Price equals marginal cost equals zero?

Local. Community. Free. If the proof of the buzzwords is in the buzz, then these describe where the classifieds world is headed at the moment. In the United States, Craigslist (shown left) has claimed the top spot; in Europe, eBay has launched and bought sites to emerge as the dominant player. Google Base, depicted below, should be cause for concern for both these players, and for everyone else as well. Microsoft, too, are reportedly entering the race with an application called Fremont. Big guns indeed.

Classified Intelligence, a consultancy, quotes Mike Kment of publishers Gannet saying “I think the price point for private-part and commercial customers, relative to… bringing buyers and sellers together, is just slightly north of zero.” Kment later explained that he was referring to listings ads, private-party ads in
particular. But the trend, he explained, is inexorable.

There are several reasons why Mr. Kment may be right. It is of course hard to charge for something that others give away for free. It is also economically logical that as marginal cost of adding an ad is close to or perhaps equal to zero, then in an environment of many suppliers price should be close to zero as well. It certainly raises some interesting questions that should be examined.

First of all, let us state that we do not believe that cost of production has anything to do with pricing of online classifieds at all; there are players with operating margins close to and above 50 percent. In our world, customers pay for goods and services what they perceive them to be worth, and that in turn depends in our case on the sales effect a service offers relative to its competitors. The competition landscape in each market varies significantly. Players in markets like the United States, the United Kingdom and Germany have more cause for concern than many others at the moment. In another opinion piece, we have argued that the emergence of online classifieds has led to items being sold that would otherwise have been stored away or thrown away. This, of course, has to do with cost, and we do not believe that anyone will ever be interested in paying a great deal of money for selling an item of relatively little value; if free alternatives exist, and in most markets they will, these will be used; if only expensive advertisements exist, then the outcome will be as it was in offline times: no sale.

Probably private listings ads for low-priced items will be free or very cheap everywhere. And the argument can be made that as long as the most you can charge is very little, you might as well view ads as the interesting content it is and get as much as it for free as possible. After all, most other content costs money to generate. For higher-priced goods, the rules may be different. And there will always be a premium on being indispensable. Let us offer some speculations:

-At the moment, the downward pressure towards a price of zero will be greatest for “stuff” ads; inexpensive items and items that do not benefit enough from being displayed in a sophisticated service with many search and image options.

-Listings fees are not the only way of generating revenues, perhaps not even the most important one. Many business models exist – online and offline – that have never emphasized charging the advertiser.

-Although most free offerings are relatively bells-and-whistles-free at the moment, there is no reason they should stay that way. Consequently, although their impact is greatest in the “stuff” vertical at the moment, that will be different too. To be able to defend their premium, those who wish to charge tomorrow will have to start running today too keep their lead.

The ad below is from the Jobs section Craigslist’s London site, and suggests that job ads also are a type of ads that may not need to many features to be adequately displayed. It is not easy to tell that the ad below has not been paid for:

When it comes to search, sorting and alerts, many pay-to-advertise providers are well ahead of Craigslist at the moment. The above ad was retrieved though browsing the ‘Internet Engineering’ category of Craigslist’s Jobs vertical. Searching the site for ‘Engineer’ returns it; searching for ‘Internet Engineer’ does not. More feature-laden sites do wisely to assume that free offerings will have features as good as they themselves have today within a relatively short time, and devote their attention to how they will stay ahead.

The same advice, of course, applies to providers of real estate and car ads; at the moment, their service commands a premium because of its features and usability, its indispensability for buyers and sellers in terms of traffic and objects; orboth – logically these three factors are intertwined.

We do not recommend giving away what you can sell, but charging for ads is not the only way to get paid – perhaps not even the most effective way.

Paying to have an advertisement displayed is not the dominant business model everywhere. In Spain and Italy, for instance, tradition is that advertising in classifieds print publications is free; people interested in, say, used cars provide the revenue by buying the mags. This line of thinking has manifested itself on-line in several European countries trough sites that do not charge for ads, but instead charge buyers for reading the ads or advertisers’ contact details.

Like most other content, charging for classifieds on-line is unlikely to work well. It is obviously not in the interest of buyers to pay, and also not in the interest of sellers to restrict access to their ad. If posting an ad will be free, how can publishers make money?

First of all, not getting paid is not a half-bad price for interesting content, which classifieds clearly are. Journalists, for an example, cost money. Free classifieds content can be wrapped around paid-for ads, attracting traffic to them and increasing their price. This is the basic idea of for instance British ‘Shopper’ magazines, many German ‘Anzeigenblätter’, and, coincidentally, Craigslist, which charges for job ads in San Fransisco, Los Angeles and New York and is considering charging for apartments for rent in New York as well.

In their report on free classifieds, Classified Intelligence cites the example of the Arkansas Democrat, a newspaper that has been running free classifieds since 1978. At that time, the Democrat had half the circulation and a quarter of the revenues of its cross-town rival the Arkansas Gazette.
By 1991, the Democrat had put the Gazette out of business and now publishes the joint Arkansas Democrat-Gazette. The most important reason, according to publisher Walter Hussman Jr., was the free classifieds. At introduction, private individuals only accounted for 15 % of the Democrat’s advertising revenues anyway. Free classifieds brought a six-fold increase in classifieds revenue within five years, boosted circulation and demonstrated free classifieds’ ability to draw attention to the ads that bring the money in.

Free classifieds sites also present a great opportunity for contextual ads and keyword ads, as they are categorized and often imply some kind of search. This is believed to be the rationale for Google’s entry into online classifieds – the more content they have, and the more things can be ‘googled’, the greater revenues Google will have from their sponsored links. (Well, not the only rationale; Classified Intelligence’s report list others as well, we recommend it to anyone who has not yet read it).

