Did Pricing Strategy Contribute to LinkedIn’s Market Meltdown?

LinkedIn’s share price hit an air pocket last week. On Friday February 5 the price slumped more than 40% wiping out about US$11 billion in shareholder value. Many analysts, such as Starmine, believe it could fall further.

The immediate cause of the correction was the collision of poorer than expected US job data and slower projected growth at the company. Analysts had been expecting the economy to add 190,000 new jobs and got only 151,000 (unemployment dipped under 5% and wages were up, so the news was not all bad). LinkedIn grew only 20% in the last quarter of 2015 compared to 56% a year earlier. The company’s guidance for 2016 revenues was US$3.0-3.65 billion, significantly lower than the average analyst estimate of US$3.91 billion. It was a bad day for a company closely linked to the job market to issue disappointing guidance. Investors lashed out.

Even with this ‘correction’ many people think the stock is still overvalued. LinkedIn had been trading at 50X twelve-month forward earnings. Twitter Inc (TWTR.N) trades at 29.5 times forward earnings, Facebook Inc (FB.O) at 33.8 times and Alphabet Inc (GOOGL.O) at 20.9 times.

A collapse of this magnitude (Tableau also had a bad day dropping 50%) should cause all of us to pause and look for deeper causes. Is this more than bad luck? What can we learn that we should apply to our own companies?

LinkedIn runs three businesses. Recruiting, Sales Enablement and Professional Subscriptions. Recruiting is by far the most important of these, accounting for 63% of revenues. Professional Subscriptions (the so called Freemium model) is steadily declining as a percentage of revenue dropping to 18% last quarter. Marketing solutions, the new kid on the block, has already grown to 19%. LinkedIn also gets $107 million From its 2014 acquisition of the eLearning company Lynda. (See LinkedIn’s results).

Earlier this year LinkedIn did some serious work on its pricing and offers. Most importantly it raised prices for its flagship Recruiter offer. Pricing of this service is opaque, it ranges from about $1,000 to $9,000 per year, and average prices seem to be going up about 8% (based on my own informal survey). The company did a good job telegraphing this price increase and tying it to value on its own site and in the media. Industry reaction was muted and the value proposition is well accepted.

Pricing of other offers was simplified and generally increased.

  • Job seekers can get a $29.99/month premium package.
  • The all-purpose Business Plus plan is priced at $59.99/month.
  • The premium service for sales people is $79.99/month.
  • Recruiter Lite for hiring specialists is $119.99/month.

Pricing per se does not seem to be part of LinkedIn’s problem, although it would be nice to get more transparency for LinkedIn Recruiter (pricing transparency will be the theme of a future post).

So are there deeper problems? LinkedIn’s major asset is its 414 million users and the economic graph it draws from the data it collects. Its major challenge is how to monetize that asset. One thing to remember is that the number for Monthly Active Users (MAUs) is much lower, about 25% of the total or about 100 million. Comparatively, Facebook has close to 1.6 billion.

LinkedIn’s major challenge lies with its business model. It has lost, at least for now, the competition for advertising dollars, where Google and Facebook capture almost all of the dollars. It has grown recruiting, a niche market, about as far as it can. Pricing tweaks and product innovation will bring only incremental growth, the kind of growth the company is predicting over the next couple of years.

Premium subscriptions (the Freemium model) are of declining importance and it is hard to see how to turn this around. People are now using LinkedIn for its groups and as a publishing platform as much as for job search and most people find that the free offer provides almost the value they need. Capturing edge cases will be expensive is likely to bring only incremental growth (although 10% of $3.5 billion is $350 million, which is hardly chump change).

The real question for LinkedIn, and its investors, is how to get value from the economic graph and the user base. Several possibilities come to mind.

  1. Sell people things that enhance their careers.
  2. Take over the talent management market.
  3. Become a publishing platform. (Could this be a road to ad revenues?)
  4. Become a collaboration platform.

LinkedIn is well positioned to do any of these things. It has already started down the path on helping people to enhance their careers with its US$1.5 billion acquisition of Lynda last April. At the time there was talk that it would also buy Cornerstone on Demand (current market cap US$1.5 billion) or one of the MOOC (Massive Open Online Courses) companies such as Coursera. Any of these moves makes sense at a macro level but they all suffer from the same set of problems.

