Every new small business needs opportunities and resources to get exposure and drive more customers. Yelp, being the popular crowd-sourced local business review and marketing site, helps people to access such businesses online.
Founded in 2004, Yelp has become an online directory to discover and connect with local businesses like restaurants, bars, cafes, spas, salons, home services, plumbers and so on. In fact, it has been recognized as a trusted and authentic site where people can find the best businesses.
Moreover, Yelp had a total of 177.4 million reviews as of December 31, 2018. With 28 million mobile app visitors, 74 million mobile web visitors and 83 million desktop visitors, its business model had made over $873 million annually in 2020.
It mostly generates revenues from advertising, transactions and others. This article has presented a detailed discussion about how does Yelp make money.
What is Yelp?
The idea of Yelp was to create an email-based referral network. Today, it’s now the largest online marketplace that allows people to search, book and review a local business. They can access the site on desktop and Android or iOS mobiles and tablets.
Here users can inform themselves about a business’s location, offerings, rates/discounts, opening/closing hours etc. In short, Yelp is a local guide across the world for word of mouth on every service from mechanics to salons, from dentists to restaurants.
Various local businesses enlist themselves on this platform for free. Through targeted advertisements, they attract customers and generate leads.
Moreover, contents are user-generated, i.e., users post pictures and rate the service. Therefore, people rely on this site very much and in turn, businesses get exposure. Besides searching or reviewing, users also create profiles, chat with others, become friends or visit Yelp events offline.
Additionally, Yelp enables users to filter down their search based on the preferences. Such as location, business category, price range, most reviewed, booking arrangements etc. And if you become one of the highest quality reviewers, you’ll be a part of the Yelp Elite squad.
A Brief History of Yelp
Jeremy Stoppleman and Russel Simons, two former PayPal employees, established Yelp in 2004 in San Fransisco, California. But their journey was not very smooth initially.
After working in PayPal in leadership positions, they moved on to different paths when eBay acquired the company in 2003. Stoppleman pursued MBA at Harvard, whereas Simons started working on his new startup idea.
After one year, they partnered up again. At the same time, one of PayPal’s co-founders, Max Lavchin, who launched a business incubator, proposed the duo to develop new ideas. He granted them $1 million in initial funding to work.
They noticed Craigslist, an online classified marketplace, was snatching away their business ideas. Also, the older media verticals like Yellow Pages weren’t advanced even in the internet era.
The main spark came when Stoppleman got sick and found difficulties searching for a local doctor online. Instead, all search results showed only high offers. And that’s when they got the idea of creating a site where people can provide necessary information online about a nearby service.
They put effort into writing the code for 90 hours a week and officially announced Yelp in October 2004. However, users couldn’t understand what the platform was about. Yelp was basically a Quora-like service where people could ask questions to each other.
But usage data showed users were not answering the referral requests. Rather they were using the site’s “Write a Review” feature to write reviews unsolicited.
Consequently,it failed to encourage people to visit the site. Moreover, employees also started leaving the firm due to dissatisfaction.
The site again gained popularity after re-designing it with reviews in the center. It launched newly in 2005 and eventually, people got the concept of Yelp.
Soon, it gained $5 million funds from Bessemer Ventures in the same year and $10 million in November 2006 from Benchmark Capital. Additionally, the number of reviewers raised from 12,000 in 2005 to 1,00,000 in 2006. The founders, in fact, launched Yelp Elite to reward badges to the high-quality reviewers.
In 2009, Google tried to purchase Yelp for $550 million. But Yelp wanted to go on independently and hence, turned down the offer. By 2011, the platform reached over 22 million reviews and covered 5,29,000n locations. Also, it expanded the business as subsidiaries like UK and France.
By the time, revenue was increased from $12.1 million (2008) to $47.7 million (2010). The biggest surprise was when Yelp acquired its rival Qype in Europe for a combined $50 million.
Yelp also introduced food delivery in 2015 and bought Eat24 for $134 million. Though in the meantime, the company faced some lawsuits and hurdles. Eventually, it cleared the name and maintained its position in the market.
Currently, Yelp is active in over 5,00,000 cities worldwide and has become the largest online review site. About 100 million unique users now search Yelp for local businesses and 97% of them purchase after visiting the platform.
Most importantly, on January 5, 2020, Yelp introduced various black-owned businesses on this platform. Customers are now able to search for such businesses on Yelp to support.
The Business Model of Yelp
Before understanding how Yelp makes money, let’s give you a highlight on its business model.
1. Customers of Yelp
Yelp consists of three targeted customer segments: local businesses, users and content contributors.
- Local Businesses: It consists of different factors like location (city or suburb), service types, price range, restaurant cuisines, operation hours, food delivery or takeout and reservation.
