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How LinkedIn Turns a Profit when "Users" Don't Use the Site

In its first quarter after going public, LinkedIn (LNKD) seemed to gain on all fronts: revenue, subscribers, and net income. In fact, the company actually posted a profit instead of the loss that analysts expected.

Analysts at Morgan Stanley and Evercore Partners still downgraded the stock because it was over-priced. But the company has kept growing.

And yet, that raises a question. As my BNET colleague Jim Edwards has pointed out, a " substantial majority" of LinkedIn's members don't visit even monthly, let alone more frequently. If that's so, how can the site make money? The answer gives insight into the dynamics of LinkedIn, and many other Internet businesses as well.

Members make money
LinkedIn depends heavily on registered users to make money through corporate hiring solutions, marketing solutions for corporate brands, and premium membership subscriptions as you can see in this table from the earnings release (click to enlarge):

LinkedIn says that its number of members grew to 115.8 million, a 61 percent year-over-year jump, and the growth over the first quarter's 102 million members was 13.5 percent. Compound that for four quarters and you've got close to 61 percent annual growth.

Premium subscriptions don't even provide 20 percent of the company's revenue. Everything else is advertising and recruitment. But marketers and recruiters want dependable, regular, and repeated access to people. Brand marketing depends on repetition and finding new employees means having as big a pool accessible as possible. Cut the frequency of contact and you cut the effectiveness, which eventually means losing the marketers and recruiters as paying customers.

The average number of unique users per month was 81.8 million, and yet, the substantial majority of members don't even show once a month. So how does the company get 71 percent of the membership as average monthly users? It comes down to a twist of math and the artful sales use of averages.

So popular, no one comes around any more
A Pew Internet Project survey recently looked at the frequency of LinkedIn use. It showed 28 percent active at least weekly, another 28 percent stop by every few weeks, 35 percent come in less often, and 9 percent never go, even though they are registered members.

Assume for a moment that that the 28 percent that stops by every few weeks is split evenly between though who go once a month and those who go every two months. Count the less-often-then-every-few-weeks crowd as visiting once a quarter, leaving the 9 percent that never show. That gives us 42 percent going at least monthly, 14 percent every two months, 35 percent once a quarter, and 9 percent, never, for a total of 100 percent.

Now we'll split all this traffic out to come up with average unique visitors who are members:

  • 42 percent, or 49 million, appear monthly
  • 14 percent, or 16 million, appear every other month, for a monthly average of 8 million
  • 35 percent, or 41 million, appear once a quarter, for a monthly average of 14 million
  • 9 percent, or 10 million, never show
Add the average monthly numbers and you get 71 million out of the estimated 81.8 million, or 87 percent. Not bad considering that a substantial majority doesn't seem all that engaged with the site.

The magic mean
And that's where the magic of averages works for salespeople from LinkedIn, or other Internet sites using similar business models. The company can claim that they get a big portion of their user base showing up on any given month, even though most wouldn't dream of appearing on a monthly basis.

The average numbers also blur the lack of engagement. Again, a minority of members generate a substantial majority of page views. That shouldn't be any surprise to anyone familiar with the 80-20 rule. But should advertisers work the math, it could mean a problem for a LinkedIn business. What the company cannot show is a density of repeated impressions.

Looking for the right bait
The other problem for LinkedIn is maintaining growth of those average monthly unique users (and hoping that advertisers don't get more detailed in the analysis). That's why the company hired former Fortune editor Dan Roth. Clearly, not enough members find the site useful on a regular basis. Also, LinkedIn needs to bring in an additional 11.8 million non-members a month to its site just to maintain the current traffic numbers.

The company needs something that brings eyes in. And strengthening the LinkedIn Today feed of outside story links provides an editorial product that might grab attention (without too much additional cost) when the existing set of services can't.


Image: Flickr user Rob Gallop, CC 2.0.
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