  1. They lock LinkedIn into a set of traditional business models. ERP software, selling content. None of these will justify a 50X forward valuation.
  2. They are divergent, not convergent, and it will require excellent management and some luck to bring out the synergies.
  3. None of them leverage open data. Can the real value of the economic graph be realized without a more open approach to data?

What are the lessons for the rest of us?

  1. Building an asset is a great thing but you have to figure out how to monetize it.
  2. If your monetization strategy is based on existing models your valuation will trend to conventional valuations.
  3. Finding new ways to monetize assets is as important as building the assets (this is Twitter’s biggest failure as well, it has not been able to get past the advertising model).

I am optimistic about LinkedIn’s future. The economic graph is a real thing and there is a lot of value locked up in it. LinkedIn may stumble on the formula to do this. It may change strategies and open up its APIs so that other companies can help them on the way. (This would require it opening some doors into its closed garden) And even if it does not, the path to building the dominant HR and talent management company is clear (maybe they should buy Zenefits instead of Cornerstone).

Innovations on pricing and revenue models will be our focus on February 25 in Toronto when we will meet at the MaRS Discovery District for Future-Proof Your Business Model: Pricing Innovation and Monetization Summit. If you are in town I hope to see you there.

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  • Michelle

    Great insights Steven!

    I agree, in part – that it is a correction in what has been an overly Bullish market these past few years.

    I don’t think the pricing increase has as much to do with the stock price collapse. It appears they have grandfathered anyone who already has one of the premium accounts like I do. The pricing as they have it is not unrealistic as they have a variety of packages to suit a wide variety of needs. I think it would be problematic if they were to not offer a free linkedIn basic account. I know of another website that started charging job seekers as well as recruiters and it didn’t work out very well for them.

    I think there are a number of ways they can continue to monetize the product. They could utilize the data to provide more custom research reports for corporations and individuals (similar to Gartner reports).

    I’ve been using LinkedIn since 2006 and have seen it’s growth and expansion. The site could continue to improve the usability, enhance the searchable data and the display of search results. I could expand on this but it would take a while, probably better done over a coffee sometime.

  • Jia Chen

    Interesting article. I am actually a bit pessimistic about Linkedin’s future. Their price increase makes sense but as you mentioned it already stretched as far as it goes. As for their asset, I’d argue it’s not very sustainable. Because their user content is not updated on daily basis by each user (in comparison to FB or Twitter), the depreciation of these asset is accelerated thus making it not as valuable. Secondly, the company has a very protective stance on user contents (even though users should own the contents), seen in their changes last Feb in their API policies. This makes it every difficult to encourage external developers to develop additional channels to update these contents and slow down the depreciation. They recent bought Connectifier. My assumption is that they are trying to grow their Sales sector and diverse revenue streams. It could be interesting, but then again, there are more effective tools than that. It feels like a jack of all trades approach.

    • Jia, your point about how often people update LinkedIn data is a critical one, as the value of the economic graph depends in part on this. I think this is a much bigger issue than API access as they can adjust that strategy at any time.

  • Steven Third

    The main issue here is that LinkedIn and all of its dot com 2.0 siblings are simply a gold-rush era bygone. The hope was always that explosive user base growth would eventually translate into revenue, but aside from captive audience based platforms like, well, only Facebook, people simply find little to no value in “social networks”. LinkedIn had first movers advantage and was smart to market and position itself as “Facebook for professionals,” but people on Facebook actually WANT(ed) to be on Facebook (not anymore, as Instagram and SnapChat have usurped the growth sector for hip and cool social media sharing, but that’s for another topic altogether). To get relevant and worthwhile data, you need your users to spend actual time browsing and engaging. I haven’t met anyone who willingly spends time on LinkedIn. They go there to send out resumes or to scope out people they will send resumes out to, nothing more and nothing less.

    On Facebook, engagement is extremely high, to the point that the average user spends at least 30 minutes everyday lurking and liking and posting on the platform. This grows their platform because everything is rooted firmly in recency. If it doesn’t happen on Facebook, it never happened.

    I, along with everyone else in my generation (20-30 year olds) see little-to-no value in sharing anything inside of the LinkedIn platform. It’s simply my modern day rolodex, a collection of awkwardly met professional acquaintances, peppered here and there with sketchy looking job offers from people I’ve never met. Its most engaged users are HR recruiters, and the occasional “Influence Post” from some PR seeking executive, most likely looking to attract talent to their company.

