Demand aggregator platforms like Yelp, Tripadvisor, Groupon, Foursquare have grown at a breakneck pace. Even ten years ago, hardly anyone would have anticipated their multi-billion dollar valuations. They are strategically positioned on the demand side, unlike Uber and Airbnb who are positioned on the supply side.
Learn how their business model works in-depth using the Business Model Canvas from one of their most successful ones: Yelp.
- 157.7m monthly unique visitors,
- 127.5m total reviews,
- US$713 million annual revenues and
- a market capitalisation of $3.2b,
What does Yelp do?
“Yelp connects people with great local businesses by bringing “word of mouth” online and providing a platform for businesses and consumers to engage and transact.” Yelp annual report.
“I’ve taken out ten ads in OC Weekly this year and have gotten maybe one call,” says Hall. “I get anywhere from five to 15 calls a day from Yelpers. They come in and then write reviews. Then other people see the reviews, think it must be great, and call. It’s its own little biosphere. It feeds itself.” This snippet from an early fortune magazine article explains what makes Yelp appealing to local business owners. and it is the opportunity to make (additional) earnings for one side of the platform.
Revenue sourcesLocal businesses can advertise among the user-generated content. The advertising model is Yelp’s main revenue source (90%). Yelp is slowly entering into the transaction business such as ordering food, making reservations and other transactions through their pages. The advertising model compares to Tripadvisor who make most of their revenues through advertising. The transaction model compares to Booking.com who make their revenue through a commission that is a percentage of the booking fee facilitated through their platform (note that Tripadvisor has also entered the transactions business more recently).
The Business Model CanvasI will start with the value proposition that connects the supply and the demand side as this gives me an opportunity to fuhrer explain what Yelp really does.
Value propositionPlatforms are multi-sided businesses. Yelp has three sides being local businesses, users and content creators. And they have to have a value proposition to all of these sides to be successful. On a higher level, it looks like this.
- Local businesses:
- Advertising: to promote their business and increase revenues
- Transactions: enable and simplify online transactions
- Users (=local business seekers):
- Discovery of the “best” local businesses to satisfy their daily needs
- More engaging and informative ways to browse local businesses
- Active reviewers* (=content creators):
- Engagement of regular reviewers who are motivated to share their experiences with others and be recognised
In more detailThe value proposition for the supply side (local businesses):
- Additional revenues
- Free business listings
- Paid, enhanced business listings
- Paid, targeted advertising
- Listing special offers
- Loyalty offers
- Gift certificates
- Table reservation & management
- Food delivery services
- Simplified transaction (getting a quote, etc)
- Local data & analytics
- Engagement & fun
- Social exchange
- Social status gains & recognition
- Exercise creative writing, being read/heard
- Chance to become Yelp Elite
- Participate in special events
- Discovery of local services
- Ease of search, time-saving
- More choices
- Lower risk of trying new places
- Price comparison / transparency (value for price)
- Easier transactions
Key partnersRegular review contributors are key partners. There is no benefit for them as such. And yet they spend their time and creativity. Remember the internet culture 1% rule:
- 1% create (new) content
- 9% comment/edit existing content. In Yelp’s case, others can vote for other reviewer’s content or leave a star rating without a review which also helps Yelp
- 90% consume content
- In 2015, Yelp bought a food-ordering service, Eat24, for $134m. Later they sold it to Grubhub (for $287m) and started partnering with them. Yelp receives a commission for every order they provide to GrubHub.
- Yelp partners with Nowait, a local service platform that helps you eliminate waiting times at restaurants.
- Yelp acquired a local wi-fi marketing company Turnstyle Analytics in April 2017 that helps increase foot traffic in local places as well as more money spent
- Yelp partners with SweetIQ to provide local businesses in-depth local analytics.
- Developers: I would add the group of developers to extended partners, Here you can see some showcases.
