As a child, I used to stand outside a toy shop and wonder why I should go to this shop and not the one next to it selling the same stuff. I had to go to both the shops and evaluate which shop had the latest version of my favorite toys. Life became a bit easier when a classmate suggested a new toy shop with the latest and unique games.
As I grew, my requirement to know the best salon, restaurant, or doctor near me increased exponentially. I wondered what if I had a friend for every recommendation I needed. Little did I know that a US-based company was building a review system of small to large businesses, helping consumers make the best decision.
Yes, I am talking about Yelp. With more than 200Mn reviews and over 100 Mn visitors, Yelp has become a go-to place for reviews on small businesses. Not only the US, but Yelp has made its mark globally. On The Strategy Story, we always present unique business models that have changed consumer behavior. Yelp’s business model has changed the way consumers connect with small businesses. What’s more interesting is knowing how a review platform like Yelp makes money while helping small businesses grow exponentially.
Yelp’s 16-year-old long journey
Founded in 2004 by former PayPal employees Russel Simmons and Jeremy Stoppelman, Yelp has become a leading local business review site in the United States. Initially, Yelp was conceived as an email-based referral network, but the idea could not attract investors and users beyond family and friends. Yelp observed that users were answering emails but were using the “Real Reviews” feature, which allowed them to write unsolicited reviews.
By 2005, Yelp revised its platform, soaring its popularity among users and investors. By 2010, Yelp had raised $125 Mn in multiple rounds with ~5 Mn reviews and $30 Mn in revenue.
Since 209, Yelp also started going international. Yelp had a presence in 20 countries by 2012, including the UK, Canada, Singapore, Turkey, Denmark, and many more. Meanwhile, Google and Yahoo tried to acquire Yelp, but the negotiations failed. Since 2012, Yelp has been a publicly listed company. Unfortunately, Yelp’s share has not given much return to investors.
In 2019, Yelp announced an ambitious, multi-year business transformation plan to drive and sustain long-term profitable growth. The strategy aimed to increase its value proposition to businesses while also driving growth through product innovation, marketing, and its multi-location business.
What is unique about Yelp’s business model?
At Yelp, users can submit a review of their products or services using a one-to-five-star rating scale. Businesses can also update contact information, hours, and other basic listing information or add special deals. In addition to writing reviews, users can react to reviews, plan events, or discuss their personal lives.
Yelp’s business model focuses on providing value to consumers and businesses alike by connecting consumers with local businesses at the critical moment when they are deciding where to spend their money. Let’s analyze the key pillars of Yelp’s business model.
- Discovery– Millions of consumers can discover local businesses around them to meet their everyday needs. To local businesses, Yelp offers its platform to showcase its products and services to new customers.
- Engagement– Consumers engage with other consumers by sharing their experiences via reviews, tips, photos, and videos. Consumers also can interact with local businesses through reviews and messaging.
- Transactions– The Yelp Platform allows consumers to transact with local businesses directly for food ordering and deliveries, online reservations, and many other similar activities.
At the heart of Yelp’s business model are the vibrant communities of contributors that contribute to the content on its platform. These contributors provide rich, firsthand information about local businesses in the form of reviews and ratings, tips, photos, and videos.
Each review, tip, photo, and video expand the breadth and depth of the content on Yelp, which drives a powerful network effect: the expanded content draws in more consumers and more prospective contributors. For this reason, Yelp fosters and supports communities of contributors and makes the consumer experience its highest priority.
Yelp encourages users to complete a public profile, which helps build a community and helps signal the reliability of their content. To provide recognition to users who are active in the Yelp community and consistently contribute high-quality content, Yelp established the Yelp Elite Squad. Such steps encourage authentic content from the start of the user experience.
Yelp competitors consist of companies that help businesses connect and engage with consumers. Search engines like Google, review portals like TripAdvisor, or service booking platforms ANGI services. These companies in competition enjoy greater name recognition, longer operating histories, substantially greater market share, established marketing relationships with, and access to, large existing user bases, and substantially greater financial, technical, and other resources.
But as claimed by Yelp in its 2020 10K filing, its ability to offer quality content, reliable community, and the performance and reliability of its products and services differentiates itself from the established market players.