    The draw of social networks, at least for the user, is that they are meant to foster community. Places like Facebook are able to foster this organically because people WANT to be there. This makes their data extremely rich and extremely lucrative for their true customers, advertisers. The service sells itself. Unfortunately, nobody wants to be on LinkedIn in the same way that nobody likes going to corporate cocktail mixers and “networking events”. The data in each profile is much poorer in quality. You have your tablestakes name, age, work history, and perhaps some projects, but nothing about who the person is, and what they are passionate about. That is what makes data worthwhile to open to the public. That is data that lacks in LinkedIn because it is a platform that does not provide any value for inputting said information.

    LinkedIn most likely realized this early on. It targeted the only sector of the group willing to sustainably spend time on its platform, HR professionals and headhunters. Unfortunately, HR recruitment is a very passive field, and because there are so many other, more focused places online to get jobs, LinkedIn is caught in an in-between situation. It’s a platform that allows head hunters (paying customers) to connect with job seekers (the product being sold). But unlike Amazon, you cannot just buy job seekers. You have to hope and pray that the product allows itself to be sold to you.

    Of its 100 million active users a month, what percentage of that is simply headhunters spamming everyone on the platform in hopes that they can find in hopes that some bites come up? And of that tiny percentage, how many are actual paying customers? And then of that percentage, how many people actually land jobs via this paid service, AND THEN of that percentage, how many PERCEIVE that LinkedIn was the reason that this person got hired? Perception here is key, and I doubt it is even possible to have metrics that track a job application from prospective to hired.

    Like you, I had high hopes for the platform. I would love to be bullish on LinkedIn as it is one of the main barometers of the tech sector’s health. Unfortunately, all of its acquisitions are unfocused and provide little to no value towards fostering LinkedIn as a relevant platform worth spending time on.

    This sustained stock slide (over a year of sustained losses) could really just mean that, in this case, the Emperor has no clothes.

    And the same goes for all social network based businesses not named Facebook.

    • If other people are getting a great deal of value from a platform, and you are not, you should look to what they are doing and what you might be able to learn from them. Social networks are gift economies, you get out the value you put in. If you don’t contribute anything of value don’t expect to get anything out. To start getting value on any social network you begin by doing things to create value for other people. Value today comes first in the form of attention. Learning about other people, their interests, reading what they write are all ways of signalling attention. LinkedIn generates a lot of revenue, I expect it to close 2016 close to $3.9 billion. This is a real company, and a very valuable company. It’s valuation had gotten ahead of reality and it has real strategic challenges to figure out how to best grow the value and then monetize the value of its economic graph.

    • This is true Steven Third!

  • Alexandre PILLON

    If LinkedIn wants to enhance its business model and sell more ads like Facebook and Google, they’d better spend a few $ on enhancing they advertisement campaign setup. As a LinkedIn advertiser let let me tell you, the current UI is shitty.

    • But do they, or should they, be trying to grow an advertising model? Even Twitter is struggling with that. Facebook and Google seem to have won that game and it will require a major disruption to change that. The disruption is unlikely to come from any of the current social media companies.

      • Alexandre PILLON

        Sure Facebook and Google are way ahead of competition. Why? They have access to lots of personal information. In contrast Twitter is desperate to get these information but does not (proof: the nice email I received a few days ago “hey why would not you add your birthday date to your twitter account!!!?”).
        That’s why in my opinion because LinkedIn profiles are very detailed, they are sitting on a goldmine and does not exploit it the right way (even if I admire LinkedIn on many other aspects).

        • I am sure this is a regular debate within LinkedIn. But I suspect it will be hard to shift advertising dollars at this point.

  • Eckart Burgwedel

    Sometimes I wonder why companies not simply monetize their immediate value proposition. I don’t sell on LinkedIn, I don’t need the premium features, and yet, LinkedIn has become an asset for my professional life I wouldn’t want to miss, and plainly, couldn’t afford to either.

    To keep the entry barrier zero, a paywall would need to be tied to some threshold of usage or features an occasional user wouldn’t reach or need.

    Another example is Pocket, the offline reader app. It’s beyond me how their premium subscription should provide enough value to justify the 5 bucks per month. If they asked me 1 USD per month just to use it for more than 5 articles per week, I’d not even have second thoughts. The wonderful news-voiceover app Umano died because they couldn’t monetize it. Had they asked me 1 USD per month just for the service, no problem — but their premium features didn’t provide the extra value I needed.

