The Time Function Of Profits; Or Why Craigslist Is Doing A Fine Job Maximizing Revenue

from the for-every-action... dept

A few weeks back there was some ridiculous buzz over the fact that Craigslist's CEO apparently flummoxed some Wall Street folks by claiming that the company had no interest in maximizing revenue -- setting off a big debate among folks, including a reporter who went on to call Craig Newmark a "lone nut" who was "threatening the livelyhood of thousands of working men and women." The reasoning was that by failing to "maximize profits" by putting ads on the site, Craigslist was undercutting the classifieds business of lots of newspapers and putting reporters (like himself) out of business. This is bizarre for two reasons. First, the idea that Craigslist is costing newspapers any money is easily disproved. However, even worse, the very premise that the lack of Craigslist maximizing revenue hurts the industry is counterintuitive. If Craigslist were making even more money, wouldn't that suggest that newspapers were making even less? If by not taking ads on their site, Craigslist is leaving money on the table, then shouldn't that be an opportunity for the newspapers to grab it?

The interesting thing, though, is that this story refuses to die -- but with a very odd bent. It originally happened a week and a half ago, yet people keep submitting different versions of it, with the latest being someone anonymous who sent in yet another version, again claiming that Craigslist is not "maximizing revenue." And while even Craigslist's CEO may claim that very statement himself -- we'd like to suggest that both the CEO and those bemoaning the lack of "capitalist instinct" are completely wrong. They're wrong because they're ignoring the "time" aspect hidden in the question about maximizing revenue. When people talk about maximizing revenue, they all too often forget to recognize the time axis -- assuming that there's some finite point in time at which revenue is "maximized" rather than doing so over an extended period of time. Craigslist is tremendously successful by almost any measure. The company is wildly popular, bringing in a ton of traffic with little effort or budget. It does bring in a ton of revenue as well, much more than is needed to support its employees and technology back-end. And, a big part of the reason they're able to do so is because they don't bombard their users with what they don't want.

So, yes, the company could "maximize revenue" in the extremely short-term by dumping a bunch of ads on the site, but it would probably piss off a lot of users, shrink their audience, shrink their value, shrink their reputation... and eventually shrink their revenue. In other words, the short-term effect would be to kill the long-term viability. It should be obvious to anyone that it doesn't make any sense to maximize short-term revenue at the expense of long-term viability, but apparently some bitter Wall Street types and confused journalists haven't quite figured that out yet. Craigslist absolutely is maximizing revenue. They're just doing so in a way that ensures they'll be maximizing it for more than just a quarter or two -- and that doesn't seem so "nutty" at all. And, of course, that's probably a big part of the reason why the company appears to have no interest in outside financing or going public. Wall Street's opinion has no impact on the company at all -- and if Craigslist can better "maximize its revenue" by ignoring the short-term thinking of those bankers, then they're better off for it.
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  1. identicon
    Anon, 18 Dec 2006 @ 12:42pm

    Does this apply to Google?

    Why not? Does what Google provide unique in the world? Maybe in terms of quality, but functionally, certainly not. Heck why do you have Ads by splattered all over your site? Are you not convinced of the readership falling because of the Ads premise?

    Craiglist is free for most advertisers and readers. And try as hard as any other news papers or magazines, there is nothing to beat it. And besides the convenience of searching for ads on the Internet beats the sh*t out of anything that print media ever provided. And there are many print media giants who have understood this and have their own sites up and running now for a long time.

    Your claim for some reason sounds to me like the sh*tty ads from Redmond that claim that their crap OS is cheaper than what can be got for zero dollars.

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