Why Can’t Yelp Make a Profit?

Why Can’t Yelp Make a Profit?

The Problem

In a word: Revenue!  But it’s not quite that simple.  Yelp cannot figure out how to charge for the content that its community of reviewers generate on a daily basis.  The company was founded in 2004 to answer the question of what to expect at local businesses before you shopped there.  Need a good doctor or want some great barbeque, go to Yelp and see what your neighbors recommend.  The company offers users the ability to post reviews on anything and everything and presents all the reviews for a specific business in just a few clicks.  The ever increasing number of reviews requires more and more capacity on a daily basis to keep up.  The company originally relied on venture capital to develop its platform and then sustain its growth from the San Francisco area across the country but with competitors like Google HotPot and Yahoo! Local, Yelp needs to carve out a profitable niche fast or risk being driven out of the marketplace.

At the root of the problem is Yelp’s business plan, or lack of one.  The company originally set out under the old internet startup mantra “build a following online and money will follow”.  Well, Yelp built a huge following but the money hasn’t followed.  The company did not have a clearly defined plan to charge to make the company profitable.  Fast forward through several years of failed revenue generating concepts and Yelp is still struggling to turn a profit with its current business model.  Yelp needs to change its model fast.

Stop Giving Away the Cow

As the old saying goes, why buy the cow when you can have the milk for free?  Yelp has provided a free means of advertising for many local businesses by publishing unsolicited and unedited user reviews.  Many businesses have seen the impact of Yelp reviews on sales firsthand but yet few expressed interest in Yelp’s sponsorship program which provided businesses the opportunity to post information and pictures on its Yelp page for a fee.  And why should they?  Yelp’s sponsorship program did not deliver enough additional value to a business owner to justify the fee.  A few good reviews are much more valuable to a business than a few nice pictures of its dining area.  If a business can continue to enjoy free positive reviews on Yelp, why pay?  Interest in the program may have been higher if Yelp had allowed businesses that received negative reviews the opportunity to edit or delete them but Yelp categorically denied that.  To make the model a cash cow instead of the free cow, Yelp needs to leverage the power of its reviewer community and use it make money by blocking content.  Yelp can continue to allow reviewers to post reviews on any business they want but only publish reviews on businesses who pay a subscription fee.  If a local business owner wants potential customers to read his/ her reviews on Yelp, they will have to pay a monthly service fee for Yelp to publish the content.  Businesses, especially local ones, recognize the influence that Yelp has in generating new customers and often times do not have the resources to take out an ad in the Yellow Pages or other media.  Yelp has offered business owners a viable alternative to the Yellow Pages and has proven its ability to influence sales.  Charging a fee for public distribution of its reviews like Zagat is not unreasonable, especially when many would likely notice a drop in new customers if Yelp blocked their review page. 

You Scratch My Back, I’ll Scratch Yours

The Yelp management team has expressed concern that charging for access to reviews would alienate some reviewers and so access is still free.  In January of 2009, Yelp boasted over 22 million unique visitors but less than 1% of those visitors posted a review¹.  While it is likely that many visitors had previously posted reviews or will post reviews in the future, there still exists a significant population of passive viewers who have not and will not post reviews.  These passive reviewers benefit from the information that Yelp provides through its network of reviewers but does not offer anything in return and in fact cost the company money by requiring greater servers and capacity to accommodate the traffic.   Yelp can implement a review to read model in which it would allow free access to its reviews if you have posted a review in the past 30 days and charge a subscription fee to just read its content.  Sites like Angie’s List already use a similar model but do not provide an option for free access.  Implementing this would not be difficult as Yelp reviewers already have profiles.  The company can track posts associated to profiles so that the reviewer would not have to do anything different.  This would encourage more passive users to become active members of the reviewing community and give Yelp more power with advertisers and local business owners in its cash cow model outlined above.  If Yelp’s passive users do not want to become reviewers, the company can charge a small fee for access to its content.  Yelp must not overprice its content for risk of reducing the number of unique visitors and more importantly its reviewers but even $1 a week for passive use would have a significant impact on revenue.  By pricing access to reviews very low and providing options to free content will mitigate Yelp management’s concern of alienating reviewers.

Time is Running Out!

Yelp needs to take action immediately because it does not offer a unique service.  Sites like Yahoo! Local, Google HotPot, and Angie’s list offer very similar services.  Yelp needs to capitalize on its reviewer community now before reviewers begin to migrate to different sites.  Reviewers identify with other Yelp reviewers, the website, and the company itself but competitors can create similar communities too.  Yelp must act soon or risk while it still has the community of reviewers to leverage.  The clock is ticking.

1.  Piskoroski, Mikolaj Jan.  “Yelp,” Harvard Business School, March 27, 2009.