    The same is true for LinkedIn, at least for me.

    • I think many people agree with you, I do. Part of the problem may be that some people at LinkedIn see job search and recruiting as its primary value and the design of premium offers tends to be skewed towards people looking for new work or hiring. That is not how I use LinkedIn. I use it to build and energize professional networks in the areas I am most interested in: marketing strategy and pricing, design thinking, skills management and personal excellence. The premium offer does not give me anything I am looking for. I also manage a reasonably large group on LinkedI (Design Thinking with >60,000 members) and I would gladly pay for better group functionality.

      • Eckart Burgwedel

        Yeah, you have a point there. I would leave the premium features untouched for those who want to intensively use the recruiting and job search features, but I cannot see how anyone who’s using LinkedIn on a regular, professional level would *not* be prepared to pay a few dollars.

  • Daniel Fiegenschuh

    Great Article. But “LinkedIn had been trading at 50X twelve-month forward revenues.” – I would check that, doesn’t sound right to me. Dan

    • You are right, it is an earnings multiple. Will try to get that corrected.

  • Love your perspective here Steven. More thought needs to be given to the impact of many of their previous acquisitions and the results that have been delivered/non-delivered and the significant impact of the walls that they have put around their data with other complimentary services. I shared many examples of the negative impact on LinkedIn Users when access to their own data and records was eliminated. Tremendous value can be realized if LinkedIn opens up access to third party companies that enhance and add value at the request of the LinkedIn customers. Tear down these walls Jeff Weiner. http://www.fillthefunnel.com/linkedin-tear-down-this-wall/

    • I agree with you Miles, but I do not expect LinkedIn to move to an open data strategy anytime soon. First they have to find some better ways to monetize the economic graph, and then they need to be convinced that opening up will enhance the value of that graph in ways they can monetize.

  • jdg

    The question for LinkedIn is how to get more people engaged on the platform or to dream up new revenue streams from the current asset. Sales people, recruiters, and job seekers are the primary audiences that use the platform consistently. LinkedIn needs to think of reasons Finance, Marketing, IT, etc. could benefit. They might look to a company like Spiceworks, a social site for IT networking professionals, as one model. Spiceworks offers IT free network management software and an opportunity to network with other IT professionals. Another model would be what Houzz has done to attract design professionals in the building industry. There must be hundreds of ways to add value to various industry segments.

    The other thing that LinkedIn might think about is allowing B2B companies to integrate their CRM data into LinkedIn data and their websites into their LinkedIn pages. Lots of companies could more readily stay in touch with past customers who change jobs, for example, or capitalize on customer champions who get promoted, to cite two simple examples.

    • I think there is an interesting point here. Is the next step for professional platforms to become discipline specific, a typical sign that a market has moved onto Main Street to use the Crossing the Chasm vocabulary. I hope the answer is No. There are already enough silos in the world and innovation comes from concept blending, something that is less likely to happen in siloed communities.

  • Michael McGowan

    It’s not about how LinkedIn monitize. It’s about the value they give their customers. They have a second rate product and poor service, delivered from behind an impenetrable wall of email forms. Their (paid-for) data searching is worse than a 1970s old green screen system for example.

    • Perhaps, but second rate compared to which alternative?

  • Seems the struggle is monetizing a monopoly. I’d define LI as a classic monopoly because there is no relevant substitute for Professional Identity. So you see pricing power with Recruiting and, at the next economic downtown, you’ll likely see professionals flock en masse to purchase premium Job-Seeker accounts.

    Where it gets trickier is the over-arching reality that, in the USA today, 95% of able workers are gainfully employed and maybe (at best) a quarter of that total are actively looking beyond their current station. I’d be curious the raw number of users LI is able to monetize… It seems like < 5% currently. So, a classic strategic conundrum emerges: At 414 million users and counting, when should you erect paywalls for the massive base of users?

    LI has already effectively closed the entire network to any would-be partners—especially those who had previously used their API— all access removed. So new enhancements to the platform or innovations to their platform will not come from outside of LinkedIn, which is not an insignificant innovation cost.

    Thus the challenge for LI is to create meaningful reasons for user engagement while at the same time figuring out how to monetize aspects of their monopoly. The market is voting with their shares that the path forward here is less than clear.