What LinkedIn Knows About Marketing and Sales That You Don't

LinkedIn (NYSE: LNKD) went public recently. With luck, your broker “got you in” at the $45 initial offering price, then sold the same day when it peaked above $120 (the price at the time of posting is in the mid $60s). What can we learn from that initial public offering (IPO)? Plenty of folks speculated that the more than doubling of the stock price on its opening day is a portent of things to come: more overhyped and overpriced Web-based social media offerings on the way from Facebook, Twitter and Groupon (which already filed for its own IPO). While time will tell if those predictions come true, that’s not what I found most interesting about the LinkedIn IPO. Buried deep within its 567-page S-1 SEC filing are lots of interesting numbers and explanations about what LinkedIn does and how it does them; even more interesting are its future plans, especially pertaining to marketing and sale.

Most people are aware of the B2C side of LinkedIn because that’s what they know. I have a LinkedIn profile, as do millions of other “business professionals.” However, I don’t pay LinkedIn for my profile; to date I have not seen the benefit of upgrading to the paid premium service, nor have most people with profiles (more than 100 million). As of the end of September 2010, premium subscriptions displayed 27 percent growth year over year, but that was down substantially from 53 percent in 2007. LinkedIn expects a continuation of that trend for premium subscriptions. It’s the B2B offerings (e.g. Hiring Solutions and Marketing Solutions) that are growing faster, and that’s where LinkedIn’s future lies.

The issue is that, to date, LinkedIn’s online sales channel has enabled online purchases of subscriptions and products. But the company admits that the increasing shift to a B2B model requires it to build out a traditional offline field sales organization “characterized by a longer sales cycle where price can be negotiated, higher average selling prices, longer contract terms, higher selling expenses and a longer cash collection cycle compared to our online channel.” And a more traditional field sales organization will require support from an expanded marketing function. It’s not just about increasing awareness of the benefits of LinkedIn to enterprises; it’s also about demand creation and account acquisition, product and solution marketing, and managing the company’s brand and reputation in the shifting sands of social media.

What’s the impact? Marketing and sales costs as a percentage of LinkedIn’s annual revenue increased from 16 percent at the end of 2007 to 24 percent for the nine months ended September 30, 2010. And, according to the IPO filing, those costs will continue to rise: “In the near term, we expect sales and marketing expenses to increase on an absolute basis and as a percentage of revenue and to be our largest expense on an absolute basis and as a percentage of revenue.” Why the ramp-up in marketing and sales costs? The simple answer is that this spending will fund organic b-to-b growth: “We plan to continue to invest heavily in sales and marketing to expand our global footprint, grow our customer accounts and continue building brand awareness.” Should this come as a surprise? Some investors may be surprised when they see marketing and sales costs as a percentage of revenue continue to climb to between 35 percent and 40 percent of revenue, which is where we see marketing and sales costs for similar sized software-as-a-service (SaaS)-based clients.