LinkedIn Revenue Model

Revenue Model

LinkedIn’s revenue model is based on three revenue streams: hiring solutions, marketing solutions and premium subscriptions. Hiring solutions accounts for half of LinkedIn’s total revenue and depends heavily on the marketing and field sales force efforts. The fact that hiring solutions became the most important stream is consistent with the constant increase in marketing and sales investment made by the company, and the increase in corporate customers. On average a corporate consumer generates $29K in revenues, and it costs the company $42K to acquire a new corporate customer. Given the high operating cost structure of LinkedIn, however, it is difficult to generate additional gross margins from new corporate customers. Their lifetime value is not high enough to offset the acquisition costs, making this revenue model not sustainable in the long run unless cuts on operating costs are made or higher revenues are generated.

The other two revenue streams used by LinkedIn depend directly on the member base. The more members, the larger the benefit for all: advertisers, existing members and corporations. With a larger number of users, more members are willing to demand premium features, and a higher number of advertisers are attracted. LinkedIn has managed to grow its base through investment in new product development. That base, however, has started to mature, making increased growth more difficult.
Marketing solutions is the second most relevant income generator for LinkedIn, accounting for 30% of its sales. This proportion has remained unchanged since 2009, indicating that the company has been able to maintain its revenue stream by leveraging its growth in registered members and page views. The greater the number of members and page views, the more attractive the social network becomes. Pageview growth rate, however, is lower (30%) than member base growth rate (39%). Because both rates have been decreasing, the average number of pages seen by a consumer has decreased, making LinkedIn less attractive for advertisers.

Economies of Scale

LinkedIn has decided to focus on a particular market segment; thus acquiring economies of scales is more difficult than if they were to target the market as a whole. Growing their member base does allow them to achieve economies of scale in fixed costs, however. That is the case for all costs except marketing and advertising expenditure which have been rising.

It is also important to note that because the member base is already large, and its growth rate is declining, customer acquisition costs will raise if they do not stop increasing advertising expense. In other words, they have to establish a level of expenditure for marketing and keep it steady in order to continue to benefit from economies of scale.

Results to Date

LinkedIn has shown an increasing growth trend in terms of revenue. Revenue per user went from $4 in 2011 to $5 in 2012. They also, however, have a high operating cost structure (mainly due to marketing expenditures) which does not allow for high profits. There is an evident need to search for ways to increase revenues, while maintaining the same member base and without increasing operating costs.
According to the footprint, LinkedIn is trying to cut each cost by almost 10%, however it has almost doubled the marketing and sales budget. Effects of this policy are explained in the higher proportion of hiring solution product sales, but have not generated enough sales to obtain higher profitability. Therefore they need to cut and establish a limit on marketing spending and also potentially cut the product development expense.

Due to the low operating profit and low net income, the company has not been able to deliver an attractive ROE to its stakeholders (2.4% in 2011). Moreover, it has also failed to make its assets profitable, indicated by a low ROA (1.6% in 2011). One reason that the asset turnover is low is due to increasing working capital, indicating that growth is leveraged on accounts payable which increase the asset base, but are not productive assets. Short term investments are also responsible for this result.
One positive consideration is the fact that the company became less of a risk to stakeholders after the IPO in 2011, because of a lower asset to equity ratio, resulting in a company that is now less financially leveraged.

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