Risks to LinkedIn’s Business Model

Despite its recent dominance, LinkedIn could fall victim to diminishing returns on assets as it continues to expand its already large market shares. According to LinkedIn, the firm has already addressed large proportions of key markets, including $27 billion of the $85 billion talent acquisition and administration market, and $25 billion of the $69 billion online advertising market. Customers could become harder to acquire, driving up LI’s customer acquisition costs.

In its early days, LinkedIn focused on individual business users and differentiated itself from other social networks by providing users with a simple site and user interface largely free of non-professional information. As the company has attempted to improve user engagement to levels seen by other social media competitors, it has added many new features including news feeds, article sharing, and status updates. These additions appear to be inconsistent with the simplicity value originally provided to users, potentially encouraging user attrition.

As the company has broadened its scope to target companies, it has swiftly increased its employee headcount and increased its number of physical locations worldwide. Large scale increases in real estate assets could endanger prospects of improving returns on assets.

The company has pursued a rapid pace of international expansion while simultaneously adding new products and services. LinkedIn risks a loss of focus as it continues to increase the breadth and depth of its offerings.

In 2011, LinkedIn derived approximately 50% of its revenue from Hiring Solutions, and 30% from advertising. Both components are highly cyclical, and the company’s revenue is tied to a strong economy. An economic downturn could damage a significant portion of its revenue streams. Though LinkedIn’s Premium Subscription model is countercyclical, it does not seem likely to compensate for other losses.

The company highlights its growing store of user data as a source of strength moving forward. However, the untapped potential of such data could be compromised by end-user privacy concerns. A backlash could discourage users from utilizing LIs services, or even lead to government regulation. An absence of public privacy concerns could also negatively impact LinkedIn. Data rich and well-heeled companies such as Facebook, Google, or Twitter could seize the opportunity to make a serious push into the industry.

Finally, industry domination could drive from its ecosystem many of the recruiting firms that often double as customers.

Differentiation: How LinkedIn Does It

LinkedIn considers its members to be the most important piece of its value chain. The key service it provides is the ability of members to find and contact other members. Users can create their professional network via LinkedIn, increasing potential in finding jobs and maintaining and managing their careers. Many products LinkedIn offers to members are provided free of charge. Consequently, members frequently update their profile, even when they are not looking for work. The result is a rich information base from their free members, which suggests a vast potential for growth while capitalizing both premium members as well as advertisers and corporations looking to take advantage of LinkedIn’s member base. A few of the distinctive elements that differentiate LinkedIn are:

Focus on the Professional Market

Unlike other social networks, LinkedIn focuses on the professional networking market. They create a space where people can manage their personal identity, search for business contacts, join industry groups, and identify career opportunities. This makes LinkedIn the world’s largest online professional network. On the other side, recruiters and human resource professionals use this network to find potential employees by posting job listings on LinkedIn, creating their company page, so that members can keep updated about the company. LinkedIn now plays an important role for recruiters, with 82 of Fortune 100 companies using LinkedIn as a critical tool in recruiting.

Business Acquisitions

LinkedIn also expanded its business by acquiring small companies that can support the core functions of its business. In 2010, they acquired mSpoke, a provider of recommendation technology, and Choice Vendor, a ratings and reviews provider. They also acquired CardMunch, Connected, and IndexTank. These companies could help LinkedIn achieve rapid growth in the future by further differentiating LinkedIn’s products and providing convenience to its users.

Product Development

With career management becoming a daily and necessary task, LinkedIn has opened up to third-party developers to create interesting products that can make members’ activities more relevant and insightful. As a result, members increase their time spent on the site, helping to attract marketers and advertisers, and enhancing LinkedIn’s revenues.

International Expansion

LinkedIn plans to grow globally. Currently 60% of members are from outside of the US, with revenues from international operations representing 32% of total revenue. In particular LinkedIn would like to capture high growth markets including Asia Pacific, India, and Latin America, so they plan to increase its sales force related to new international offices.