Extended partnersThese are partners without being key partners. Search engines are a source of significant amount organic (=free) online traffic but also an increasing source of major competition. Yelp has partnered with search engines Bing, Yahoo to have their reviews and ratings listed within the respective search results and maps. But this was in the early days. Since then the search engines have also been sourcing their content from other platforms, such as Tripadvisor, Zoomato, Facebook, etc. The relationship with Google is even more troubled. Google has their own local search results and rating system. It has ended up at the Federal Trade Commission (FTC) for potentially favouring their own search results, Yelp has supported these allegations. Check out what Google does for their reviewers in comparison to Yelp’s Elite program here.Here’s a quick test: check for your favourite cafe in different search engines. Yelp is now only one of several content providers for them. The risk of significant reduction of organic traffic would hit Yelp hard. Government agencies: In 2015, the General Services Administration (GSA) have invited Yelp to support monitoring official government pages, e.g. the Transportation Security Administration (TSA) and other administrations. I have talked at length about the troubles Airbnb, Uber and other platforms are facing with parts of the public and local governments. Yelp is not spared of similar trouble. Partnerships like the GSA one can help Yelp to gain credibility and legitimacy. Lobbyists: In 2013, Yelp hired their first lobbyist to influence legislation potentially affecting them. In 2016, President Obama signed the The Consumer Review Fairness Act that bans businesses providing services only in return for signing a contract that “prohibits or restricts an individual […] from engaging in written, oral, or pictorial reviews, or other similar performance assessments […], including by electronic means” – a practice that had started as a reaction to online reviews.
Non-key partnersWhy did the small business owners not make it on the list of key partners? This is quite a difference to Airbnb and Uber where we include the home owners and drivers as key partners. The reason is that Yelp has positioned themselves differently on the supply-demand map compared to Uber or Airbnb. Uber drivers and Airbnb home owners are the providers of their inventory. This role is taken by the content creators on Yelp, not by the business owners. Their businesses can be added and rated without the business owner’s actions. As with the other platforms, I don’t include cloud, maps, payments and other providers as key partners. These services have become standard and not a source of competitive advantage or the basis of leading functionality. I have only added providers of leading-edge, proprietary (and ideally exclusively provided) functionality into the category of key partners above. What are the chances you come back and check for similar articles? If you are liking this article, don’t forget to sign up for future articles at the end this one.
Key activitiesManaging network effects and growing them is the most important activity of platform businesses. And of course, it has many facets. Growing the positive network effects was one of the biggest achievements of Yelp as Fastcompany reports:
“When Yelp was founded in 2004 […], they were ambitious entrants into a crowded review market filled with competitors like Citysearch, Digital City, Gayot, and a host of other sites. Thanks to Yelp’s smart moves and their competitors’ missteps, Yelp became the top reviewing platform for businesses, restaurants, and shops. While Citysearch and Digital City struggled after being acquired by larger companies primarily interested in traffic, Yelp assiduously courted a dedicated user community. The genius of Yelp is that, through meetups, comment boards, and astute community engagement, they managed to make their regular users feel like members of a larger family.”Key activities:
- Enhance positive network effects, e.g. keep contributors engaged through a vibrant community local events and rewards, Elite membership and engagement on the platform
- Keep users coming back by providing value and a great customer experience
- Reduce negative network effects – this is very important and I am covering this extensively under “customer relationships” below
- Sell ads & products to local businesses (the salesforce makes up ~60% of all employees)
- Grow the platform, e.g.
- through partnerships or acquisition of complementary local services platform
- into adjacent niches and verticals
- reach higher penetration in existing verticals
- through expansion of transaction business (online ordering, reserving, etc)
- Expand reach through addition of product channels
- planning and executing fun and engaging events for the community […]
- […] helping them get to know one another to foster an offline community experience that can be transferred online;
Key resourcesThe master resource (or asset) of any platform are its network effects. It is the resource that needs to be built and the nurtured. In Yelp’s case, this is having a large and growing inventory of local businesses for users to discover with good descriptions, reviews and ratings associated with this.
