LinkedIn made a profit for the first time in 2010, after revenues more than doubled. That growth rate is phenomenal, but can it be sustained?
To put things in perspective, the company has piles of cash - $106 million at 31 March to be precise - and no material borrowings.
Its readily realisable assets were 50% greater than its short-term liabilities at 31 March. And about 26% of last year’s revenues was spent on product development. That all sounds very encouraging.
The critical issue for LinkedIn in the medium term is whether people who buy its services get the results they want.
And a little question-mark about that began to appear in the financial results for the quarter to 31 March, when sales and marketing expenses absorbed a much larger proportion of revenues than previously, namely 31%.
Indeed sales and marketing costs have absorbed an increasing proportion of revenues in almost every year since 2006 (see chart).
Normally the reverse of that trend would be expected as the marketing spend resulted in longer term membership and customer loyalty.
So is LinkedIn having to spend more and more money to keep its paying customers or, worse still, to replace disappointed customers with others?
The question is as important for LinkedIn’s recruitment services as it is for its advertising sales. And in both cases, the ultimate test will be the quality of response.
That means reaching a sufficiently large proportion of the right target audience with minimum wastage, and doing so in circumstances that maximise the prospects of a response.
"Our member base constitutes one of the most influential, affluent and highly educated audiences on the web", LinkedIn says.
In December 2010, US visitors to the website were reported to represent more decision makers, have higher average household incomes and be comprised of more college or postgraduates than US visitors of many other leading business websites.
"Our marketing solutions provide advertisers with the ability to target specific and relevant audiences based on our members’ profile information, including title, function, company name, company size, industry and geography", the company explained, adding: "In addition, our detailed advertising campaign reports provide advertisers with insights to further maximise the return on their advertising budget."
It’s all very well boasting absolute membership numbers and offering useful analytical detail about them, but the likelihood of a good quality response will also depend on how active those members are and how long a targeted member spends on the page carrying an advertisement.
LinkedIn has already acknowledged that its membership numbers cannot be relied upon because some may have died and others may have arisen from multiple registrations.
Equally important is the frequency with which members visit the site and how genuinely interested those members are in what is displayed there.
In times of high unemployment it is particularly likely that job-seekers will pay to have their details presented to potential employers on the LinkedIn database in their desire to explore every medium.
That does not guarantee a rewarding response - job scarcity remains job scarcity.
It is equally likely that, in times of staff shortage, employers will be more inclined to pay for entries to be placed on the LinkedIn job board just to be sure they have trawled every potential source.
With such a large membership LinkedIn will always attract some business, and it could be several years before we can know whether users feel they get real value for their money.
The effectiveness of database searches by recruiters will also depend on how well disposed a member is to being head-hunted via LinkedIn when perhaps they are comfortable with their current employer.
Head-hunters will not be able to rely on LinkedIn for anything more than the equivalent of a long list of people to approach and even then they would be unwise to assume that list will include all the most suitable candidates.
Without doubt the LinkedIn model, with its analytical benefits and large membership, provides value to its customers. The unanswered question is: how much value?
Bob Willott, editor of