The Case Study: Pricing strategies amid uncertainty

The story

By 2001, the online community Craigslist had disrupted the whole North American newspaper classified advertising market. On Craigslist community sites in a number of cities, users could look for free for jobs, housing, personal items, other services, items for sale and community topics such as volunteering.

Mr Newmark’s vision was of an online community that was accessible to anyone with a computer, regardless of the user’s ability to pay. Craigslist also had a culture of no commercialisation or outside investors.

The challenge

When the internet bubble burst in 2001, the site’s sole reliance on job postings at $75 per insertion began to pose difficulties. By then, Craigslist had 40,000 or so paid-for job listings a year and all other listings were free. The recession posed a serious threat to this annual operating revenue of $3m.

Mr Newmark and his team needed to work out how to replace $1m in projected lost revenue while keeping the organisation’s culture and brand.

The strategy

The team identified and analysed a variety of new pricing alternatives that might make up the projected shortfall.

● Charge more for job listings. This seemed the most obvious option as Craigslist’s rivals often charged more than double its fees. But they also had better products, such as graphic display, levels of search and so on. Also, with weak demand due to the downturn, raising prices might be poorly received.

● Fundraise through a virtual tip jar. This idea, a pop-up onscreen suggestion of a donation, is best analysed by adjusting levers such as possible amounts and percentage of people who might donate – a sensitivity analysis. To achieve $1m, Craigslist judged it would need 10 per cent of users to donate $10 per transaction on average. The team thought this wildly optimistic as use of the site had been free.

● Charge fees for services listings. This raised the issue of elasticity of demand: if Craigslist charged for listings, the numbers would drop – but by how much? Mature businesses often have transaction records from which they can derive the demand curve, but it is common for an internet business to begin as a free site. Without any data or experience as a commercial site, Craigslist had no practical way to predict the effect. One alternative, market research, would be a less than ideal way to obtain limited data and information on consumers’ willingness to pay.

The team estimated that, based on $40 per listing and an assumption that 50 per cent of users would be retained, Craigslist would easily reach the $1m goal. But the wider damage to the brand, even with a small testing of the waters, could be substantial.

● Charge for ads for autos, personal items or services, and house rentals. At just $20 per listing for autos, for example, the team worked out Craigslist would achieve $1m, even with a 50 per cent drop in listings. The team concluded Craigslist could make much more than its goal if it chose and then stuck to a relatively high price per listing, even if demand fell.

What happened

Overall, the team felt the various pricing options would hurt the brand and culture – with the possible exception of charging for autos advertisements since sellers would be gaining a large sum of money in one lump.

In fact, the effect of the 2001 downturn on hiring was less harsh than feared, so Craigslist escaped making any big changes to its pricing strategy. It stayed true to the founder’s vision and today Craigslist still charges $75 for job listings and everything else on its site remains free.

The lessons

The Craigslist team recognised two important issues. First, when consumers are used to a website being free or cheap, they may be resistant to the introduction of fees or price increases.

Second, there was a danger that not only would the revenue raised be insufficient, but introducing a commercialised approach could have serious negative ramifications for the brand and culture that were so vital to Craiglist’s success.

-Financial Times, 30 July 2012