Is leaving potential ad space bare really “leaving money on the table”?

Kevin Burton points out that given current ad monetization capabilities, CraigsList is leaving millions on the table every year. And Kevin says that it’s “evil” to do so, since that money could be given to charity.

I can see his reasoning: a way to do good is to make tons of money and give it away to help people. So if you leave potential money unearned, you’re either shortchanging yourself or the people you would have helped. This especially seems like a compelling argument when it comes to advertising, which appears to be “free” money since it is only exchanged for the momentary attention of users.

But the fact is, the absence of ads on CraigsList represents value for users. How big a value is it to not have to see a few ads? My own feeling is that it’s not all that big, but I think it’s safe to say that most people would choose a site without ads over one with ads if given the choice. And since there’s no shortage of CraigsList imitators, that translates to what could be a very important competitive advantage.

So you can view the decision to not run ads as a bet: a bet that in the long term, this will enable CraigsList to keep their lead in the market. Sure, they could run ads now and send a few billion to charity, but that would be short-lived as they lost users. GM could sell all their assets and send it all to charity too, but there wouldn’t be any GM in the morning.

Now I have no idea if Craig or anyone else at CraigsList thinks of it this way, but you can view this decision as the application of a straightforward business philosophy: listen to your users fanatically and give them exactly what they want as long as you can cover costs. By never building any excess profit cushion into your business, you never leave the door open to a competitor to undercut you. And as a bonus, customers love you.

I would even say that as everything about web apps gets easier and easier, this might well become one of the only ways to build a sustainable business on the Internet. The barriers to both building apps and to users switching are getting lower all the time. This leaves critical mass and customer loyalty as two of the only real competitive advantages left. Charging the minimum to users, both in terms of fees and distractions, is a solid strategy. It’s a way to build and defend mass and loyalty against the competitive apps that will inevitably be chasing the same users in short order.

Update:

Some commenters in the original NYT article point out that ad revenues can also be used to address the “unmet needs” of CraigsList users, and that if this investment is not made, CraigsList will lose to a competitor that does fund this additional work via ads. This is a valid point, but I’d argue that the success of CraigsList so far is evidence that the company is keeping profits at the right level to develop *only* those features that user really want. This is a judgement call, and so far at least, it looks like they’ve made the right calls.

Other commenters say that CraigsList is engaging in “predatory pricing”, and that this pricing is putting others like newspapers out of business. I don’t find this a convincing argument. Predatory pricing (or loss-leading or dumping) is when a company sells a product at a loss in order to either build market share or drive others out of the market. CraigsList is profitable. While they are not *maximizing* short-term profits, this may be exactly what is needed to stay a viable business. The fact that classified ads are not bringing newspapers the same revenues as they used to is just further evidence of this; evidence that minimizing excess profits is what’s needed to compete in a market where it’s so easy for ideas to be realized and for users to switch.

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