How to Price Your Service: Lessons from Elon Musk's Twitter Blue,Netflix and More

“Needs some tweaks, but overall proceeding well.” That’s what Elon musk tweeted when asked about the new Twitter blue implementation proceedings. Elon musk's recent monetization strategy to price twitter blue (verification tick mark) has created a lot of buzz and controversies. Some feel this doesn't go well for users, and some say it is necessary. However, Elon is firm in his position to execute his plans.

But this article isn't about that. The whole scenario has another problem, From a commercial standpoint, the problem is its homogeneous pricing of $8 across all the countries! And this problem requires a "tweak".

Elon musk's Twitter blue strategy is to give relatively better preference to those accounts with blue ticks. That is, tweets from verified accounts will be noticed better and more frequently when compared to an unverified account. One might argue that Twitter is only for celebrities. A common user just uses Twitter to follow their favorite stars and celebs who post about their work, thoughts, and opinions. So why should a common user bother to get Twitter blue?

The application of Twitter is much broader than the assumption mentioned above for a common user. It essentially is a platform to raise your opinions and give feedback. Not just about societal issues; it is also about customer service-related communications. Twitter users post all kinds of tweets about services and products they consume. Starting from posting a video of an airline mishandling someone to complaining that a uber driver didn't show up to pointing out a cool feature in google pixel to sharing opinions about a newly released movie. Twitter users communicate a wide range of thoughts and opinions. This makes getting a blue tick essential and beneficial for any Twitter user.

Pricing a widely valuable service at a homogenous price of $8 across all countries can potentially be a mistake. Why is it a mistake? Well... it's Simple, The Buying Power!

Each country has its respective buying (or) purchasing power. $8 can be cheap in a country, and at the same time, it can be on the premium side for another country. There are different economic metrics to calculate the buying power of countries. But the simplest way to find the buying power is to understand the average salary (or) earnings of a country and find the affordability of a product or service based on that. For example, in the case of Twitter, $8 is 0.17% of an average U.S. citizen's monthly salary( $54000 per annum or $4500 per month). Whereas in India, it is 1.9% of an average Indian's monthly salary ( INR 3,87,500 / annum or INR 32,292 / month). Similarly, it is 0.7% in china,0.25% in Japan,0.17% in UAE, 1.4% in Brazil, 0.6% in Russia,0.8% in the Philippines,0.2 % in Germany and so on.

Pricing a tech service in this way can be a potential opportunity lost to Twitter. A classic case study of losing the opportunity by pricing their service at a homogenous price is Netflix.Netflix India, till 2021, was charging almost Rs 500/month for their basic plan. In the U.S., Netflix's basic subscription was $8.99/month. Almost similar prices in both countries. The pricing might suggest Netflix at an equal homogenous price in both countries. However, in terms of purchasing power, it will be way too high for someone in India to afford the services. Netflix's basic service costed 1.5% of an average Indian's monthly salary. On the other hand, in the U.S., it was just 0.19% of their average monthly salary. This was why Netflix couldn't acquire the large potential user base in India.

However, on the other hand, This was not a mistake made by amazon prime. They understood the purchasing powers of different country people and charged accordingly. It's been five years since their launch in India, and they are still pricing their services based on the buying power. Netflix understood this very late and has just recently changed its price. Their basic pack is now Rs 199/month, which is 0.6% of India's average monthly salary. No bad, huh? Netflix said it had added 1.08 million paid members in APAC, mainly from India, for the June quarter. This rate is expected to account for a growth of 50+% in 2022.

A counter-argument to this pricing approach is that "the revenue per user considerably reduces". However, from a commercial standpoint, it is to be noted that countries like India will bring in volumes, thus increasing the total revenue.

A few more companies have used and are continuing to use the approach of “pricing based on buying power.” One example is Spotify. The difference in "price based on buying power" between USA and India for Spotify is less than 2x (0.3% to 0.6%). Unlike old Netflix pricing, which was almost 10x (0.19% to 1.5%). Spotify now has 188 million subscribed users, growing at a sensational CAGR (compound annual growth rate) of 40% since 2015.

Below is a graph of companies marked based on their importance to "Pricing based on buying power" and their respective CAGR from 2015 to now.

Many popular services have understood the need to price their services based on buying power of different countries and have grown at a higher CAGR over the years. While some brands that have given less importance to pricing their services based on buying power have seen relatively less CAGR in subscribers count.

In the case of Twitter, subscriber growth is more important than all of the above services in the graph. This is because most of Twitter's revenue is still to be generated from ads. If the users feel they can't afford twitter, they will quit Twitter leading to a loss of revenue from ads. Hence, it is essential that the twitter management team understands this and "tweak" their pricing strategy. And as a suggestion, the estimated price range suitable for India is between Rs 65/month to Rs 130/month. Similar estimates can also be made for other countries based on their buying power.

Now that we have looked into services, can the same pricing strategy be used in the products industry? Particularly in the electronics category?

Google Pixel 7 is 15% of the average Indian's annual salary compared to 2% of the average USA citizen's annual salary. iPhones are also being priced on similar lines. Why? and can it be "priced based on the buying power"?

Let's understand that in the next blog.