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
    Petréa Mitchell, 18 Dec 2006 @ 1:03pm

    Another example

    Disneyland fans watched this same thing play out in the late 90s/early 00s when Paul Pressler was the head of the Disney parks division. Pressler was from the retail world, and his thinking was all about maximizing dollars generated per visit and per square foot.

    So the focus of the Pressler years was on adding store space and cutting costs. This meant practically no new attractions, especially none of the "E-ticket" headline variety; peeling paint; deferred maintenance (which ultimately killed someone); and a generally degraded park experience. Which of course led to fewer visits, and thus more pressure to wring money out of every one...

    It's been 4 years now since Pressler left for the Gap, and in the meantime, the subsequent management has reversed the neglect and started opening new rides... and now we're finally back to Disneyland having more visitors than it knows what to do with again.

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