Pricing power is one of the strongest indicators that a company has an economic moat. If prices increase, and demand remains relatively stable, it's a sure-fire way to ensure that revenue and profits continue to climb. Warren Buffett even once said "The single most important decision in evaluating a business is pricing power."
So when LinkedIn's (NYSE:LNKD.DL) VP of Global Solutions Mike Gamson described "pricing power" as "ours to deploy" at a recent J.P. Morgan conference, I took note. Specifically, he was referring to the company's ability to continually raise prices for its Talent Solutions business -- its biggest segment by revenue.
During Mr. Gamson's conversation at J.P. Morgan, he noted that LinkedIn has an opportunity to expand its efforts with value-based pricing. That means charging more for companies that can get more value out of its products.
LinkedIn has already started experimenting with this kind of pricing with its job-listing product. Job listings in high-demand geographic areas and careers now cost more than job listings in low-demand areas and professions. Conversely, other job listings don't cost as much as they used to, but Gamson said that the lower pricing has increased uptake for those lower-value job listings resulting in more revenue.
LinkedIn still has an opportunity to produce similar results for its other Talent Solutions products like Recruiter. Larger companies that do more hiring every month naturally get more out of Recruiter than smaller companies that only hire a handful of new employees. It doesn't make sense to charge these companies the same prices.
To that end, LinkedIn has started working on its ability to track the hiring process on its platform. By collecting data from Recruiter searches, InMails, and user profiles, it can effectively determine when a company has hired someone using its products. That could be key in figuring out how much to charge customers, as well as providing the return-on-investment data necessary for customers to take to their bosses to justify the prices, and have them sign off on it.
But LinkedIn isn't just resting on its laurels. It's still actively developing Recruiter and its other products. LinkedIn overhauled Recruiter at the end of last year. Management says the new update increased candidates per search 40% in the first quarter, and InMails per search increased 30%. That drives value across the board, leading to potential price hikes in the future.
Proactive and reasonable price increases
Mr. Gamson noted that increasing prices in a B2B context is different than in a consumer context. "In a consumer context, when something goes up in price, it's your dollar, and you have a personal reaction to it," he said. "In a B2B context ... it's all about giving our customer the heads up, so that they can go to their boss in plenty of time, have it not be a fire drill, and have it worked into that next year's budget."
Gamson later added, "When we've offered a reasonable price increase, with enough heads up, so that they can get it into their next year fiscal planning, it's been pretty straightforward."
Investors are unlikely to see 20% price increases for any LinkedIn customers, but it's having no problem increasing prices. As long as it can show that the return on investment is there for its customers, it should be able to increase pricing at its own discretion. At this point, Gamson believes the return for some customers is too high, saying pricing power is "ours to deploy."
LinkedIn's ability to name its pricing puts it in a much-stronger position than traditional social networks that rely on advertising. The advertising model -- which LinkedIn also participates in -- relies on businesses bidding on ad inventory, and the ad seller (the social network) has no direct control over the actual price paid.
In other words, the customer base determines what fair value is for the product -- not the seller -- and the customer base always wants to pay less. LinkedIn is in a much-stronger position to continuously grow revenue and earnings by selling its services to businesses, on top of advertising revenue.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.