At the heart of our business are the vibrant communities of contributors that contribute the content on our 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 expands the breadth and depth of the content on our platform, which drives a powerful network effect: the expanded content draws in more consumers and more prospective contributors. [source: Yelp annual report]Yelp’s key resources are:
- High-quality content
- Large inventory of local businesses with description, pictures, reviews and ratings
- Total business profiles
- Claimed profiles
- Businesses that advertise
- Established vibrant communities
- The brand
- Captured data and insights
- The platforms technology and algorithms
- search & ranking algorithms
- recommendation software & filters
- mobile features (check-in, tips, nearby, etc)
- Infrastructure & network security
- Skilled employees (esp. developers / engineers)
- The right partnerships
- Intellectual property
Customer segmentsYelp has three sides to their business: content contributors, local businesses (supply side) and users (demand side). I have covered the contributors extensively above. So, let’s have a quick look at the local businesses and the users. Keep in mind that there are many ways to segment and micro-segment depending on the questions you want to have answered. Local businesses:
- Segmentation by location:
- Country, city, suburb
- Segmentation by category:
- Around 20 categories from restaurant, real estate, pets to public services and more
- Segmentation by price category
- From “inexpensive” to “ultra-high end”
- Segmentation by opening hours
- Segmentation by meal type (for restaurants):
- breakfast, lunch dinner, serving alcohol (Y/N)
- Segmentation by features (close to 40 features at this stage), e.g.
- Suitability for kids/groups, accessibility, parking, Wi-fi and many more
- Segmentation by vertical (as per their data sheet):
- Beauty & fitness
- Home services
- Segmentation by suitability of Yelp products:
- Home location, work locations and other frequent locations
- Verticals they are interested in
- Price categories
- And many more
Customer relationshipsThis is one of the most important categories for Yelp’s business model and one of its biggest risk areas. Every platform causes disruption to the status quo. And that upsets those that are (or fear to be) worse off. Yelp is not any different.
Small business owners are concerned about bad reviewsIn a 2014 small business owners survey [pdf] Yodle found that 78% were concerned about negative reviews. Yelp has been facing criticism around the reviews. Critics have alleged that companies that pay for advertising get negative reviews filtered out and positive reviews featured more prominently (and that the opposite happens to those that do not advertise). But facts and observations speak a different language:
- Several lawsuits (over 2,000 with the Fair Trade Commission) have been filed against Yelp basically accusing them of extorting businesses into buying advertising. So far, not one lawsuit has even led to a trial.
- A detailed study by Harvard professor Michael Luca has found no empirical correlation between being advertiser on Yelp and more favourable reviews.
- A lively article from Sandra Allen on Buzzfeed comes to similar conclusions.
Yelp works on several layers against fake reviewsThe other source of negative externalises are fake reviews. Yelp works on this in several ways:
- Yelp algorithms separate reviews into 3 categories:
- Recommended (71%): evaluated as genuine
- Not recommended (22%): somewhat suspicious and only displayed on a second page
- Removed (7%): Reviews that are not being displayed
- As you can see, a staggering 29% are not recommended or removed. As the algorithms evolve, reviews can be re-categorised.
- Sting operations to uncover providers of fake reviews and investigate suspicious cases.
- Consumer alerts that put a time-limited (90 days) cautionary note on those business’ pages that have been determined to have engaged in misleading customers.
- In 2013, New York Attorney General imposed heavy fines on a number of businesses that have been caught writing fake reviews. The Attorney General called Yelp’s filters “the most aggressive.”
