I would like to return to the issue of the value of LinkedIn. This is prompted by the fact that I have been reading Tim Harford’s excellent book The Undercover Economist. The opening chapters of this book reference the pioneering work of the 19th century economist David Ricardo and his investigations into price (income), costs and the importance of what happens at the margin to determining the relationship between the two and thus profitability.
Ricardo highlighted the importance of marginal costs (i.e. what it costs to produce one more unit of production or add one more customer) in setting prices and thus generating revenue and creating profits. Very basically, what Ricardo showed was that in a relatively competitive and open market, you cannot generate revenue from your product that is significantly more than the marginal cost.
In 2010, LinkedIn revenue was $243 million (according to Mashable) and in March 2011, LinkedIn claimed 100 million users. This means that revenue per user is around $2.43. According to Ricardo this should indicate that marginal costs will be close to that i.e. the cost to LinkedIn for adding an additional user and servicing them for one year should be not be significantly less than $2.43. If they were, LinkedIn is either not operating in an open and competitive market or else something else rather odd, and probably unsustainable, is going on. Continue reading