Craigslist’s Business Model

The magazine Wired regularly publishes some of the most interesting articles about economics and the modern world. Last month, for example, they had a great article about the antitrust threats looming over Google. The month before, it covered the economics of Somali pirates, which I never found time to write about. And the month before that, it discussed how Google, not eBay, is really the master of auctions.

This month, Wired provides an in-depth look at craigslist.

For those who don’t already know, craigslist is the place to post classified ads on the web. According to Wired, it is the world’s “most popular dating site,” “the most popular job-search site,” and “the nation’s largest apartment-hunting site.” Not to mention the myriad other things you can buy, sell, trade, give, receive, etc. on the site.

How did craigslist achieve this dominance? The article doesn’t provide a crisp answer, but it does offer some gems about how the company operates.  You should read the article for the full effect, but here is a sample:

On innovation:

Think of any Web feature that has become popular in the past 10 years: Chances are craigslist has considered it and rejected it. If you try to build a third-party application designed to make craigslist work better, the management will almost certainly throw up technical roadblocks to shut you down.

On its business strategy:

Besides offering nearly all of its features for free, it scorns advertising, refuses investment, ignores design, and does not innovate. Ordinarily, a company that showed such complete disdain for the normal rules of business would be vulnerable to competition, but craigslist has no serious rivals. The glory of the site is its size and its price. But seen from another angle, craigslist is one of the strangest monopolies in history, where customers are locked in by fees set at zero and where the ambiance of neglect is not a way to extract more profit but the expression of a worldview.

A comparison to staffing at other major web sites:

It is difficult to overstate the scale of this accomplishment. Craigslist gets more traffic than either eBay or eBay has more than 16,000 employees. Amazon has more than 20,000. Craigslist has 30.

On meetings:

The long-running tech-industry war between engineers and marketers has been ended at craigslist by the simple expedient of having no marketers. Only programmers, customer service reps, and accounting staff work at craigslist. There is no business development, no human resources, no sales. As a result, there are no meetings.

A natural hypothesis is that craigslist achieved its dominance through a first-mover advantage — i.e., it got there first and once people started using it, it became the focal place for classified ads. That hypothesis has its attractions, but as Gary Wolf, the author of the article, points out in an accompanying blog post, that can’t be the whole story. Craigslist has arrived in different cities in different years. Sure it was a first-mover in Silicon Valley back in the mid-1990s. But was it really a first-mover in the hundreds of cities that it added in the past few years?

I suspect that the answer involves a combination of factors in addition to the benefits of being a first-mover. For example, the company enjoys tremendous economies of scope — it’s easy to expand into new markets when it wants to. And given its strong brand name, craigslist can quickly garner a critical mass of buyers and sellers. Once that happens, the network effect kicks in — once I start using it, it becomes more valuable for you to use it as well. Presto, craigslist is the Borg, assimilating new communities at will. (It would be interesting to know if craigslist has ever failed in any of the markets it entered; that would shed light on the root of its success.)

A good portion of the article is devoted to mocking craigslist for its antiquated, cluttered design. I remember having the same reaction the first time I used a Bloomberg terminal. At a time of Windows-based software, it was a DOS-based throwback. It seemed ugly and user-unfriendly on first contact. But it dominates the financial information space.

I suspect that this shared disregard for design reflects a fundamental similarity in the businesses. Users want content. And not just any content. They want the same content that their colleagues, competitors, potential trading partners, etc. are using. Once they start using the service, the way to keep them happy is more and better content. Design might be nice too, but content is the killer app. Both Bloomberg and craigslist excel on that front.

3 thoughts on “Craigslist’s Business Model”

  1. Very interesting post. I think Craigslist is a great example of the first mover advantage and network effect and that the other factors you mention, economies or scope and brand name, are important components of a first-mover advantage. As you point out, Craigslist has some real limitations. Craiglist’s ability to break into new markets is a good counterargument but I bet it reflects our national media market more than anything else, rather than being a sign that Craigslist’s simplicity and lack of features is what users would ideally want.

  2. As a seo marketer for the last five years i try to call on as many website as possible, by doing so i keep myself in the loop for new knowledge. The information you have provided has given me a great idea that i plan to incorporate into my website. I also plan on giving your blog address to my email list, so they too can find new ideas.

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