Yelp also claims its audience has high purchase intent and is generally affluent. It estimates that over 50% of our audience has an annual household income of more than $100,000.
How does Yelp make money?
So far, we have very well understood the business model of Yelp and its key pillars. One aspect that we still have not covered is Yelp’s revenue model. If a business can register a business account for free, how does Yelp make money?
Yelp makes money through three revenue streams: Advertising (CPC advertising), Transactions (interactive consumer tools), and Other Services (data licensing). Yelp generated $873 Mn in 2020, of which advertising contributed 96%. Let’s break down each revenue stream in detail.
Yelp provides a range of free and paid advertising products to businesses of all sizes. These products can deliver targeted search advertising to large local audiences. Yelp recognizes revenue via the business listing and advertising products, including advertising sold by partners, as advertising revenue. Advertising accounts for 96% of the revenue generated by Yelp.
Yelp’s advertising products include CPC Search Advertising and Multi-location Ad Products.
- In CPC Search advertising, Yelp primarily sells performance-based ads that allow local businesses to promote themselves as a sponsored search result on our platform, on the listing pages of related companies, as suggested “additional businesses.” Even in advertising, CPC advertising generates the majority of revenue.
- In Multi-location Ad Products, Yelp offers a range of ad products designed for multi-location advertisers, including Showcase Ads, which showcase special offerings with limited-time localized promotions in relevant search results; and Seasonal Spotlight Ads, which highlight special offerings and promotions related to a holiday or seasonal event.
Business Listing Page Products- It’s free for a business to create a free online business account and claim the listing page for each business location. Yelp provides an upgrade package (2nd most popular product after a search) where businesses can highlight their profile, select photos or videos to emphasize on the page through a slideshow feature, secure Yelp Verified License, use Yelp connect, and many more.
Yelp claims to align its business model with advertisers’ success by enabling small businesses to purchase and more fully manage their advertising on a self-serve basis. The strategy, in turn, helped Yelp increase retention and reduced its reliance on sales and customer support. In Q3 of 2021, Self-serve channel revenue increased by approximately 10% from the second quarter of 2021 and more than 45% YoY.
In addition to advertising products, Yelp also offers consumer-interactive tools to facilitate transactions between consumers and the local businesses on Yelp. These features are primarily available through partner integration. By both transaction volume and revenue, the largest of which is its partnership with Grubhub, allows consumers to place food orders for pickup and delivery through Yelp. Transaction revenue stream only contributed 1.5% to its revenue in 2020.
Yelp generates other revenue through subscription services, licensing payments for access to Yelp data, and other non-advertising, non-transaction arrangements.
As Yelp generates humongous data with hundreds of millions of detailed reviews, photos, and business information, it presents a particularly high-value proposition for enterprise customers looking to integrate local content into their products or analyze local data to gain valuable business intelligence local business information. Yelp makes money by offering licenses to such data sets. This stream also contributed 2.5% to Yelp’s revenue in 2020.
What’s the latest at Yelp?
- Focus on data: Yelp has seen many long-standing data licensees, including industry-leading mapping platforms, local search products, and voice assistants. Yelp has also seen strong demand for its content from auto manufacturers. It estimates that its content will be integrated into the infotainment systems of more than half of the new vehicles shipped for sale in the United States in 2022. The focus on monetizing data can be seen from the fact that revenue generated from data licensing programs tripled from the third quarter of 2019 to the third quarter of 2021.
- Improved monetization strategy: Through product innovation, Yelp is Building increasingly differentiated category experiences for its services to explore new avenues of monetization. To better match consumers with the right Services businesses for their projects, Yelp rolled out custom search filters and launched a new ad format, Themed Ads. Yelp recently launched Yelp Project Cost Guides to help consumers make informed decisions when hiring a service professional. Revenue from the service stream has grown 10% YoY.
- Enhanced Features: Recently, Yelp launched a feature where users will be able to scroll through a vertical feed that features visual content from local restaurants in their city, including Popular Dishes, popular photos from consumers, and updates directly from restaurants.
In Summary, Yelp understands the power of content generated on its platform in different formats. Yelp is hardly a review website. It’s a data-rich company that in the future might become a go-to place for businesses of every kind to get insights on their customers. So far, Yelp’s journey has not been that impressive to investors, but then who knows!!