LinkedIn’s share of life

Last week, the share price of social network LinkedIn soared on its first day of IPO – up to over $90 from $45 – bringing the company value to over $10 billion. LinkedIn has captured a large “share of life” of its 100 million users – a community larger than Japan. Extracting value from such a big share of life is hard work, and even harder is to sustain and grow this value. eCommerce sites can learn from LinkedIn how to focus on a share of life of their users they can chew, meaning: turn it into valuable information for their users and themselves.

Network effects of social media are overestimated

LinkedIns Freemium Model

LinkedIn's Revenue : A Freemium Model

With 100 million members, LinkedIn is one of the largest social networks in the world and claims to be adding 1 million new members each week.

Those who invested in LinkedIn may have based their share price estimate on Metcalfe’s law of network effects which says that the value of a network grows proportionally to the square of its size, meaning very fast.

But Metcalfe’s Law does not directly apply to social networks because they are not pure communication networks but rather social media.  As a social media, LinkedIn’ value depends on the value of its content. LinkedIn derives its revenue from subscriptions and advertising. Currently 41% of its revenue comes from hiring solutions — essentially premium database access sold to employers, 27% from premium subscriptions to employees and 32% from advertising.

A big “share of life”

At first glance, it seems that LinkedIn, as a professional network, has managed to aggregate an extremely valuable and highly tradable content: its members’ professional personal data.

This is what I call share of life. Social networks like LinkedIn, Facebook or Spotify compete to capture a share of life of Internet users. Each of them convinces users to willingly share some of the personal data that defines them as individuals and, therefore, can be used to target them. This includes: ID data, connections, likes and dislikes, beliefs, opinions, behavior and experiences, pictures, personal files…

Professional data such as curricula and professional connections appears to be the cream of share of life. This type of personal data has always been much needed to recruit, to find clients, and, more generally, to establish business relationships. However, it was very difficult to access before LinkedIn was created. It certainly had never been aggregated in such a massive searchable database.

LinkedIn undoubtedly met pent up demand.

Content quality risk

As a social network, LinkedIn relies almost entirely on users to generate quality content. This is an especially big challenge for LinkedIn because its content is not only a context for advertising. Unlike other social networks, LinkedIn directly monetizes its content in form of premium access to its database of personal data and connections. While maintaining the quality of this database is vital, LinkedIn has no direct control over its creation process. This is why content quality is listed as a risk factor in LinkedIn’s SEC filing:

“The number of registered members in our network is higher than the number of actual members because some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names. […]”

To increase its content quality, LinkedIn must rely on its members’ willingness to maintain their data. This is problematic because member’s engagement to do just that is currently quite low. From LinkedIn’s SEC filing again:

[…] a substantial majority of our members do not visit our website on a monthly basis, and a substantial majority of our page views are generated by a minority of our members.

The risk: a negative spiral of lack of engagement and poor content quality could unfold as follows:

• Users register to search for a job, but later don’t update their data
• Incomplete and obsolete profiles multiply
• Distrust ensues
• High profile users stop accepting connections
• Membership becomes strongly skewed towards job seekers
• Recruiters sieve through useless résumés
• Advertisers don’t reach their desired targets
• High profile users look elsewhere for premium services
• Companies cut their hiring expenses
• Quality issues hurt ranking in search engines
• Traffic drops
• Advertisers cut advertising expenses, etc.

Of course, the process of content decay does not happen from one day to the next. But as social networks Friends Reunited and MySpace proved, a first entrant can lose its lead. One could even claim that the entropy of a digital community left to itself is chaos, followed by extinction. In any case, keeping such a community engaged is hard work.

Fostering engagement

Share of Life Value

How the "Share of Life" Value can Turn from Priceless Information to Worthless Data

To prevent from entering a negative spiral, LinkedIn constantly fosters member engagement. It uses three main drivers to convince its members to keep generating valuable information:

– Rules shape engagement: The first driver of engagement comes from how the site defines the purpose and values that align the individuals’ goals with those of the community; rules are explicit like the site’s terms of use, or embedded in tools like the rules about who can approach whom and how.  The challenge is to keep a balance between loose rules that dilute the value of the community and tight rules that hinder interactions.

– Tools add value. Next come the tools that motivate users to create quality data by helping them manage this data and get something in return. Tools include: proprietary applications and partner plug-ins such as apps from TripIt or Twitter; tools for searching, analyzing, matching, pushing, and broadcasting information in all formats. Tools return value in form of recommendations, statistics, easy ways to manage group invitations, and more.

– Marketing drives usage. The third and indispensable driver is active communication. Networking benefits and additional services are not enough to motivate users. The motivation to use a social network is a fragile flame that must be fanned, increasingly so as more and more social networks and sites compete for share of life. Users need a lot of feedback, reminders, alerts and other incentives to keep LinkedIn in mind and stay active on it.

In short, fostering engagement to maintain content quality requires sizable investments and operational costs in personnel, systems and marketing. For this reason, LinkedIn has already warned that its profitability will shrink in 2011.

What we can learn from LinkedIn

Every online business, be it a brand, merchant or a media, is tempted to compete for a share of life of online consumers. And they should. But as they do, they should bare in mind that share of life is worthless if it can’t be turned it into usable information for users and for the company:

1) Be focused on your “legitimate” share of life. Do not bite more than you can chew. eCommerce sites should focus on the users’ share of life that is directly related to their mission. For example, a fishing equipment site should focus on capturing and analyzing individual profiles of visitors, registered users and clients in terms of their products searched, preferred and purchased. It may sound trivial, but it’s hard enough.

2) Return value to users. Return to the community and to individual users as much value as possible from the share of life you own. An often neglected place to start is registered user/customer account management tools: How easy is it for customers to add or delete a credit card? To store, retrieve and share their wish list? To check their latest purchases? My TV series site (I admit to a foible for the Mentalist) does not allow me to browse through my purchase history. I can’t see which episode I last bought, how unhelpful is that?

3) Make data collection and maintenance your cost, not theirs. Bear in mind data obsolescence. Focus on behavioral data that is more current and does not require voluntary input. Extract more value from however little personal data you have before trying to collect more.

4) Never stop marketing to those users who have entrusted us with a share of their life.

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One comment

  1. Per-BKWine says:

    I think we who were among the first 50,000 members of LinkedIn should have had a priority allocation when they allocated the shares for the IPO! 😉

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