- Users: They are divided depending on their demography, location, interests and spending profile.
- Content Contributors: It includes a vibrant community of active reviewers engaged in fun social exchanges.
2. Value Proposition
For Local Businesses: Yelp is an authentic and verified e-platform for all sized businesses, including small local ones. It provides,
- Exposure and visibility to millions of customers.
- Opportunity to engage with more people and increase traffic.
- Targeted advertisements.
- Reviews to promote the busienss.
- Local business data.
- Chances to increase profit.
- Robust analytics to monitor traffic.
- Yelp reservation.
- Yelp waitlist management.
- Yelp Wi-Fi.
- Food delivery.
- Loyalty program.
- Yelp deals and Gift certificate.
For Users: A Yelp user get the following benefits,
- Browse local businesses in informative ways.
- Discover new places and services.
- Save time and money.
- See pictures and videos.
- Compare prices.
- Read reviews.
- Make reservations.
- Get food delivery.
For Content Contributors: Yelp invests a lot in engaging and fun content in order to make them easier for the users and businesses to interact efficiently. The content contributors and active reviewers get the following opportunities,
- Engage in fun social activities and interaction.
- Support the local and community businesses.
- Get recognized by Yelp Elite. The Elite squad is a diverse community of passionate photographers, writers and adventurers. If you also want to join, make a profile with the real name, picture and nominate yourself. Keep sharing your thoughtful reviews, send compliments and up-voting reviews to become an Elite member.
- Get exclusive invitations to special local Yelp events and meet-ups.
3. Yelp Customer Relationships
Self-service Platform: Being a self-service platform, whether it’s Yelp mobile or website, users can now easily serve themselves anytime, anywhere. The two major key factors are:
- Transparent: People rely on Yelp because of its transparency. When it comes to posting reviews, photos or videos, ratings, tips, all are easily accessible to the customers online.
- Transactions: You can order food directly without leaving the Yelp platform.
Maintain Brand Reputation: Undoubtedly, Yelp has efforts into building and maintaining the brand image and reputation within the community.
Easy-To-Interact: Yelp allows the businesses to interact with their consumers in a friendly manner with features like Request A Quote, Yelp Reservation (save up to $800/month), response to the reviews etc. With table management and customer communication tool, you can easily find and book your favorite restaurants.
Engaged Community: Yelp has successfully established a growing community of local businesses, content contributors and users, interacting among themselves through reviews, pictures etc.
Dedicated Sales: Yelp’s dedicated sales team directly engages with local businesses for advertisements, weekly email campaigns and marketing.
4. Yelp Partnership Program
Yelp partners, marketing and other advertising agencies and firms provide service to the local businesses. While joining the Yelp advertising partner program, it’s easy to access resources and increase revenue by connecting the clients with purchase-ready customers at scale.
Key Partners: Till now, over 300 agency partners have joined Yelp to accelerate their growth.
- DexYp, which helps to sell advertisements and bundle products.
- GrubHub, a complimentary local service platform, helps customers with an extensive selection of restaurants and delivery options.
- Other partnership companies like Chatmeter, Sprinklr, InMoment etc., provide analytical knowledge and historical data to the businesses.
Extended Partners: Apart from keys partners, Yelp also gets extended tech partners like online payment transaction company Visa, web hosting company GoDaddy, search engine providers Google and so on.
5. Key Activities
- Yelp’s primary activity is to manage network effects.
- Always focus on maintaining customer experience in order to generate more traffic.
- Sell as many ads and products it sponsors to increase revenue. It has a huge sales force of 3850 employees out of 6030 as of December 31, 2018, to sell advertisements to the local businesses.
- Expand the platform through partner programs, customer acquisition and introducing new products/services.
- Create brand awareness by hosting fun events such as meet-ups, parties etc.
- Grow local communities of local businesses and active content reviewers.
- Manage day-to-day activities like launching new features, hiring new talented people, secure strategic partners etc.
6. Key Resources
- Yelp is mostly famous for its high-quality, authentic and reliable content by real users.
- This platform incorporates skilled employees to develop new features, engage with customers and businesses and improve platform technology.
- Brand reputation is the key resource to pursue new partnerships.
- The vibrant community of contributors.
- Multiple partnerships with different businesses.
7. Channels of Yelp
- Yelp mobile app and server website are the main channels.
- Self-serve ad channel to help partners to sell ads.
- Yelp business page.
- Yelp blog for business owners.
- Social media pages like Facebook.
- Other channeling efforts like email, newsletters etc.
