Clew’s Deep Dives offer a closer look at some of the most loved search-related products.
A brief history
The story goes that sometime in 2004, Jeremy Stoppelman came down with the flu and looked up reviews for local doctors only to come up empty. Annoyed but inspired, he partnered with fellow PayPal engineer Russel Simmons and approached Max Levchin at MRL Ventures with the pitch for a business that let people crowdsource recommendations from strangers on the internet. Without even a deck prepared, the two friends managed to convince Levchin to invest $1M in what would become the massively popular review site, Yelp. Originally, Stoppelman pushed for the name “Yocal”, a play on “Yellow Pages” and “local”, but as many company name stories go, he couldn’t get his hands on the domain. He finally settled on Yelp, though not without hesitation.
“It’s sort of like a cry for help. Will we get passed that? Does it have a negative connotation?”
The product began as a Quora-style forum where users would provide recommendations when prompted. The critical insight came when the founders noticed users clicking on a link buried in the footer of their site, a link that allowed people to submit unsolicited reviews. Turns out, people were willing to write 5, 10, 15 reviews in one sitting. Riding a larger crowdsourcing movement emerging at the time, Yelp saw an explosion in its user growth as it launched across the country. In November of 2011, the company filed for an IPO. By then, the company had raised $55M in funding over the course of five rounds from firms including Bessemer, Benchmark, DAG, and Elevation Partners. On March 2, 2012, Stoppelman, the remaining co-founder who held 11.1% of the company, rang the bell on the first day of trading. At that time, the company’s market cap was valued at $1.47B. The company’s current market cap sits at $2.71B, though still a far cry from its all-time-high of $6.92B in 2014.
The company & business model
Yelp rests heavily on its ad-based business model, with a sliver of revenues coming from transactions fees and subscriptions from non-advertising products like reservation management and analytic tools for businesses.
Yelp’s growth has been supported by the increasing influence of reviews on consumer purchasing decisions, the move of local advertising from offline to online, as well as the rise of mobile. Still, the 15-year old company with its fanatic user base and all, is vulnerable to competition. In its S-1, the Yelp cited competition in the market from companies like Google, who have longer operating histories, greater market share, and larger user bases. If Google were to scrape Yelp’s content without permission, create its own product, and compete for the attention of contributors and consumers, Yelp would be in trouble.
Between 2010 and 2011, that’s exactly what happened. Months earlier, TechCrunch had reported that Yelp turned down Google’s acquisition offer, an offer which would have paid $500M in addition to earnouts (additional payments conditional on performance). Following the story, Google began scraping content from Yelp’s site and incorporating reviews into its own local products without permission. This became an anti-trust issue and Stoppelman even had to testify before the U.S. Senate Committee. What was clear following the experience, was that Yelp could not depend on Google. Then on, Yelp would begin driving traffic to mobile, in a conscious effort to reduce its reliance on search engines to get in front of users.
Now, mobile accounts for 80% of all searches and 76% of all ad clicks on the platform.
What began as a simple idea from two friends emerged as a $943M a year business. Nonetheless, Yelp has struggled in recent years due to stiffening competition from large incumbents including Google and Facebook. Though Yelp was the first real success story founded on the idea of crowdsourcing reviews, social media and hyper-connectivity among people and businesses opened up new channels to get information. Whether it’s from location-based products like Google Maps or rich Instagram feeds, people can find inspiration and recommendations for purchase decisions through a variety of other places.
Given those pressures, Yelp has experienced a progressive slowing in the growth of paid business accounts as local advertising dollars are drawn to competing platforms.
What’s been core to Yelp’s financial success is trust in its content. For Yelpers to continue using the platform, they have to be able to rely on its recommendations. For businesses to continue advertising with the platform, they have to have confidence they’ll see a financial return from the time and money they invest in building and maintaining a quality listing. Unfortunately, the company has been plagued by incidents that erode trust. Yelp has been accused of extortion, with business owners claiming the company would threaten to remove positive reviews unless they paid for ads. Even lawsuits were filed against Yelp, though later dismissed after the Federal Trade Commission found insufficient evidence of any wrong-doing. More generally, the platform is believed by some to be reactionary and driven by negative reviews which overshadow positive customer experiences. The combination of these public sentiments and competitive pressures have greatly impacted Yelp’s financial performance between the period of 2010 and 2018.
