Price is the Enemy of Profit

The other day my Twitter friend Nimesh Shah (@Sarcatrist) and I had an interesting debate, as much as 140 characters per tweet would allow, about Facebook. The question: Will FB lose members if it starts charging money for membership? Therefore, is it a strong enough brand?

Unfortunately for FB, the fact that it is free (and will always be) is among the first things you see when you’re signing up for membership. This implies something important, which can be either a huge strength or a debilitating weakness, depending on how you want to create business value in the future.

How Much Money Would You Pay to Use This Brand?

You see, Product, Price, Distribution, Promotion are all strategies to win, and the combination of these deliver value to consumers, creating the whole package – the Value Proposition. Tasty, reasonably priced family meals available everywhere is McDonalds’ proposition. Fantastically designed devices owning which helps you belong to an exclusive group is Apple’s, except that you’d pay higher prices than many other functionally similar products. Access to all the information in the world at your fingertips with nothing to pay is Google’s. And networking, sharing and entertainment with friends for free is Facebook’s.

Let’s face it, your first pitch to the consumer creates the premise based on which he finds value in your product. In the case of Facebook, the brand’s proposition is composed of its core offering plus the price (zero). Can they change it? Should they change it? Almost a billion people have joined Facebook not only because it offers great networking, but because it offers all that for no commitment other than your time, your own photos, videos and updates. Price, or the lack of it, is therefore a part of their product! Charging money will irreversibly change the product. The question is whether Facebook’s product is strong enough, and more importantly, unique enough to make people want to hang around even if the initial promise changes.

Whatever may be the future of Facebook, this predicament and the consequent lesson should not be lost on marketers of any product or service. If you’re looking to create greater value per unit of volume than your competitors, price must remain a variable strategy; it should not be a constant part of your intrinsic proposition. An “affordable” brand will always find it difficult to raise prices because affordability is what the consumer expects. A brand that continuously sells its products with free gifts or discounts will not be able to sell well without those gifts because the gratis part becomes part of the proposition for its buyers. For example, establishments that initially benefitted from Groupon customers driven by deep discounts find it difficult to sustain returning customers when the discounts are removed.

What’s more, a brand that ties up pricing into its proposition will find it much more difficult to explore and succeed in newer consumer segments. But make the product a solo hero, and brands can venture into new segments and command better prices in all of them. Apple is the best example of this.

Affordable price is a friend of revenue. But when combined with product proposition, it’s the enemy of profit.