice round $5.00. When I was told about this (from a marketing person my company had hired to teach the executive team about how important marketing people are) I concluded marketing is bullshit and the only thing marketing generally successfully sells is: marketing.
I ran a pretend shop in a game site selling or re-selling virtual game items for virtual game money. This scrip ran like water in one hand and out the other because it was meant to be fun and easy, it was a game. The game-provided shops themselves had features that helped you to track sales and who your customers were.
Dropping the price a teeny tiny amount: It works! It doesn’t even have to be one unit less than a whole number, it can be one unit less than the price that most people would sell the thing.
It is in my living memory that gasoline was much much cheaper than it is now. And gas tanks were much much bigger than they are now. A tenth of a cent adds up and was a bigger percentage of the price.
Ohio never had tax tokens, but I do remember tax stamps, which were essentially the same thing.
Maybe this is where Musk got tripped up: the Twitter owners’ original list price was only $43,999,999,999.99!
I think the way people round up the x.99 prices when repeating them is part laziness and part unwillingness to repeat that sort of marketing gimmick. At least when the gimmick is that silly. How much I chalk up to laziness and how much I chalk up to moral fortitude depends on the amount of faith I have in humanity at that moment.
Good one, Raging Bee @#17!