New Business Models – Classified Advertising

New Business Models – Classified Advertising

February 12th, 2013 // 9:25 am @

classified_ads_250x2512The Internet is changing many businesses in dramatic ways, those who win from this will be those that understand and embrace their changed business model most effectively.

One industry that should suit the Internet perfectly is classified advertising, whether it is for cars, homes, jobs or any other advertising we are used to seeing in our newspapers.

Classified advertising is and has been a naturally monopolistic business. We all used to know where to advertise any given thing we had to sell, or where to look for that thing we wanted.

When it was to sell or buy a cheap car, we went to our local paper, looking for a home we probably did the same. If we were advertising or looking for a job we knew board jobs were advertised in the Times, senior sales roles in the Telegraph, and government jobs in the Guardian.

This made it easy for these publications that were market leaders in whatever niche it was, to sell these adverts at high prices, and gave them little need to invest in marketing to tell us they had these adverts. Low marketing costs and high revenue made classified advertising the most profitable part of most newspapers. Those with these leadership positions were profitable and the cost of attacking their position was prohibitively expensive, thereby they were effective monopolies.

The only downside to this profit making potential were the logistics. The need to collect the adverts, physically print them, and then distributes the finished newspaper. This was relatively slow and expensive, but at the time it was the only sensible way to do it.

The Internet changed that, the underlying benefits of classified advertising remained, but the time and costs of printing and logistics all but disappeared.

Economic logic should mean that those with market leadership in their chosen area kept it. Their revenue should have remained high as they still offered the same advertising readership, and their costs should have fallen by the use of the Internet. Therefore those with market leadership should be enjoying significant profits.

This is not yet what has happened, as the industry is still going through its development cycle.

What exists at the moment in most parts of the classified advertising market are a large number of small players, made up of traditional media and new media players, but in few markets has a clear market leader yet developed.

We are beginning to see some battles for market leadership develop in certain industries. Within the house sales advertising market Right Move and Zoopla both seem to have understood the changed business model and are competing hard for market leadership.

The market for job advertising remains fragmented, with no clear leaders yet having developed in the market, either in the general market (all jobs) or within the myriad of job boards focused on specific industries or job types.

There are a number of reasons why market leaders have been slow to emerge.

Traditional media has on the whole been poor at transferring to the Internet. As in so many areas of business those making healthy profits find it hard to make the tough decisions required when confronted with significant changes in their business model driven by new technology.

There have been numerous new entrants driven by the relatively low cost of market entry (a web site is cheap), and the lure of the revenues traditionally associated with classified advertising. Many of them have been hampered by a lack of the capital required to achieve market leadership, and a limited commercial understanding of this new business.

However it is the lack of a full understanding and acceptance of the new business model that has slowed the development of many of these companies.

Classified advertising online has a new business model with different criteria driving business value, and changed key drivers to achieve that value.

The most significant driver of value will be market leadership. In the battle between Right Move and Zoopla, the winner will have a significantly higher value than whoever comes second, that leadership will be measured by who has the most content (houses for sale) and who has the most readers (house buyers).

That is not to say the looser will necessarily not be able to survive but it will always have lower revenues and higher sales costs, as it will be attempting to overcome the fact that it has less readers for its advertisements than the market leader. Its marketing cost to readers will be higher as it will have to battle the reality that it is offering them less house adverts than the market leader. It will in essence be a less efficient business model, will be less profitable and therefore less valuable.

If what drives the value of the business has changed, so has what gets you to market leadership in this new business model.

There are in classified advertising two audiences that are closely intertwined, and having a clear understanding of this dynamic is critical.

One has readers, those people who read and hopefully respond to the advertising. Readers want relevant adverts, and will tend to go to whatever media provides that. If one is looking for a home of a certain value in a certain town, you will want to go to whoever provides that content. Marketing money spent getting you to that media will be efficient as if it offers you the most adverts that are relevant to your needs you will come back in the future.

