Stopping the Red Ink: Newspaper Profits Hinge on Investment, Not Cuts
Journal of Marketing, 2007

Newspapers that invest more money in their newsrooms make more money. The media industry’s recent impulse to slash jobs to cut costs is not only ineffective, but can lead to more red ink, according to a study by Professor Prasad Naik and his research partners from the University of  Missouri, Professor Murali K. Mantrala, Shrihari Sridhar and Professor Esther Thorson. Their study, “Uphill or Downhill? Locating your Firm on a Profit Function,” was published in the April 2007 issue of the Journal of Marketing.

The paper investigates the newspaper industry trend of downsizing newsroom staffs, or cutting investments in news quality, as a way of sustaining profits in the face of declining circulations. Naik and his co-researchers found that investments in newsroom quality actually increase a newspaper’s profitability, implying that downsizing decisions can trigger financial disasters. Better quality news boosts subscription sales directly and indirectly increases advertising revenues.

Furthermore, Naik and his co-authors offer a diagnostic tool to enable newspaper firms to determine how close they are to the optimal levels or the “sweet spot” with respect to news quality and other marketing investments. Based on real data, Naik et al. found that several newspaper firms are not optimizing their investments in news quality and were more likely to not be spending enough rather than overspending.

American Public Media’s MarketPlace radio program reported on the study in February. Read the transcript and listen to the story here.