The LinkedIn business model explained
Back in 2002 former PayPal Mafia member, Reid Hoffman together with Konstantin Guericke,Jean-Luc Vaillant,Allen Blue,Eric Ly created the professional social network that would grow until it was acquired by Microsoft for $27 billion in December 2016.
In this article, we’re going to see what are LinkedIn secrets and how its business works. In fact, a well-designed business model is a primary driver of value for any company in the long run. So how did LinkedIn become a company worth $27 billion?
We’re going to focus on two aspects. First, how LinkedIn makes money. Second, what customers it serves. Third, we’ll see how, when and why it makes sense to build a multi-sided platform, just like LinkedIn has done.
Freemium, subscription-based and advertising
Source: LinkedIn Newsroom
LinkedIn success is based on its value as professional network where people can manage their brand, while recruiters can find candidates to fill job vacancies. In addition, it has a platform related to education and skills developments. Last but not least LinkedIn offers the opportunity to sponsor products or services with paid advertising campaigns.
With more than 660 million users LinkedIn is a strong platform.
Its business model is organized around four pillars:
- Talent Solutions
- Learning & Development
- Marketing Solutions
- Premium Subscriptions
Let’s look at each of them more in detail.
As specified by the LinkedIn annual report for 2016 (before the stock got delisted), the talent solutions comprise:
Hiring and Learning & Development products. Hiring provides innovative recruiting tools to help our customers become more successful at talent acquisition and professional development. Our products aim to be the most effective way for enterprises and professional organizations to efficiently identify and acquire the right talent for their needs. Learning & Development provides online education courses that aim to make it easy for professionals to accelerate their careers and realize their potential by learning new skills.
In fact, the Talent Solutions platform can be broken down into:
- LinkedIn Recruiter, which breaks down the process in allows enterprises and professional organizations to find, contact and hire highly qualified passive and active candidates based on three main features:
1. Advanced searches (through LinkedIn‘s search engine is possible to find any professional profile the comprises the professional network by applying filters to the search
2. InMail service (a service that allows you to message anyone on the platform even if not in your network)
3. Talent Pipeline Management (a sort of dashboard for recruiters that allow them to keep all their leads in one place)
Within the hiring process, there are also other features and products, such as referrals, job slots, job posting and so on. The primary business model here is subscription-based.
Learning & Development
Back in 2015, LinkedIn had bought an online learning company called Lynda for $1.5 billion. Lynda was integrated into LinkedIn as the learning and development platform for professionals. In short, subscription members can get access to thousands of professional courses. Thus, this segment of the business is subscription-based as well.
The marketing solution is the part where LinkedIn uses its member’s user base to let other businesses advertise their products or services. There are six products in this area:
- Sponsored Updates
- LinkedIn Ads
- Sponsored InMails
- Display Ads
- Ads API
The last segment is related to the premium subscription members.
The differentiation between the subscription-based model and the advertising model is not as simple as it seems. In fact, within premium subscriptions, you can have access to advertising features (like InMail Messages); therefore, even though the LinkedIn business model is mainly subscription-based. That is more diversified. In fact, it is undeniable that part of the value of the professional network comes from the leverage the businesses can make of the LinkedIn members’ base.
LinkedIn in numbers
Today is an exciting day, one I’ve been looking forward to since June. It marks the close of the agreement for Microsoft to acquire LinkedIn and the beginning of our journey to bring together the world’s leading professional cloud and the world’s leading professional network.
Therefore, it’s hard to say in hard numbers how much this integration benefits Microsoft. In fact, having LinkedIn is more than just a way to generate new revenue streams, but also a new avenue to “hit refresh” on Microsoft‘s brand value. Also, many have argued that one of the reasons for the acquisition was to bring onboard LinkedIn‘s founder, Reid Hoffman:
— LinkedIn (@LinkedIn) June 13, 2016
Before Microsoft had bought LinkedIn, the professional network was listed. In fact, when the acquisition was announced the company’s stock jumped to $195.96 to align at the price of the offer from Microsoft. It was a premium of over 40% compared to the market capitalization of LinkedIn previous to the announcement; when the acquisition was official LinkedIn also delisted its stock to join Microsoft.
In short, today if you want to have financial information about LinkedIn you’ll have to dig into Microsoft‘s financials. In fact, by delving into Microsoft’s financials, there is no doubt that LinkedIn is one of the “products” that bring revenues as you can see from the table below:
In 2017 LinkedIn revenue was $2.3 billion, which primarily comprised revenues coming from LinkedIn Talent Solutions. In 2018, the revenue surpassed five billion, still primarily from the talent solutions offering.
Where does LinkedIn get its value? Undoublty from the platform it was able to build, which serves both hands of the professional industry: HR managers and Professionals.
LinkedIn is a Multi-Sided Platform
Based on the 10K for 2016:
As many multi-billion dollar companies, LinkedIn has several revenues streams which comprised four main areas back in 2015:
- Hiring (59.2%)
- Learning & Development (3.6%)
- Marketing Solutions (19.5%)
- Premium Subscriptions (17.8%)
Regarding the business model, LinkedIn could be defined as a Multi-Sided Platform. In fact, one of the key aspects of a business model is the customer segment your organization serves. In short, to whom you’re selling your products or services.
In short, although LinkedIn serves different target customers. They are highly dependent on each other. In fact, LinkedIn gets its overall value by offering services for both HR managers in need of qualified candidates; and professionals looking for career opportunities.
Therefore, If I were an HR using LinkedIn hiring that would help me find qualified candidates. At the same time, the Learning & Development platform allows LinkedIn members to get more qualified. Which in turn, increases the value of the hiring services as more qualified people are available.
To assess the value of a Multi-Sided Platform financial metrics are useful but a more holistic approach helps.
Summary and Conclusion
As of 2017 LinkedIn generates almost $2.3 billions in revenue. The company has been integrated into Microsoft as of the end of 2016. Therefore, to understand how it is doing from the financial standpoint you’ll have to look at the financial data filed by Microsoft.
In terms of Business Model, LinkedIn focuses on two main patterns for generating revenues: subscription-based (Hiring, Learning & Development) and advertising (Marketing Solutions).
The overall platform gets value by integrating those services and serving both the hands of the professional industry (HR managers and professionals). That makes LinkedIn a multi-sided platform.
For more on Customer Segments:
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