Monday, February 7, 2011

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.

9 comments:

  1. Patrick, I think you made some great points. Many web companies have failed by only building great user communities with no business model to monetize up front. I think your idea of having the businesses pay a fee to see reviews is one of the best I have read so far.

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  2. I agree fully with your point about "stop giving away the cow". Actually a very good way of phrasing Yelp's situation. I'd be interested to see, however, if businesses would subscribe and buy the ability to read the reviews. There are so many other blog and comment sites that would give the same information for free. I also wonder if those other sites would follow suit and start charging businesses to read reviews.

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  3. This comment has been removed by the author.

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  4. Great read. If you will entertain me for a few minutes, please allow me to present a counter-problem to you:

    Obviously, Yelp is showing some early signs of vulnerability, though they are far from being in any form of eminent danger, largely due to their strong network effects, as you mentioned.

    From Quora: http://www.quora.com/Craigslist/Why-hasnt-another-product-disrupted-and-replaced-Craigslist

    "Bad sites with network effects show much slower decay in use than they should based on their absolute quality. (think eBay.) Bad sites who price most of their product at free show incredibly slow decay in use. (think Craigslist)."

    Of course, Yelp has the added protection of being far from a bad site.

    Question: How can a start-up company (and not Google or Yahoo) steal market share from Yelp and reach success?

    Here's my strategy, but I'd love to hear your thoughts on this subject as well!

    1. Focus on lateral competition as opposed to frontal competition [Facebook vs. MySpace, everyone vs. Craigslist]

    -- Focus on stealing a vertical segment, such as restaurants or services (Angie's List).

    2. Target demographics that Yelp is not dominant in (user base, geography). This might be part of lateral competition.

    3. Build a better product (user experience, content) - this one is a toughie

    4. Execute better (have a better profit model, exploit chinks in armor such as the above.. and what you may have to contribute).

    I hope you find this to be a good contribution to your post. Thank you for your time!

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  5. DChang,

    I appreciate your breakdown as I have repackaged the offerings in a directory for restaurants specific, with 2 primary profit streams, and a 3rd stream from targeted advertising. The user experience is improved through a relevance filter which quantifies taste, and thus streamlines natural encounters of people, media, restaurants, even deals, combined with the latest in geo-socialization and what we've learned since the smartphone now drives user-friendliness.

    Thank you for your time, would be down to chat further. Would disclose my domain, but just bought it last week and waiting for transfer completion to begin hosting a coming soon.

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  6. How much do you think yelp should charge the companies for public distribution of their reviews ? What's the appropriate fee for such an advertisement.

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  7. It's interesting, when I first read what you've written here, I thought to myself that you clearly do not understand the nature of an internet business. However, that may be a bit harsh.

    What you propose, simply put, will kill Yelp so fast it literally will not be funny, and actually quite sad. While in practicality your suggestions for generating revenue would undoubtedly be profitable, it would undermine the credibility of Yelp in such a profound way, that the site would become useless to consumers, in which case they would cease to use it, and then business owners would cease to use it as well; and that would happen in a matter of months. Social Media blogs and Technology publications across the country--no the world-- would crucify this practice and that would be the end of Yelp.

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  9. YELP is bankrupt and will never make a profit. Search Google "yelp scam", "yelp extortion" , "yelp mafia" and see over three million results. Any small business man with a smartphone recognizes extortion and mafia tactics when YELP! calls. jeremy stoppelman is a master lair and con-man. He sells his yelp stock as soon as he can because it is worthless. Only 67k active advertisers with 55M business listings. Ten Years-NO EARNINGS. Every small businessman HATES YELP with a passion. GET OUT OF THE STOCK NOW!

    ReplyDelete