The second audience is advertisers, who want the most relevant readers for their advert. If you are trying to sell a house at a certain price in a certain town, you want the media with the most relevant readers, people looking for such a house. And you will pay disproportionately more to advertise with whoever supplies that audience. If you are trying to sell a home for three hundred thousand pounds the cost of the advert is relatively insignificant, so if the media with the most relevant potential buyers charges twice as much as the second one with less potential buyers, it is logical to advertise with the market leader who is the one most likely to sell your house.

Readers want the most relevant adverts, and advertisers want the most relevant readers.

Therefore the key business drivers that produce market leadership, are driven by this relationship, these drivers include:

Business Focus – It is important to remain focused on delivering to the two audiences what they want, and not to get sidelined into peripheral businesses. The supply of useful supporting information can enhance your relationship with your audiences, such as house price trends or CV writing tips. What becomes damaging is when this other content impinges on the supply of the core content your audience’s want. For example Auto Trader a supplier of classified adverts for cars has allowed the suppliers of car finance to place fake car adverts designed to rank highly in search results but not actually offering a car, but finance. It is in such cases that one starts to damage that core relationship with your reader that is central to business success.

Sales Size & Structure – Traditionally keeping sales costs as a percentage of revenue low was in many business models a key success driver. Within this new business model that dynamic has changed for two reasons

  1. Sales teams in contact with advertisers are often the best way to drive the number of adverts on your web site, and building that content is business critical.
  2. With a product with near zero variable costs, as a web site with one advert of 10,000 costs the same. Then in such circumstances sales people who are bringing in incremental sales higher than their costs are adding contribution

Building significant sales teams can particularly in the period building towards market leadership be critical and cost effective.

This is an unusual part of the business model and one that some web advertisers have struggled to explain to their shareholders. Monster in the US, the clear market leader for job advertising online in America was forced to cut its sales team under shareholder pressure. This I am certain made the sales cost as a percentage or revenue, which is a traditional business measure improve. What it stopped was Monster building sales teams to go into unexplored markets or parts of markets where incremental, content (Jobs) and revenue could have been exploited.

Within this sales strategy it is critical to ensure that added sales resource focuses on incremental sales, and does not merely dilute existing sales. Closely understanding the structure of your potential market and structuring your sales resource to attack every economic part of it can achieve this.

Marketing – as with all marketing it is important to have a clear core message you want understood by your audiences and then focus on how best to deliver it.

The core messages are simple, and are linked to what the audiences seek. Once you can tell advertisers you have the most relevant readers for their product, and you can tell readers you have the most relevant adverts to their needs, then marketing will be efficient as will business growth.

Pricing – The pricing model has changed from the traditional media model. While there was room to add additional pages of adverts to a magazine or newspaper this was limited logistically. Therefore the revenue per column inch was a critical business measure.

On the Internet there is room for unlimited advertising, with close to zero cost of adding an advert, and the search ability allowed by modern technology makes such large groups of adverts easy to navigate.

With the number of adverts you have being critical to attracting readers, and with zero cost of additional adverts, it is necessary to first build the content (number of adverts) regardless of revenue per advert.

Once you have the most content and as readership climbs then one can increase the cost per advert based on that readership. And if you have achieved a position with the most relevant readers then your ability to price up is significantly ahead of those who have not achieved leadership.

As online classified media develops there are three key growth steps to the final goal:

Start up to critical mass – This period is one of trying to build content and from that readership that justifies any charge for the advertising. During this period revenue is likely to be minimal, with costs high as one invests in getting content and then readers.

Critical mass to online leadership – From critical mass to online leadership, the point at which you have more content and readers than anyone else on line, will be a time when revenues will climb, but be off put or even overtaken by the costs of continuing to build content and readership.

Online leadership to market leadership – Once online leadership is achieved the business will become more efficient with revenues rising, and sales and marketing investment being significantly more efficient.

Market Leadership – Once true market leadership has been achieved over every other type of media in the chosen market, revenues both per advert and it total will rise, while sales and marketing costs will level of in absolute terms, and even fall. During this stage as long as sufficient reinvestment is made to keep market leadership, the business will be highly profitable.

Significant consolidation is starting to happen within online classified advertising, this will accelerate.

Those with the capital, the understanding of the changed business model and the managerial expertise to implement effectively will build the profitable media companies of the future.

Category : Blog &Business Strategy

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