Prepared for Purdue Entrepreneurship Certificate Program

Team Analysis & Discussion

Spring 2007 © Hank Feeser

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Craigslist Case Study:

From: http://www.startup-review.com/blog/craigslist-case-study.php

Craigslist.org is not like other companies profiled on this site, mainly because it is not really run like a typical company. Craigslist fashions itself more of a public service than a for-profit entity, eschewing many opportunities to monetize its user base. However, Craigslist has clearly established itself as one of the leading online brands and the dominant presence in the US online classifieds market. According to Alexa, Craigslist’s traffic is up greater than 5X in 2006 over 2005, as it has expanded its geographic presence to ~200 cities. At over 10M monthly unique visitors and 3B pages views per month, Craigslist is the number 7 ranked site in the US (and 25th globally) according to Alexa. Craigslist is also one of the earliest examples of a site built through word of mouth marketing.

Interviews conducted: Craig Newmark, Founder

Key success factors

Craigslist became successful largely by following certain guiding principles, rather than by following an explicit strategy. I believe that Craigslist’s success can be boiled down to three key points, which I did more or less confirm with Craig himself.

Culture of trust

Craigslist creates a culture of trust around the site in many ways:

Social aspects of site are key to driving the commercial aspects

To characterize Craigslist as just a classifieds site is a big understatement. I would argue that the entertainment value of the site to users is a key aspect to the Craigslist consumer experience. I often peruse the site to read the outlandish posts in the “Casual Encounters”, “Rants and Raves”, and “Missed Connections” sections. My friends also e-mail me entertaining Craigslist posts from time to time. These non-commercial sections of the site are important for several reasons. While I rarely post or respond to these sections, they keep me coming back to the site even when I am not looking for an apartment or job. Others find it fulfilling to have a forum to air their thoughts, thereby giving users a voice in their community. This creates a pattern of usage that is more frequent than buying or selling an item. Secondly, these posts foster the sense of community and trust that give consumers greater confidence in the commercial-oriented classifieds.

Site ease of use

Craigslist has done a terrific job of removing barriers for users to post and browse the site. Perhaps the key product decision was not requiring user registration, thereby allowing anonymous posting and browsing. A simple, text-based format was also important in the age of dial-up connections to keep site performance fast. The user self-service site publishing tools are also intuitive and core to the site.

Launch strategy

Given that Craigslist initially started as an e-mail distribution list, it was indeed marketed solely through word of mouth – if you can even call it “marketed”. Craig originally started Craiglsist to tell friends about upcoming tech or art events in SF. Once the number of people on the list grew too large, Craigslist became a formal website. Craig originally thought to call the site “SF Events”, but friends encouraged him to use “Craig’s list”, since that was how it was already being referred to. The content expanded from events to classifieds, to the full range of categories offered on the site today. Craigslist will add a new city to Craigslist when there are enough requests from users to add that particular city. Craigslist does not (nor did not) specifically target “social influencers” or conduct any pre-launch marketing in a new market that they enter.

Much of Craigslist’s recent growth has to be attributed to an amazing amount of positive mainstream PR, in addition to word of mouth.

Exit analysis

Craigslist stands by the self-proclaimed “nerd values” of its founder, happy to make a good living for the employees of Craigslist without the need to make an extravagant profit. Craigslist is generating anywhere from $10-20M per year in revenue and employs just 19 people. Craigslist makes money by charging for job listings in a few major cities (San Francisco, LA, NY).

Craig has turned down many acquisition offers for Craigslist that would by any measure make him a very rich man. Craigslist’s CEO Jim Buckmaster has stated that Craigslist could probably make 10 times the revenue it makes today if they tried. So what is Craigslist worth? Assuming they could make $200M in revenue at a 40% net margin, and applying an Ebay-type EBITDA multiple, that would place the value of the company at ~$2.4B. I have no doubt that if Craigslist were to sell, it could command more than a $1B purchase price as is today, and probably significantly more (Note: Craig is a better man than I!)

eBay would be the most logical acquirer, given that they already own a 25% stake through a rather dubious stock sale by a former trusted employee of Craig’s. FYI – I did not ask Craig to comment on the history of that transaction. Assuming that those were common stock shares, it seems unlikely that eBay as a minority shareholder has any real influence over the strategic direction of the company.

Discussion Starter

It will be interesting to see what type of impact new competitors will make on the popularity of Craigslist. Everyone from the big boys (eBay, Google, MSN) to start-ups (LiveDeal, Edgeio, Oodle) has an online classifieds offering. Many of these new offerings are employing Web 2.0 technologies and strategies, while Craigslist has continued to maintain its relatively simple philosophy and design.

I do not believe that these other companies will be successful in dethroning Craigslist for the simple reason that the community element around Craigslist is a difficult one to replicate. It is not just a more robust classified post or search feature that makes for a more compelling user experience. The consumer loyalty that Craigslist has developed over the last 10 years is highly defensible. How many people out there owe finding the place they live or work to Craigslist?

