As Facebook (NASDAQ:FB) looks for new ways to monetize its 1.1 billion users, it should probably ask LinkedIn (NYSE:LNKD) for some advice. Unlike Facebook, LinkedIn has been more effective in using its 225 million members to its advantage. As a result, the world's largest professional network can support itself through three distinct revenue streams, which together grew by 72% year over year in the first quarter.
Talent solutions is LinkedIn's largest and most important segment since it provides recruiters with a tool that's unmatched in the industry. The network effect is what makes it such an indispensible product for recruiters because it keeps getting better as more professionals join. It sort of goes without saying, but LinkedIn has tremendous pricing power over its 18,000 and counting paying recruiters.
Same page, different book
Why can't Facebook take this same idea and apply it to its own business? Instead of connecting recruiters with a talent pool, Facebook could charge businesses with a large enough presence for the privilege to connect with their fan base.
The fact that Coca-Cola gets to connect with over 68 million fans for exactly zero dollars is kind of ridiculous, don't you think? Facebook is the one that's providing the platform to allow businesses to connect with as many as 1.1 billion fans. I'm having trouble see why Facebook couldn't justify a fee for this service.
After all, Facebook is a ripe place for businesses to self-promote for free. While over 16 million businesses that have a Facebook presence, less than 6.25% are active advertisers. No wonder the company has struggled with growing average revenue per user faster than active user growth.
Let's say any business page with over 500 likes had to pay Facebook $25 a month to connect with fans. Assuming 75% of the 16 million businesses won't meet this criterion, Facebook would generate an additional $1.2 billion a year in revenue and increase the average revenue per user by about 20% compared to the last four quarters of combined results. To put this figure in perspective, Facebook increased average revenue per user by less than 12% in the first quarter on a year over year basis.
Now, imagine if Facebook charged a progressive fee based on the number of likes, or if more than 4 million businesses surpassed the 500-fan threshold.
Ready for lift off!
Contrary to popular belief, Facebook has tremendous pricing power. The company needs to acknowledge it has a massive 800-pound gorilla that could be game-changing for investors. Should Facebook continue to struggle with user monetization, I think it's more a question of when -- rather than if -- this will happen.
Fool contributor Steve Heller owns shares of LinkedIn. The Motley Fool recommends Coca-Cola, 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.