How LinkedIn Is 3 Times Better Than Facebook

LinkedIn has proven a rare example of an online company booming post-IPO. But how does the company make money - and how do you play a role?

Mar 31, 2014 at 8:30PM

LinkedIn (NYSE:LNKD) was one of the rare tech companies to perform well right out of the IPO gate. The site has become a requisite for professionals hoping to form a broader network of contacts away from the social-gaming interference of Facebook (NASDAQ:FB). The standard profiles are free, but that isn't stopping the company from making money on those users. So how exactly does LinkedIn monetize? In short, LinkedIn has three dedicated ways to monetize users whereas Facebook heavily depends on only one.

Since the IPO in early 2011, LinkedIn shares have risen over 300% and the company now has a price-to-earnings ratio around 855. Whether LinkedIn deserves that sort of P/E comes down to a personal choice on the company's growth potential. But understanding the company-specific monetization metrics can help inform that choice.

How does LinkedIn make money off its members?  

1. Hiring solutions are key to success
The entirety of LinkedIn's fourth-quarter revenue came from three segments: Talent Solutions, Marketing Solutions, and Premium Subscriptions. Talent Solutions -- formerly called Hiring Solutions -- accounted for 55% of total earnings in the fourth-quarter with $245.6 million in revenue. Historically, Hiring Solutions has served as the primary revenue-grossing division. Linkedin Revenue

Source: Company filings 

The average person with a LinkedIn profile tends to stay on the receiving end of these services, which largely appeal to companies willing to pay up to have better search tools when trying to fill an open position. But the companies wouldn't use those tools if LinkedIn didn't have the base of experienced members with what amounts to posted resumes. Talent Solution's hiring aid products are purchased through the website and include tools with names like Recruiter Lite and Talent Finder.  

Most of Talent Solutions happens behind the scenes. But LinkedIn's second-largest segment is more out in the open. 

2. Ads stream through LinkedIn experience
Marketing Solutions is essentially advertising revenue brought in through means that include display ads -- a concept that should seem familiar to anyone who has ever used the Internet. But LinkedIn also has sponsored InMail -- or ads in private messages -- and sponsored updates that show up on a user's home page feed.

LinkedIn benefits over Facebook in that its ads don't account for the majority of revenue; in the fourth quarter, advertising accounted for over 90% of Facebook's revenue. And the nature of why and how members use LinkedIn makes the ads seem more organic than on other sites. Facebook can shove in autoplay videos between a friend's marriage announcement and someone posting a mourning message about a recently deceased relative. LinkedIn mostly sticks advertising between work-related conversations and reading materials, which has far less potential for awkwardness.

But, again, LinkedIn's ability to sell advertising spots depends upon people signing up for profiles and returning to those profiles on a fairly regular basis. In the fourth quarter, Marketing Solutions accounted for 25% of overall earnings with $113.5 million in revenue.  

3.  Tempt users with advanced features via subscriptions   
Premium subscriptions account for the smallest slice of LinkedIn's revenue: $86.1 million, or 20% of total fourth-quarter revenue.  But the company stands alone in the social media sphere as offering paid subscriptions in a way that can help a variety of different people.

LinkedIn offers individual subscriptions that allow users greater access to those outside the connection network -- including free messages to people without a shared connection -- and also to see details on who has checked a user's profile. Knowing who's looking can help someone better tailor the profile to attract potential employers.

LinkedIn, of course, offers business subscriptions that can combine with Talent Solutions to form a comprehensive hiring platform. The system could especially help those trying to fill a highly specialized position that may have only a few applications in the geographic area. 

Foolish final thoughts
LinkedIn benefits from the number of different ways the company can monetize its user base. Whether or not LinkedIn's P/E ratio is concerning is still debatable. But the company has grown revenue for the past five quarters and has beat analyst estimates on both revenue and EPS during that period. That, combined with its three monetization paths, make LinkedIn a social-media company to watch.

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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