Yelp

Crowdsourced reviews for businesses might seem commonplace and mundane today, with Yelp commanding a valuation of $3.4 billion and 145 million average monthly unique visitors. Yet the company’s beginnings in 2004 demonstrate how leveraging the crowd was not always an easy task.

 

Founded by two former PayPal employees, the initial product was an email-based referral network. The user would input both the service he was looking for, as well as emails of a handful of individuals from whom he was requesting the information. Yelp would send an email to these people, along with a few others in the same geographical area. It would then compile responses and send it back to the users. Fortune describes this system, and rightly so, as “convoluted.”

 

The 2004 Yelp aimed to solve the same problem as the 2018 Yelp; the company began after one of the founders was unable to find an online recommendation for a local doctor. However, the manner in which the 2004 Yelp attempted to create and capture value was significantly inferior. There were notable hurdles in adoption from both sides of the platform. For a user, having to specify both services and emails in itself would be a barrier to use the platform. The wait time, which would run into a few days, further reduced value to the user. On the other side of the platform, there was minimal positive reinforcement or incentives offered to the reviewer.

 

The 2018 Yelp offers a completely different solution. A centralized online portal, as opposed to emails, addresses some of Yelp’s initial challenges. The ability to read reviews instantaneously without any requisite input and light touch interaction with the platform offers significantly more value to the user. Furthermore, it incentivizes users to contribute content (reviews) through reward of an “elite” status (based on the quantity and quality of the user’s reviews, active voting record and interaction with other users), which earns the user a colorful badge on their account profile and invitation to special events. Additionally, it does not supplement organic reviews with those by paid writers. In concentrating on the social aspect of the product, compared to Citysearch and Angie’s List, Yelp has been able to maintain an image of authenticity, which allowed for both more open reception by the users on the one side, and greater ownership of reviews by the reviewers on the other. The value of this product was highlighted in a 2011 HBS study that estimated that a one-star improvement in Yelp rating increases the topline by 5% to 9%. How then does Yelp capture this value? Advertisements.

 

This is not to say that Yelp has not had its fair share of challenges. While organic, unpaid and independent reviews are an important factor in Yelp’s growth, studies have shown that reviewers are biased by prior reviews. This specifically happens primarily on the positive review front, where positive reviews beget more positive reviews. This has not been as prevalent with negative reviews. The playout of this has been instances where a restaurant creates fake accounts to post a few positive reviews, facilitating a snowballing effect to score more positive reviews.

 

Yelp has fought back in several ways. First, it employs an algorithm designed to filter out reviews that it believes to be fake. Second, and perhaps more effective, Yelp has conducted “sting operations” at the source of the “crime” itself. For example, Yelp will pose as companies that advertise on Craigslist, offering to post fake reviews. In situations where it catches a business, it will publicly call out the business on its Yelp page. It will be interesting to see how this cat and mouse game plays out, especially as Yelp expands into other geographies.

 

Ultimately Yelp must protect what is the main driver of value: authentic reviews.

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2 thoughts on “Yelp

  1. Yelp has also been accused of removing reviews unfavorable to businesses in exchange for ad revenue from the businesses. If this is ever found to be true, it will be interesting to see if the crowd of reviewers stays with the platform or takes their content contributions elsewhere. Maintaining community trust is a complicated and necessary role of companies that depend on crowds.

  2. Great post. The biggest opportunity for Yelp is to leverage their data and user base in adjacent business. Food delivery has enormous potential for Yelp. With its extensive data and restaurant partners, Yelp is very well positioned to compete against Grubgub and others. They already acquired Eat24. As in this example, I believe the strength of crowd-sourcing platforms to source, create and channelize communities from data generation business models to revenue generation business models. However, Google will be a tough competitor for Yelp with its increasing focus on adjacent search and review areas. Increasing consumer stickiness will be the key challenge ahead.

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