Streamline Training & Documentation: 21st-Century Journalism XVIII: The Profit Curve

Tuesday, February 20, 2007

21st-Century Journalism XVIII: The Profit Curve

The April issue of the Journal of Marketing is publishing a study presenting evidence that adequate investment in the newsroom is essential for the long-term health of a newspaper.

"Uphill or Downhill? Locating Your Firm on a Profit Function", by Murali K. Mantrala, Prasad A. Naik, Shrihari Sridhar, and Esther Thorson,¹ investigates the impact on profit of three areas of newspaper operations:

news quality

circulation-distribution

advertising sales effort

The researchers used financial data for small- to medium-size newspapers — papers with circulation of 85,000 or less — to assess how well the newspapers were allocating investment funds among these three areas. Thorson explains that

The most important finding is that newspapers are under-spending in the newsroom and over-spending in circulation and advertising. If you invest more in the newsroom, do you make more money? The answer is yes. If you lower the amount of money spent in the newsroom, then pretty soon the news product becomes so bad that you begin to lose money.

In other words, newspapers are often "type U firms" — they are on the uphill (left) side of the Quality/Profit curve shown in the figure below.

Ideally, a company will be investing optimally in all three of the operational areas listed above. Such a company is "type N," i.e., its spending is "near-optimal," meaning the company falls in the relatively narrow area centered on the curve's peak. A company underinvesting in quality is on the uphill side of the curve; a company overinvesting in quality is on the downhill side.

The researchers developed a diagnostic tool to help companies in their decision-making. The five-step algorithm

extracts information contained in the market data — on the responsiveness of readers and advertisers, and their interrelated demands — and combines this information with the firm's knowledge of margins to not only recommend appropriate investments in quality, distribution and advertising, but also identify an individual firm's location on the profit function to mitigate under- or overspending errors. In addition, it offers guidance by tracing the optimal path that drives the company from its current location to the neighborhood of maximum profit ...

Details of the diagnostic tool are provided in the paper. Use of such sophisticated tools, and recognition of the importance of maintaining strong brand equity through consistent high quality, are certainly part of the solution to ailing newspapers' financial problems.²

__________
¹ Respectively, professor of marketing at the University of Missouri-Columbia, professor of marketing at the Graduate School of Business of the University of California-Davis, PhD student at the University of Missouri-Columbia, and professor of advertising at the Missouri School of Journalism. The online version of the paper cited in this post is from April 2006.

² For another take on newspaper quality, see this earlier post.

###

Labels: Journalism

<< Home