After going public back in 2011, the company reached its peak market cap of $6.92B in 2014. That fiscal year, the company had finally become net income positive.
Since then, Yelp’s market cap has trended downwards, with the lowest dip in 2016 down to $1.18B and more recently hovering around the $2B-$3B range. The public market hasn’t been optimistic about the company’s performance. In May 2017, Yelp’s stock plunged 25%, its biggest one-day loss, after a disappointing earnings call. The reasons for missing revenue targets were cited as increased competition from other tech companies for sales talent as well as Yelp changing its ads to no-term sales in efforts to encourage businesses to sign up. The change in terms for ads meant an initial spike in new paid accounts, but it also meant less predictable revenue and increased risk of churn. A similar stock plunge occurred in November 2018. The public scrutiny has brought to light some major fragilities in Yelp’s business model which depends on user trust.
Why is search core to Yelp’s business?
Yelp’s ability to surface the most relevant information directly affects the value of its platform to users and its attractiveness to advertisers. This portion will dive into the considerations that go into Yelp’s recommendation algorithm which serves to maintain the integrity of the platform and further the company’s financial interests.
There’s been research done to quantify the impact of Yelp on businesses’ performance. This information helps in understanding the value of the platform. Reviews sites in general are increasingly a part of consumers’ path to purchase. An individual visiting Yelp is typically a high intent visitor and is low in the marketing funnel.
In a survey of Yelp users, it was found that they were making purchase decisions faster than before. The number of users who purchased something within a few hours after visiting the platform increased by 212%. These users who likely go on to contribute content by writing reviews themselves, together affect restaurant demand, according to a Harvard research paper. The study combed Yelp reviews and restaurant data from the Washington State Department of Revenue to identify the causal impact of Yelp ratings on restaurant demand. In Yelp’s five-star rating format, the study found that a one-star increase leads to a 5%-9% increase in a business’s revenue.
If consumers are depending on Yelp as a simple heuristic in helping them decide where to grab dinner, what are the factors that go into Yelp’s summary score for a business? The company does not publish this information, for the same reason as Google, so as to prevent people from gaming the algorithm. At a high level, Yelp only displays reviews it classifies as “recommended” on business listings. For a variety of reasons, a review might be flagged as “not recommended” which means it’ll only be available on secondary pages and will not factor into the business’ overall score. In a paper analyzing the features influencing Yelp’s algorithm, the authors were able to create a model that classified reviews with an accuracy of 78%. Certain features are more straightforward when trying to identify bots or fraudulent accounts, like the completeness of the reviewer’s profile, their activity on Yelp, as well as their IP address. But the paper also highlights more nuanced features. For instance, posts with moderately complex sentence structure makes it more likely for an individual’s review to be recommended. If the reviewer has a history of varied sentiment, which suggests less bias, or if the individual has a larger social graph on the platform, their reviews will be more likely to get recommended. Alternatively, rating a business much higher than average is likely to result in a review being flagged as non-recommended.
It’s not in Yelp’s interest to extort business owners for a boost in short-term revenue or allow bots on the platform to inflate user metrics. Especially with the introduction of no-term sales, the platform is incentivized to be a sustainable, trusted source for users and advertisers. Darnell Holloway, Senior Manager of Local Business Outreach at Yelp says, “The experience that people read about online is going to be in line with what happens when they go to that business.” If the opposite were true, it’d be unlikely for users to trust Yelp for any future recommendations. In a similar spirit, Yelp only allows sponsored ads to show up at the top of search results or on competitor’s profiles when the business wishing to advertise has a rating of at least three-stars. The company has created policies to protect the integrity of the platform, sometimes even at the sacrifice of easy revenue.
Certainly, there’s a host of obstacles facing the company. Regardless of what the future holds for Yelp, Stoppelman’s early intuitions about the power of bringing word of mouth recommendations online could not have been more right. Challengers will continue to hammer at Yelp, and it will be interesting to see how the company adapts its product and business model to remain as a dominant player in the hotly contested space. But as of today, Yelp.com continues to attract millions of users on a daily basis. As for Yocal.com? Well, that’s now just another expired domain.