Strategy Series Part 1: The LinkedIn Business Model

The LinkedIn Business Model

The business model of LinkedIn can be characterized by three strategies which have allowed the company to be successful to date. Firstly, strategies of differentiation and a focused approach at capturing a niche market have led LinkedIn to be an industry leader in social networking, recruiting services, and online advertising. Secondly, LinkedIn has effectively captured cross sided network effects in a two-sided market serving members, corporations, and advertisers. These strategic frameworks provide the context in which LinkedIn is able to deliver value by connecting the world’s professionals.

Generic Competitive Strategies

As a company LinkedIn is able to differentiate itself from competitors through several individual strategies which help to mitigate competition. As a social network, LinkedIn was an early mover, predating both Facebook and Twitter. The company was able to achieve profitability in less than four years, and subsequently rode the tide of booming social networks to rapid growth in the late 2000’s and into the next decade. LinkedIn distinguishes itself from other social networks in its focus on professional networking as opposed to social networking, and in particular in targeting the 640M people considered high value “knowledge workers.” LinkedIn, in contrast to their competitors, provided a simple user interface with a minimum of superfluous content. LinkedIn’s affluent demographic is also a source of differentiation with advertisers, creating marketing solutions which are highly sought after by advertisers and which generated 30% of revenues in 2011.
In the case of LinkedIn, competitive advantage from differentiation is partially conveyed through the opportunity to command higher margins from advertisers and lower price sensitivity among consumers. Its strong brand and established network has also fostered customer loyalty to the brand and created high switching costs for members. The higher switching costs are evidenced in the difficulty of transferring one’s professional network from LinkedIn to a competing product. This effect is derived from an early mover advantage which allowed the company to gain many new users when there were little to no competing products.

In choosing to focus on a particular customer segment, LinkedIn decided to forgo a larger potential market and greater sales volume in favor of a bigger chunk of a smaller market. This market focus allowed LinkedIn to grow in other areas, such as geographical expansion and a broadened product portfolio, as well as aligning well with its strategy of differentiation.

Network Effects

LinkedIn’s fundamental ideology is that its members come first. This idea is not only a feel good mantra, but also a central tenet of the company’s strategic growth. This target of consistent membership growth allows LinkedIn to leverage the power of network effects to its advantage. A continuous increase in the number of users and levels of engagement fuels an ever expanding collection of data. The huge amounts of data that results from this strategy has two effects. The expense of creating and maintaining that kind of information creates an incredible barrier to potential new entrants in the market. It also adds relevance and value to the premium products that LinkedIn offers. For example, the more members seeking employment through LinkedIn, the more likely corporations are to use its hiring solutions products. Further, this is an example of how LinkedIn effectively captures cross-side network effects in a two-sided market.

Two-Sided Network

As a platform connecting multiple user groups, LinkedIn is able to deliver value to both sides of its two-sided network. The users who generate the majority of revenue are corporations and advertisers. Corporations, as users of LinkedIn’s hiring solutions products, are attracted to the millions of members using the website and mobile app to actively search for jobs. The hiring solutions products are paid, and include LinkedIn Corporate, LinkedIn Referral Engine, and Talent Finder. Advertisers utilize LinkedIn through the site’s marketing solutions, which are also paid services, and include LinkedIn Ads, display ads, and sponsorships. Through the network they gain access to a targeted and affluent audience. The combination of revenues from these users subsidize the free memberships which provide much of the business’ value.

These members are made up of both job seekers and currently employed individuals who are using LinkedIn either for career maintenance, or who may be passively open to new employment. There is also a percentage (20% of revenues in 2011) who pay for a premium subscription, which provides integrated solutions such as InMail and Profile Organizer. Free members gain access to a wide professional network. They are also able to manage their professional identity through Profiles, filter business knowledge and insights through features like LinkedIn Today, and access these networks anywhere they are, through the website, the mobile app, and increasingly, API integration with partner companies.

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