Estimate Customer Acquisition Cost of LinkedIn

Mission

The mission of LinkedIn is connecting the world’s professionals to make them more productive and successful.

Facts

  • LinkedIn currently has roughly 774M+ users.
  • A total of 39% of LinkedIn users pay for LinkedIn Premium, which has four price tiers:
    • Premium Career: $29.99/month
    • Premium Business: $59.99/month
    • Sales Navigator Pro: $79.99/month
    • Recruiter Lite (Hiring): $119.95/month

Definition

  • Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. It includes things like advertising costs, the salary of your employees, the cost of servers, payment processing fee, etc., divided by the number of customers acquired.
  • We’ll count the cost of maintaining/supporting the free tier of LinkedIn for all non-paying customers as part of the acquisition cost for the paying customer.

Assumption

  • LinkedIn’s userbase = 800M
  • Considering all the Premium tiers, let’s assume that LinkedIn Premium costs $70/month on average.
  • Assume all estimated prices apply globally as well. In real world, they would differ depending on the countries. For example, the salary of an engineer in the US is much higher than that of in India.

Calculations

Let’s break CAC down:

  • Free Tier
    Let’s look at the Cost per Free User & Number of Free Users per Paid User:
    • Servers: As the number of users scale-up, server costs per user exponentially decreases. For LinkedIn specifically, the server costs will further come down as it’s moving to Microsoft Azure and I hope the parent company is giving them some discount. If we assume that LinkedIn spends roughly $200M every year on servers, cost per user would come down to 40 cents.
    • Salaries: 480M free users & 16,000 LinkedIn employees. That means each employee is going to support 30,000 free users. If each employee costs $200,000 each year, then each user will cost (200K/30K) = $6.66 on average
    • Operational Costs (office space): LinkedIn has offices globally. As you amortize the cost, this would come out pretty small. Let’s say it’s 50 cents.
    • For every 1 paid user, there are 1.5 free users on the platform.
    • Formula = Cost per Free User x Free per paid user Total = (0.4 + 6.66 + 0.5) x 1.5 = $11.34Thus, $11.34 is the cost for supporting the Free Tier of LinkedIn.
  • Ads
    • Let’s take into account the advertising dollars spent. We’ll mainly focus on digital ads as I’ve not personally seen any billboard ads of LinkedIn. What I see a lot is YouTube and Google ads.
    • Let’s assume the CPC (Cost Per Click) is 20 cents. The typical rate of YouTube ads is in the range of 10-30 cents.
    • Let’s assume the number of people coming in through these ads is 10%. I see a ton of these YouTube ads and if someone keeps seeing it every day they might just check it out.
    • Formula = CPC x Ad Conversion rate Total = (0.2 x 10) = $2Thus, $2 is cost of running digital ads.
  • Free Trial
    • There’s an opportunity cost for having a free trial. LinkedIn could have charged a premium but they choose not to. That’s one month of LinkedIn Premium.
    • Let’s say the average price is $70/month and we take out 3% payment processing fee from that. The remaining is $68.

Total CAC = (11.34 + 2 + 68) = $81.34

Overall, this number looks fine to me considering that majority of comes from Free Trial bucket. If we remove Free Trial from the total, the adjusted CAC would be $13.34.

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