The share price of Facebook plummeted from an opening high of $45 down to almost $17, much to the annoyance of many investors. However, there are two kinds of people who are annoyed by this – those who were trying to make a fast buck and those, such as the pension funds, who were looking towards the long term who think they have been duped in some way about the true value of the business. The lawyers are going to have a field day, of course, but the fact of the matter is the original price for Facebook stocks was clearly not right.
The folks at Facebook will no doubt argue that they took every step possible to set the “right price”, but therein lies the conundrum for anyone selling anything – what exactly is the “right price”. Some wags, of course, like to say the “right price” is the maximum amount a customer is prepared to pay. But what is that maximum amount and how do you find out? As many people selling services will tell you, they get a sense of frustration when they quote what they feel is a high price for something only to be told by the customer, “that’s fine, let’s go ahead”. This immediate acceptance is a clear implication that they would have paid more – but how much more…?
There is all sorts of advice about setting prices – such as taking into account the market conditions, looking at what the competition charges, doing market research and using split tests of various prices. You’ll also find advice about setting “price ranges” so that people can choose their “price point”, thereby allowing you to get sales from people who have different value considerations.
Ultimately, though, much of pricing strategy is actually guesswork. We put our finger in the air and go “that’s about the right price”.
Now, however, new research gives us a better idea of what information we need to find out in order to set the right prices. The study from researchers at the University of Maryland suggests that we need to take into account whether our customers are looking for a short-term fix, or are concerned more about the long term.
When people are focusing on the short term gains they may achieve in buying something they look for different options and pay most for the most different. But when they are looking for long term benefits they actually want to find things which are similar to others. Practically, what this means is you can get higher prices for your products and services if you show how different you are to the competition when you customers are looking for an item which is a “quick fix”. Alternatively, you need to show how similar you are to the competition if the product or service you are offering has a long term benefit for customers.
As a result, if you are selling pensions you want to show how similar you are to other pensions, not different. But if you are selling something that helps a company increase its profits within a month with better time management, then you would need to demonstrate how different you are in order to get the higher price.
So why did the Facebook share price fall? It is likely that the high price was focusing on people who were interested in making a fast buck – yet in the world of the stock markets, many pension fund holders are really interested in the long term. Had the price been set even higher, making the company seem more like Google, then the bulk of shares purchases would have been from those interested in the long-term and there could well have been greater price stability. But by making the share price approachable, the proverbial person in the street could afford to buy shares in the hope of making a fast buck. In other words the price appeared to be focused on the wrong type of investor.
It is a lesson for all of us – your pricing depends upon what benefits your customers are looking for, short term or long term. If it is long term you need to show how SIMILAR you are to the competition. Being different only works for short term focused customers it seems. Facebook’s share price made it stand out as being different to many other technology stocks and thereby probably appealed more to the “fast buck” investor,
- Facebook’s Zuckerberg admits disappointment over plunging share price (business.financialpost.com)
- Facebook rules out share sale to cover tax bill (reuters.com)