Moving onThe relationships Yelp needs to manage are:
- Local businesses and business owners
- Users, raters, review writers as mentioned throughout this article
- Elite members
- The media
- Relations to the respective administration/jurisdiction as well as the legislator (through lobbyists)
- Pro-active communication through their channels
- Responsiveness to customer and user issues
- Staying on top of legal cases
- Provide transparency (to the degree possible)
- Communicate through your promoters
- Community pages
- Customer support
- Social media pages
- Manage the platform’s image
- Monitor media landscape and sentiment
- Review transactions that failed badly and react quickly to avoid any viral spread of it
- Liaise with cities, communities, regulators as required
ChannelsBy now you are very aware of Yelp’s channels. Here’s a quick overview: Product & transaction channels:
- The Yelp app
- Yelp webpages for users (Yelp.com)
- Yelp is experimenting with offering their services through new channels:
- automobile navigation systems
- wearable devices
- home virtual personal assistants
- Yelp webpages for business owners
- Yelp blog webpages
- Yelp developer pages
- Yelp Facebook pages (by city)
- Other Yelp social media channels
- Free media coverage based on the novelty factor
- Digital or traditional ad campaigns
- Direct campaigns, e.g. vouchers
- Emails & notifications: engage, stimulate participation; reinvigorate/recover (special offers, reminders, …)
Cost structureMost platforms are still young companies or start-ups. Their biggest cost-driver are the costs of customer acquisition (CAC). For Yelp it’s quite similar. Yelp has a very large sales force, whereas many other companies spend more on marketing (online and offline) as such. As per 2Q17 Data Sheet [pdf]:
- Yelp total headcount: 4,600
- Yelp sales headcount: 2,750 (~60%)
- Sales and marketing: 55% (percentage of net revenue)
- Salaries, payroll tax, benefits,
- travel expenses,
- incentive compensation & stock-based compensation for sales staff.
- Business and consumer acquisition marketing,
- community management,
- branding and advertising costs,
- allocation based overhead costs.
- Product development: 19%
- salaries, payroll taxes, various benefits,
- travel expenses,
- stock-based compensation expense for engineers, product management and IT staff.
- Outside services and consulting,
- allocation based overhead costs.
- General & admin: 14%
- salaries, payroll taxes, various benefits,
- travel expense and
- stock-based compensation expense for executive and other administrative employees.
- outside consulting, legal and accounting services,
- allocation based overhead costs.
- Cost of revenue: 9%
- web hosting costs,
- credit card processing fees,
- salaries, benefits and stock-based compensation expense for infrastructure teams related to the operation of the website and mobile app,
- costs associated with video production for our local advertisers,
- confirmation and delivery services associated with Yelp Eat24.
- Depreciation & amortisation 5%
- depreciation on computer equipment, software, leasehold improvements,
- capitalised website and software development costs and
- amortisation of purchased intangible assets.
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RevenuesMost of Yelp’s revenues come from advertising sold. As per their Q217 financial report: Total revenues: $208m (quarterly), comprised of:
- Revenues from ads: $186.6m (=89.7%)
- Transaction revenues: $18.4m (~9%)
- Other: $3.8m (~2%)
- Home & local: 31%
- Restaurants: 14%
- Beauty & fitness: 13%
- Health: 11%
- Shopping: 9%
- Other: 22%
Economic value-add to the participantsFor any platform business model to work there must be an economic value add to all key participants. The platform can only extract value to the extent it creates in sum for the participants (add to that the extent they grow the overall market).
Value creation for the demand side (=user)
- The value that the normal user derives is a better discovery experience with more valuable results to their search and lower search costs (i.e. time and reduction of risk choosing the wrong business and running into buyers remorse). These are largely intangible but yet very powerful rewards for the normal user.
Value creation for the supply side (=local business owner)
- Professor Michael Luca has found in a 2012 study that each “star” of a Yelp rating affected the business owner’s sales by 5–9 percent.
- Professors Michael L. Anderson and Jeremy Magruder from UCLA Berkeley have found that an increase from 3.5 to 4 stars on Yelp resulted in a 19 percent increase in the chances of the restaurant being booked during peak hours.
- In their investor presentation (pg 23), Yelp calculates that advertisers get a 269% Return on Investment on their ad dollars.
- And finally, Professor Michael Luca states in his study that – on aggregate – smaller businesses profit more from comparison websites than large chains “(3) chain restaurants have declined in market share as Yelp penetration has increased […] that online reviews substitute for more traditional forms of reputation.”
Yelp Business Model CanvasSo, now finally we can put all of the above into the platform business model canvas.
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