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Social networking started its meteoric rise more than a half a decade ago, but some of the biggest names in the space are just getting set to really cash in.

One of those names: LinkedIn, the social network that has carved out a lucrative niche as the social network for professionals. It's going public soon, and could pave a golden path for social networking brethren like Facebook when they go public.

On the surface, LinkedIn looks impressive. In the first three quarters of 2010, it generated upwards of $160m, double what it produced in 2009. Perhaps more importantly, 2010 also marked the company's first year as a profitable enterprise.

But does LinkedIn look more impressive a company than it really is? At least one observer thinks that might be the case.

Last week, Jim Edwards, a former managing editor at Adweek, noted that LinkedIn's usage is driven by a relatively small number of users. In the "risks" section of its IPO prospectus, the company reveals that "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" and "the number of the registered members is higher than the number of actual members".

According to Edwards, "This smells bad for advertisers. Consumers need to see messages more than once a month in order for ads to work." But is that really the case?

It's worth pointing out that advertising is just one of LinkedIn's revenue streams; the company also makes money from paid memberships and recruiting solutions. As early as 2008, its other sources of revenue accounted for three-quarters of the company's revenue.

But revenue breakdowns notwithstanding, LinkedIn's usage is likely just another confirmation of the Pareto principle, more commonly referred to as the 80/20 rule, which basically states that 80% of Y will be produced by 20% of X.

In other words, 80% of a company's revenue will be generated by 20% of its customers, or 80% of its pageviews will be generated by 20% of its customers.

While the numbers 80 and 20 may not be precise, many businesses find that the general rule holds true. Which is important, because acknowledging this, it's probably to be expected that LinkedIn -- and even Facebook -- sees much of its activity from a relatively small number of users.

It would actually be more surprising to see usage distributed evenly, and such a pattern might even pose risks of its own. The nice thing about the 80/20 rule is that, when it's observed, it gives a business the opportunity to segment and focus most on serving those customers or users who drive the majority of the value creation, as opposed to being stuck trying to be everything to everybody.

At the end of the day, there may very well be an argument to be made that social networking companies like LinkedIn will be overvalued when they go public, but the mere fact that a minority of users creates the majority of the value isn't one of them.

Photo credit: ifindkarma via Flickr.

Patricio Robles

Published 22 February, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2390 more posts from this author

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iDCx

After starting my website some 2 years ago - and knowing that the SEO would take me some time - i dipped into social networking via linkedin in order of driving some traffic towards my new site.

I recently read that 1 in 20 ppl on linkedin were found to be recruiters... this made me ponder - i do agree that the 80/20 rule is apparent here and indeed in most occurrences of a sliding business model coinciding with the economies of scale produced by the Professionals on linkedin - thus we must agree -

these professionals are often working - thus if they're heavy users of linkedin, how can they be producing the work required for their jobs? henceforth i dont think this is a bad thing, yet it is understandable that the user base often only visits the site when they want to or are called to for a reason.

Great read either way - however i dont think i would be investing in the long term usage of linkedin once it was to float - but then, i dont think its going away either.

Thanks for the info econ!!!!

iDCx

over 5 years ago

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Nick Tann

I've been on linkedin for years and I've never even noticed a commercial.

A similar thing happened with bands and artists on MySpace. I get hundreds of bands wanting me to be their fan.....

over 5 years ago

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David Edwards

Linked In seems to be the place for business deals... Looking into it!...

over 5 years ago

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Roy

LinkedIn can be useful for recruitment and recruiters. As part of an overarching job hunting strategy it shows you are in the right professional frame of mind and taking care of your online profile. For recruiters it's useful to see who is doing what. As always with these networks, a lot depends on the numbers and frequency of usage. I don't think anyone wants it to become a recruitment consultants echo chamber. 80/20 sounds about right for now... whither LinkedIn after float...

over 5 years ago

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Tyronne Ratcliff

I haven't noticed a lot of ads when I've been on the site, I'm' guessing they generate a lot of their revenue through recruitment. I still believe LinkedIn is in its infancy

over 5 years ago

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Patrick Clarke

The 80/20 rule also usually applies to complaints and refund requests. 80 per cent of these requests usually come from 20 per cent of your customers, usually those at the bottom end in terms of their spending.

over 5 years ago

John Courtney

John Courtney, CEO and Executive Chairman at Pay on Results SEO, Content Marketing, Social Media, Digital PR, PPC & CRO from Strategy Digital

I've been a LinkedIn member for nearly 10 years now and I still think its the sleeping giant of social media. I find it really useful for finding and recruiting staff for my SEO agency. Where it lacks is the day to day interaction that you find with other sites.

over 5 years ago

Stephen Frater

Stephen Frater, Digital Director at Delineo

From an advertiser's perspective, LinkedIn advertising is nowhere near the finished article. A minimum bid of $2 per click is scandalous.

While the targeting functions are ok, segmenting on geography still leaves a lot to be desired.

Had no problems creating adverts that gained clicks but the quality of click through has so far been very poor.

over 5 years ago

Justin Rees

Justin Rees, Cofounder at Talking Customers

Like some of the previous comments, I find LinkedIn extremely useful and have made some great contacts that have resulted in material revenue generation.

However, from a valuation perspective I have to agree with some of Jim Edwards' comments. Unlike Facebook, LinkedIn is not very sticky. It is not really the Facebook of the B2B world as when you get to your desk (or pick up your mobile) it is not the first place you go and there are not many add on features that are anything more than gimmicks.

If LinkedIn want to make advertising a significant source of revenue they need to do give their members more of a reason to visit the site!

over 5 years ago

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Larry Concannon

I described LinkedIn to my kids as "facebook for grown-ups"... I've been on for upwards of 10 years. It has changed recruiting. I am at the position I am now due to a former co-worker seeing my status and telling me about an interesting little company near me... It has gotten to the point now that when I want to connect two people for business reasons, I include their linkedin URLs in the email....

over 5 years ago

Vincent Amari

Vincent Amari, Online Consultancy at Business Foresights Ltd

They still have potential to increase more regular visits, just need to rethink the 'social' parts of their business model and add more value for 'normal business' users.

@ John Courtney
It may feel like 10 years, but they only launched in May 2003 :-)
I joined in Sep 2003.

over 5 years ago

Vincent Amari

Vincent Amari, Online Consultancy at Business Foresights Ltd

They still have potential to increase more regular visits, just need to rethink the 'social' parts of their business model and add more value for 'normal business' users.

@ John Courtney
It may feel like 10 years, but they only launched in May 2003 :-)
I joined in Sep 2003.

over 5 years ago

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