There seems to be four main ways that the competition is trying to differentiate itself from Craigslist: 1) incorporate user reputation and feedback into the classifieds, 2) make it easier for users to submit classified listings (especially power users), 3) adjust the business model away from a straight listing fee per classified, and 4) offer a larger selection of items/postings. Of the four strategies listed above, I think that incorporating user reputation into a classifieds site might be a possible winning strategy. Is reputation/feedback of higher value than user anonymity? For some categories I think it will be, and that’s where Craigslist might be vulnerable to a competitor.

In addition to commentating on what made Craigslist successful, anyone care to comment on where the weaknesses might be? How will a new entrant make an impact? Let’s start the discussion!

Reference Articles

There are probably over 50 articles written about Craigslist – as I mentioned, mainstream PR has definitely helped spread the popularity. There were three that I felt were particularly useful:

Craigslist – On the record: Craig Newmark (November 2004) – SF Gate

The Rise of Craigslist and How It’s Killing Your Newspaper – New York Magazine

This one is really old, but gives great insight into how to create an online community. Are You on Craig’s List? (Winter 2000) – Fast Company

Updated resources:

An excellent blog post by Naval Ravikant, CEO of Vast.com (a search start-up targeting the classifieds market). Naval has a detailed analysis around Craigslist’s revenue potential if they attempted to monetize the service more fully. I think his analysis lends credence to my assumption that Craigslist could very easily make $200M per year in revenue, but I don’t agree that $1.2b - $1.4b in revenue would be likely. Many of the classifieds categories (like personals) I don’t think are monetizeable and only exist because they are free. It would also be a mistake for Craigslist to start charging for these more social-oriented categories in my opinion.

Another great post on Craigslist’s success by Topix.net CEO Rich Skrenta. I think Rich makes an excellent point about the discussion forums being a key contributor as a “pre-launch” activity before Craigslist opens a site in a new market.

If anyone has some other links with more insight into Craigslist, please leave a comment below.

10 Comments »

  1. I also see CraigsList as the classic example of growing an online community geographically, which presents a conflict that I am continually challenged by. On one hand, I believe users of most online communities extract more value from the community if there are more folks in their local area using the site. This is certainly the case for CraigsList. Therefore, from a user value perspective, rolling the site out city-by-city makes sense. On the other hand, this strategy greatly complicates user acquisition. It complicates your ability to leverage SEO, affiliate marketing, and other viral effects that Internet marketing has enabled.

Anyway, how critical was CraigsList city-by-city roll out strategy to their ultimate success?

Comment by Mark Roberge — July 30, 2006 @ 9:10 pm

  1. Hi Mark,

Whether to go with a city by city launch or a more national launch depends upon how users derive value from the product. Does there need to be critical mass in a geographic region before users can derive value or not? In the case of Craigslist, density of postings is important to make a classifieds site work. However, in the case of a community like MySpace, users derive value from communicating with friends regardless of whether there is a lot of density of people in their local area. With MySpace a national launch works without local density volume. Thus, I think the Craigslist city-by-city roll-out strategy was the right approach and important to their success.

Comment by Nisan Gabbay — July 31, 2006 @ 10:43 pm

  1. Mark, regarding your comments and the reply by Nisan, a great deal of the answer lies in the ‘10 year’ factor. Too many of us wish to build sites and services that command attention and dollars and acq offers in a year or two. Perhaps Craigslist is as much proof of the mantra ’slow and steady’ as anything else. In that sense, organic growth is lasting growth.

Comment by Mark Stedelbauer — August 1, 2006 @ 1:41 pm

  1. A key factor for sucess of Craigs list isthe perception of the brand. While the big boys (google, MSN ..) or the new Web 2.0 startups launch services loaded with features and new technology, Craigslist continues to be a pleasant change with its age old simple text based interface. This added with no graphical banner ads creates unprecedented community loyalty and very unique brand perception that stands for simplicity, ease & non-profit appeal. Much of the dot com and technology business works the same way as a traditional consumer business: Create a USP/brand that distinguishes itself from the market , define your niche and rule it! While everyone (including the new startups) fight in the red water of commercial appeal community sites, Craigslist continues to be in blue waters. Take a survey and ask how many think Craigs list is a for profit company … most would say NO. :)

Comment by Sameer — August 1, 2006 @ 2:51 pm

  1. Sadly, I think that Craigslist’s limitation lies in the fact that Craig figuratively and literally won’t sell out (which I fully support). I think a new entrant with less character and bigger pocket can win over the larger piece of pie. There is a large segment that isn’t aware of the CL community and what it stands for. In my opinion, mainstream in your face advertising can win over the market segment that enjoys big box convenience, comfort, and safety.

Comment by Todd Allen — August 1, 2006 @ 4:50 pm

  1. I have used Craigs List for advertising positions in the technical group I was managing in a startup in San Francisco. The reasons we used it were:
    a. We wanted to attract local candidates only.
    b. It was pretty easy to setup and use. You post the opening, enter credit card details and done.
    c. It was very effective since so many locals were looking at postings for local openings.

