Craigslist, Profit Compression and Pizza Ovens

I’ve been thinking about the NY Times Douthat column on Facebook and commerce, and there is one thing I want to add to my posting (Physical Goods in a Virtual Era).

In his column, Douthat notes that Facebook is no General Motors, and that despite their $100B market capitalization, they don’t actually employ very many people 9 (a tiny fraction of GM’s payroll in it’s heyday). In fact, even Apple, who manufactures all of their devices in factories outside the US, has a small payroll relative to their unquestionably high revenues.

All of which leads me to Craigslist and the profit compression phenomenon. As many analysts have noted, nothing has done more to damage the traditional daily newspaper than Craigslist. By effectively replacing the daily newspaper’s expensive want ads with free or inexpensive online ads, Craigslist has destroyed the newspaper’s main source of revenue, costing the industry scores of billions of dollars. According to University of Michigan Economics Professor Marc Perry, newspaper ad revenues have fallen from a peak of over $60B, and $46B a short five years ago in 2007, to $20.7B in 2011 (the lowest level in 60 years).

Against these massive revenue loses, Craiglist itself remains a small, privately held company. It does not disclose its finances, or even it ownership structure for that matter, but most analysts estimate that it has revenues of slightly higher than $100M. The 11th most popular site in the U.S., Craigslist has only 32 employees. The mouse truly ate the elephant.

But don’t feel sorry for Jim Buckmaster, the Craigslists CEO. Various analysts estimate that the site with worth at least $1B, making Mr. Buckmaster a very wealthy man (at least on paper).

In a similar vein, product companies can compress the profits of a related market through innovation, and turn their increases in unit production into a strategic advantage. For example, as consumers buy iPhones and iPads rather than PCs, Apple benefits from economies of scale, which in part helped them to bring the iPad to market at an aggressive $499 price. Meanwhile, faced with declining PC sales, HP and Dell have been forced to lay off staff.

We are actively pursuing a profit compression as a strategy at Forno Bravo. By introducing smaller, ready-to-use ovens at lower price points than what the incumbent suppliers had been changing, and by introducing the concept of complete oven kits at aggressive prices, we have significantly lowered the Average Selling Price (ASP) for the entire industry. But as I noted in my earlier posting How Do You Price a Pizza Oven?, our unit volumes are much higher than our competitors and we are flourishing making a smaller per oven profit.

With the upcoming Presto oven, our smallest and least expensive oven yet, we are continuing to push this trend—we hope to the delight of our customers.