Yelp: Eating with the Crowds

Yelp has helped create and grow the local business space. Can it remain a market leader in an increasingly specialized space?

Yelp has seen both the rising power and the declining stature of the crowd. The company famously started when two former PayPal employees had difficulty finding a doctor when one was down with the flu. Initially, the company was an email referral product, but due to lack of investor interest, pivoted to the review site that we know today.

Value Creation

Yelp solves a very real problem – gathering reliable data on local businesses and restaurants. It’s also seen some tremendous numbers and growth – as of December 2016, it has an average of 24M monthly mobile app users, 65M mobile web users, and 73M desktop unique visitors. Mobile traffic has seen a steady increase since 2012.

Yelp provides value on both sides of the chain – users gain large amounts of firsthand information on businesses they are considering to visit, and local businesses can make a name for themselves / increase foot traffic by providing excellent products / value.

Yelp also created an offers category whereby businesses can provide offers and incentives to Yelp users in order to attract new customers or returning business. This provides them with a new platform of user engagement and marketing and in turn, customers can be delighted by local exploration and the feeling of getting of a deal.

Value Capture


While solving for a problem, the company ended up being one of the most significant contributors of the local economy ecosystem. It not only helped to create value around this space, but quickly learned how to capture it as well.

Yelp makes money in 3 primary ways:

  1. Sponsored search – local businesesses pay Yelp for traffic to either their Yelp page or website
  2. Ads – monthly subscription packages are available to customers with a business account. This enables business to place banner andtet on any search related to their own category on Yelp pages (including competitive pages)
  3. Offers / Deals – daily deals or local offers are provided to Yelp guests with Yelp taking a cut of the purchase.

Challenges

Despite its success, Yelp faces many strategic challenges going forward:

  1. Network effects – the company’s value prop is very much dependent on network effects – people come to the site in order to consume a large amount of statistically significant data. If user contribution becomes antiquated or else less relevant, suddenly, value creation and value capture both take a beating. It’s essential for Yelp to cultivate and incentivize its communities to participate in order to maintain its ecosystem and relevance
  2. Credibility – there is potential for review fraud or else exaggeration. User fraud is monitored closely – if reviewers are friends with business owners on facebook, for example, their reviewed are automatically flagged. Similarly, if users are not engaged on Yelp but provide a comment for a business, the posts are flagged as potentially suspicious. Extreme reviews are also a problem – those who feel strongly about a certain business (one way or another) are more likely to post on Yelp than the average 3-star reviewer. This leads to a skewed distribution and potential less efficacy of reviews
    1. Yelp solves for this by developing credibility scores such as ‘Yelp Elite,’ awarded to certain members who consistently contribute to the community with strong and fair reviews
    2. Besides this, it’s very difficult to solve for extreme reviews. Yelp should focus on growing review base in order to maximize statistical significance of rating
  3. ‘Expertizing’ of industry – Super-niche players that claim expertise in local businesses can slowly encroach on Yelp’s space. For example, Chowhound and Infatuation position themselves as “expert” food review websites that avoid the problem of mass contribution. Expert-curated sites and apps can indeed pose a threat to the marketplace and crowdsourced reviews that Yelp has worked so hard to develop.

All in all, I believe that Yelp has accumulated enough early liquidity to be a relevant player for a long time. However, it’s greatest asset is its user base and it must constantly innovate and engage in order to keep them loyal. Without the user base, the company falls into the chicken-egg issue of volume.

On a personal note, though I was once Yelp Eite and took my status very seriously (spent hours of my wild and precious life writing reviews, attending events, being “relevant”….hours I’ll never get back….), I’ve now switched over to Infatuation myself due to the true expertise and relatively less bias in analysis of high-end restaurants. Though this still provides Yelp with space for relevance (they have charted out local economies in an unmatched way), it does provide potential disruptions to the company’s model.

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Student comments on Yelp: Eating with the Crowds

  1. Thanks for sharing, Meghana! In addition to competition from niche players, I’m curious to know what you think about Yelp’s ability to compete with mass-market players like Google (with its rating and discovery features built into Maps) and Facebook (as a marketing platform for local businesses). On Google’s end, it seems that they have done a good job of collecting review information and exposing it to users, but I don’t know if many people purposefully use Google Maps for the same local business “research” tasks that they use Yelp for. (I certainly don’t.)

  2. Great post, Meghana! Like you, I am an Infatuation loyalist but rely on TripAdvisor and Yelp when searching outside the Infatuation network. I know you mentioned restaurants can offer promos via Yelp but I’m curious about your thoughts on why Yelp doesn’t appear to be partnering with other adjacent businesses in the space to better serve its user network. For example, when I search for the local restaurant Island Creek Oyster Bar on Yelp and TripAdvisor respectively, TripAdvisor offers the option to book a table via OpenTable. Yelp, on the other hand, only offers links to the business website. My take is that this is a mistake but perhaps there is a strategic reason for this that I’m missing.

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