The local thing IS Craigslist unique value proposition! I am sure the same logic applies to other categories in Craigs list like apartments for rent or for other things people wanted to buy or sell locally.

So I am glad Craigs list is thinking very local and small. That’s the reason it works. That and it is stupidly easy to use!

Nari

Comment by Nari Kannan — August 3, 2006 @ 7:27 am

  1. I started using Craigslist when it was actually a list (I also managed to hit “reply all”). What I see missing from the analysis is some context around joining in the early days. How CL created critical mass in its first market. If you lived in SF, you had challenges: 1) finding a place to live, and 2) getting a job/employees. CL addressed both issues.

Satisfying necessities came long before establishing a culture of trust.

I’d also argue that satisfying your customers is the best way to build a brand.

Comment by jason — August 3, 2006 @ 9:54 am

  1. Hi Jason,

I think that you have made an excellent point regarding the utility of Craigslist as an e-mail list in the early days. Craigslist did help solve problems of very high importance to people, which created a strong brand loyalty. Coupled with Nari’s comment regarding what I call the “micro” local nature of the service - that’s a winning combination.

Thanks for your comments,
Nisan

Comment by Nisan Gabbay — August 3, 2006 @ 10:37 am

  1. Its interesting to see a lot of CL wannabes now trying for a piece of the pie but I dont see any sure successes yet.

I am not too impressed with sites such as Oodle etc as they are more of aggregators (bottom feeders :)) They dont really do any of the heavy lifting of actually getting users to post. Their concept is easily replicable and hence can be commoditized. They are not community oriented. Having said that, they can find limited success in markets that are highly fractured with many players.

As Nisan mentioned - what differentiators could a CL wannabe bring to the table? Here are my 2 cents.

1) Playing to a Niche Market. I am beginning to see this with media jobs (eg MediaBistro) or startup jobs (eg Crunchboard from TechCrunch). These give higher visibility to ads to a very tightly focused audience. Its a good business model for blogs. Attract their target audience through high quality blog commentary and monetize it thru features such as job boards in addition to advertising.

2) Cross Marketing to Large Existing Customer Base. Big players like Google (googlebase) and MySpace (myspace classifieds) etc can take advantage of it though to make it work they need to take time to nurture it and not just roll out apathetic cookie cutter versions.

3) User Reviews (a.k.a Classifieds meets Social Networking). I agree with Nisan here but I’ve seen Tribe try and fail with this concept. That doesnt mean it is not good. But i guess classifieds are tough as it takes “time and patience” to build critical mass

4) Provide Multiple Distribution Channels. Majority of users want to post once but reach as many people as possible. Furthermore this could be across multiple media too.

Now to talk about Craigslist weaknesses.
1) Need Better Visibility. Its so successful in the number of ads that many times my ad barely gets noticed. Would love to have a premium bold/picture etc feature ala eBay to stand out.

2) Need Better Search/Filters. I live in Manhattan and am currently searching for a new apartment . So I’ve been browing thru CL for the last 2 weeks to find a nice 2bdrm pad in the Village/LES/Soho area. However this has proved very frustrating as the keyword “village” or “soho” or “les” bring up tons of housing ads which are actually in queens or brooklyn or bronx. (Because smart posters/brokers add these keywords to all their ads - its just like meta-tags in our html header).

3) The User Trust issue. I have dealt with some wonderful people thru CL but also quite a few rotten apples / scamsters. Note the recent scandal in the news.

Btw Nisan - great site and keep up the good work.

-Jon

Comment by Jon — August 7, 2006 @ 10:06 am

  1. Jon.
    In regards to the trust issue this is just starting to get addressed by startups such as RapLeaf (www.rapleaf.com) They are taking the eBay user feedback model and applying it to transactions outside of eBay.

On that note, eBay has blocked links to RapLeaf ratings from within postings.

Comment by Khalid — September 11, 2006 @ 2:29 pm

10. craigslist Scam

Though not terribly widespread at the end of 2006, the craigslist scam makes our top ten list because of its potential to wreak harm in the years ahead. Starting this year scammers began taking advantage of the growing popularity of craigslist to victimize people trying to rent their homes or apartments.

The scheme is basically the fake check scam, with a twist. Darryl, of San Diego, told ConsumerAffairs.com that he received almost identical replies when he listed a room for rent on both craigslist and Roommate.com. The replies claimed to be from "Marie," who called herself "a young humanitarian officer."

"Marie" said her employer would be sending Darryl her expense check, which would be for several thousand dollars. Darryl was to deposit it in his account, deduct the rent and deposit, and send the balance back to her.

Fortunately, Darryl saw through the scam. If he had cashed the phony check, it would not have been discovered for a few days. By then he would have sent the scammer a very real check for a $3,000 or more.

"Most people who use craigslist have great stories to tell about their experiences with buyers, sellers, tenants, landlords and such, but we also receive occasional reports of scams and fraud," craigslist warned on its Web site. "We've found that one of the best ways to avoid this problem is to keep all transactions local -- whenever possible, don't do business with anyone who is not in your local area."