Startup Review

Craigslist Case Study

written by Nisan Gabbay, posted on July 16th, 2006

Why profiled on Startup-Review.com

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 25^th 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:

• Craig and the Craigslist staff actively respond to user e-mails.
• Craigslist does not make any major changes to the site without first announcing and testing response from users.
• Craigslist actively incorporates user feedback into the product. Craig told me that there has not been any popular suggestion that they have not incorporated into the site.
• No banner advertising on the site contributes to the perception that Craigslist is “not in it for the money”
• Users are the primary mechanism for filtering inappropriate/miscategorized content. Craigslist has some mechanisms for preventing the posting of inappropriate content, but for the most part, it is up to the users to flag content.
• Lastly, the .org domain name contributes to a non-profit perception (Note: Craig did not feel that many users care or think about this)

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.

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