Founded more than a decade back, Yelp has become the go-to-place to discover local businesses. With 115M reviews of more than 3M local business, Yelp is by far the largest players in this space in the US. Yelp is playing in the $150B+ local ad spend market in the US of which ~$20B happens online.
Yelp serves two sides of the platform: local business and consumers. For consumers, over time Yelp has become the destination to search for local business ranging from upcoming restaurants to finding local plumbing shop. Consumers can rate and write detailed reviews about their experience with the local business and those reviews are used by other users to sort through the clutter and find the right business they want to work with. These extensive reviews form the core value proposition of the Yelp platform for the users.
From businesses perspective, Yelp helps them maintain an online presence through their “business page” on Yelp. It helps users discover these local businesses and hence, driving user traffic to the stores. Yelp reviews also help differentiate business based on the quality of services provided by them as reflected by Yelp reviews. Studies have shown that increasing one-star rating on Yelp leads to 5-9% increase in revenue for local business [Prof. Michael Luca, HBS]
The breadth and depth of reviews on Yelp creates a network effect for the platform. Since there are already more reviews on Yelp, users come on Yelp to discover local business and then write/rate more business, in turn creating the network effect which has given Yelp more than 115M reviews. Every new user/review add direct value to all other users on the platform and add more incentive for business to be present on the platform.
To keep the virality and network effect growing on the platform, Yelp does not charge the users rather incentives them (in form of Elite Status etc.) to discover and keep writing reviews. Yelp also does not charge business for a basic presence on its platform but monetize for creating an enhanced presence through local advertising. Yelp has a large sales team for convincing local business to advertise on the platform that resulted in ~$800M revenue last year. With a large market size of $20B online local ad spend just in the US alone, Yelp has a long way to go.
Yelp also captures value by facilitating transactions on the platform such as booking a restaurant/spa appointment, ordering food, requesting quotes from local business etc. This leads to better user experience and deeper integration with the business and is a clear way forward for Yelp to be the market leader in local business discovery market. Deeper integration with business would allow Yelp to minimize the multi-homing on both user and business end.
This space of local business discovery has very hyper-local network effects – as a user, I care most about the local business in my area. This naturally limits the expansion of Yelp in other geographies where local players (like Zomato, TripAdvisor, Angie’s List etc.) already dominates the market. With the proliferation of social networks, it is getting easier for users to discover the places that their friends recommend/like, resulting in fewer discoveries on Yelp. Also, using the distribution of Android and Google Maps, Google is increasingly pushing users to rate/review local business and thereby threatening the core value proposition of Yelp.
In spite of these challenges, some peculiarities of this market play really well in Yelp’s favor. First, it is extremely difficult to get local business on a particular platform – Yelp has a large sales team (500+) dedicated to this task, whereas both Google and FB would likely not go down that path. Second, 80-20 rules apply for users writing the reviews where very few users write majority of the reviews. With Yelp Elite program, Yelp has done a great job in keeping these users loyal to the Yelp platform. Lastly, Yelp has started investing heavily behind deeper integration with local business through SeatMe (appointment booking), Eat24 (food delivery) etc. in the hopes of locking in business to its platform.
In summary, Yelp has an extensive network effect going on both sides of the platform and has a strong moat because of the breadth and depth of user reviews. It has also started making the right moves in increasing engagement and integration with the business. It will be interesting to see how this space will evolve in the next 5-10 years.
[Disclosure: I will be joining Yelp for full-time post HBS]