The same report also recommends upsells as a source of revenue. For some, upsells may be the way to go. But we believe the potential of upsells varies between different countries and different providers. Some markets are too mature for print upsells to have substantial potential, and some web offerings would probably benefit less from offering advertisers “ways to stand out among the clutter” than offering a service that is sufficiently easy to use and well-structured that clutter is not an issue.

Wrapping paid-for content in free content is one way to attract traffic. Another, more dubious way, is to wrap someone else’s content around your own.

A for many annoying aspect of the Internet is that one man’s plagiarism is another man’s innovative new form of distribution. To phrase it bluntly;Google wants everyone’s content to be indexed because they want to train people to go to Google for pretty much anything. Another example, most prominently displayed in the United States, is the emergence of metasearch engines like Oodle.com, SimplyHired.com and Indeed.com.

The downward price effect of metasearch engine is linked to its effect on the indispensability premium that is the basis for many of the sites that charge for ads today.

The most well-known metasearch engine in the world; owing in no small part to its recent well-publicized brawl with Craigslist, is Oodle.com, an American site that crawls sites that have given it permission to do so, and many have. Ads from sites like eBay, Apartments.com and Cars.com are indexed, as well as newspaper sites like The New York Times and smaller dot-coms. Oodle also indexed Craigslist’s listings until asked to stop in October. Jobs metasearch sites SimplyHired.com and Indeed.com scrape Monster.com’s, CareerBuider.com’s, Yahoo! HotJobs’ and Craigslist’s listings. An argument can be made that this is a good thing for listings sites, as anything that widens their distributions and increases sales effect for their customers should be. But take a look below:

At the moment, clicking Oodle’s Post an Ad link will take you to a list of sites Oodle scrapes, and offer the option of advertising with them. What is to keep Oodle and the like from taking ads directly? Right now, probably only market forces. As long as Scraped Site 1’s ads appear in metasearches, it makes sense for Scraped Site 2 to allow theirs to, not wanting to give their advertisers poorer distribution than Scraped Site 1’s get. They must take it on faith that the metasearch engines will not turn into direct competitors one day.

The same rationale is the reason why CareerBuilder will post all their jobs on Google Base, according to an e-mail sent by CareerBuilder to their customers and posted on among other Joel Cheesman’s SEO blog. The question, of course, is how long it will take these customers to figure out that they can list on Google Base directly, saving CareerBuilder’s USD 399 fee.

In Europe, eBay emerges as the player to watch for now.

A more immediate cause for concern, and the subject of much attention is eBay’s bulking up in classifieds listings, in Europe and elsewhere, and the pricing schemes adopted by most of their sites. 25 % of Craigslist; Rent.net; Kijiji; Mobile.de; Marktplaats.nl including Intoko; Gumtree.com; Opusforum.org; Loquo.com….means that eBay is serious about listings, and that they will not roll over and surrender their position as the world’s biggest marketplace. (That depends, of course, on your definition of marketplace. Measured by merchandise value, Wal-Mart is the world’s biggest retailer, well ahead of Carrefour. eBay is eighth.)

Kijiji is eBay’s classifieds community service and can be regarded as a Craigslist with funkier design. Including Gumtree, Opusforum, Marktplaats, Loquo, Intoko and more, Kijiji at time of writing covers 19 countries; and cities from Guildford to Langzhou.

Annoyingly, they mostly let people advertise their stuff for free (the most notable exception is Marktplaats, which charges for listing goods with a value of more than €200, services and websites).

If vetting ads the answer? If it adds value, someone should be able to charge for it, right?

Like many other free goods, free online classifieds may be inherently prone to abuse – like spamming with multiple copies of the same ad. The example below is exempt from Kijiji’s Berlin site and is an effective way to frustrate buyers as well as sellers that drown in the clutter:

An effective response, of course, is screening and vetting of ads. Doing this has the interesting side effect that the marginal cost of an ad will no longer be zero. The marginal cost will not influence what the perceived value of vetting is, of course, and there are other means of stopping spam (Bayesian filters, for instance). But it constitutes an example of a value-adding service that may differentiate providers from each other.

For now, anyway. And for now, what are Craigslist et al.’s strengths – its simplicity, its garage look-and-feel, the fact that you can post anything you like; are also among its weaknesses – you do get better features at many paid-for sites, it is easier to find what you want, especially if you know it in advance, and there is of course the bonus that charging for something tends to drive time-wasters away.

But with giants like eBay, Google and Microsoft set to battle this out, who really thinks that features and usability will not improve drastically? Players like these know usability, they have deep pockets, and are not about to skimp on features in a market as huge as online classifieds is likely to be. The picture of Google Base’s Beta version below is scary as it is. But it will probably be much more scary as it is refined.

Perhaps the business model for classified ads in the future will be like the business model for search engines and many other web offerings today: pay-for-performance – whoever facilitates the sale, gets paid. And the best service will win. It sounds fair, at least, although some of Google’s rivals in search will probably argue that it is more complicated than just that. Whatever the outcome, publishers wanting to make a living off online classifieds will have to devote great attention to what delivers sales to their advertisers.

And whatever the outcome, Craigslist, Kijiji et al. already offer more information, searchability, and much more reach than the ordinary three-line print ad. Granted, online classifieds providers should worry about them. But print providers even more so.

Classified Intellingence: “Free Classifieds Report” Nov 2005, Joel Cheesman’s Online Recruitment blog, FinnTech’s own research