McKinsey Quarterly – Classified Ads

There is an article about the classifieds industry in the last McKinsey Quarterly edition. The article can be viewed here but you will need to register in order to view the full text.

Here are a couple of interesting quotes:

    Newspapers are having difficulty raising advertising rates to make up for sagging volume, since online competitors offer advertisers an inexpensive (and inexhaustible) supply of ad space in local and national markets. In some cities, newspapers find that they must offer small advertisers general classified ads free of charge.

    Strong competition characterizes real-estate advertising too, though the housing boom of the past five years has softened the impact.

    Lines of employment ads in newspapers now stand at about half the level we would have expected given prior trends (View Exhibit). US newspapers earned $5.8 billion from employment classifieds in 1996 but only $4.8 billion in 2004, including $300 million from the newspapers’ own online operations. Most of the loss can be traced to price destruction wreaked by the newspapers’ online competitors, which earned some $400 million.

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I agree with the author that price destruction
has been dramatic in the classifieds industry, but this is not
necessarily a bad thing. Web users now have access to a free ad
marketplace and they can post as many ads as they like, consequently
the liquidity of the marketplace significantly improves.

The
reality is that free online classified websites are putting downward
pressure on the price of newspaper classifieds in a similar way that
Skype brings down long distance calling prices. If newspapers want to
compete, they will have to will drop prices and change pricing schemes,
like performance-based pricing and auction-based sales similar to
AdWords.

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