8. Cost Structure
Sales And Marketing: Yelp earns at least 51% of revenue from sales and marketing including, customer acquisition cost, sales commission fees, branding and advertising costs, local community management costing etc.
Product Development: The product development makes a minimum of 23% of total revenue including, consulting fees, salaries for IT teams and engineers, and stock-based compensation costs.
General Administrative: 13% of net revenue comes from this section that includes other employees’ salaries, overhead cost, office maintenance cost, legal and accounting fees.
Cost Of Revenue: Additionally, 6% of revenue Yelp makes from credit card processing fees, web hosting fees, employee costs, video production costs etc.
Depreciation: Also, depreciation earns up to 5% of net revenue associated with different computer equipment, software development cost and leasehold improvement cost.
How Does Yelp Make Money?
Like other social networking businesses, Yelp mostly makes money through advertisements. It offers two premium advertising models: self-service and full-service.
The self-service program offers free tools, including profile enhancements and some advertising solutions. On the other hand, the full-service program provides all Yelp’s free tools, self-service tools, video hosting, upgraded business page features and dedicated support.
However, Yelp’s money-making strategy has two more categories: transaction deals and other services if offers. Let’s get into the details of how does Yelp make money.
In 2018, the company made 97% profit only from this segment. Each advertising product sold by the listed business and partners is categorized as Yelp’s advertising revenue.
Additionally, a study shows that 97% of consumers make a purchase whenever they visit Yelp. It’s even easier to deliver services to a larger audience with the mobile and desktop app. Thereby, most businesses buy Yelp ads for the following benefits:
- Reach 3 times more customers and eventually grow business faster.
- Create ads within a minute.
- Only pay when someone clicks the ad (cost per click).
It costs as low as $5 a day. Though, to avail of special offers like free credits on buying Yelp ads, visit the official Yelp site.
However, with the upgrade package, one can get additional features and bring more to the business. The Yelp upgrade package includes,
- Yelp Connect (cost $180/month) to create posts and share updates about the business, promoted by Yelp automatically.
- Add a Call to Action button to convert page views into messages and call to encourage customer interaction.
- A logo to present the business or brand more professionally.
- A portfolio to show off the best work.
- Highlight the business on Yelp’s business listing page with the verified badge.
- Remove competitor ads.
- Create a slideshow to choose the order of the photos to display on the page and search results.
Yelp has different features and tools to ensure transactions between businesses and their customers are done appropriately. Here’s how does Yelp make money from transaction deals in four ways.
Yelp Platform: By integrating with partners, customers can transact directly on Yelp’s website or mobile app. That means they can order any product or service on this platform.
Yelp Deals: Through exciting Yelp deals, businesses can promote their products and services on the website at a discounted rate. Yelp takes additional fees as a share of each deal sold from the business.
However, this is currently available only in the US and Canada. Keep searching the site and checking the little green tag to find businesses offering Yelp deals. In order to purchase a voucher, go to the Buy Now option.
Gift Certificates: Business owners sell gift certificates at full price to the clients. The price range can be between $10-$500. Customers then can redeem the gift card at the time of purchase. Yelp earns a sizeable revenue from the selling of such gift certificates.
Partnership with Grubhub and Eat24: Another transaction revenue resource is through Yelp’s Eat24 business. Customers can order food directly on this platform while Eat24 and Grubhub facilitate the order and Yelp receives a commission fee.
3. Other Services
Apart from the subscription-based services, Yelp earns revenue from non-advertising and non-transaction services too. The company earned 2% of total revenue in 2018 from the following:
Yelp Reservations: It’s a tool to use for an online reservation system that allows any nightlife business and restaurant to accept an online reservation from their Yelp listing or own website. One can sign up for Yelp reservations with a monthly subscription fee of $249.
Yelp Waitlist: It’s another subscription-based solution for waitlist management. Customers can join waitlists and check wait items. Moreover, this function is available on both the in-store kiosk and Yelp business page.
But due to the COVID-19 situation, Yelp added a new takeout feature on the waitlist. It lets users add takeout orders, track them and notify them via text message about the pickup. In addition, you can easily track all parties in one place using the To-Go tab.
Yelp Wi-Fi: Yelp Wi-Fi is a marketing tool allowing local businesses to reach their current customers. It gives them the leverage of using existing Wi-Fi networks to collect customers’ contact information, send promotions and get insight into their visit trends or demographics.
It’s in fact, increases customer loyalty and engagement by 80%. Further, Yelp allows businesses to promote ads on the Wi-Fi login page. The company offers this service on a monthly subscription fee.
Yelp Knowledge: It provides businesses with data on various locations, review types and ratings on different categories. Yelp allows them to access these data for a minimum fee. This is how does Yelp make money through different service offerings.
An Overview On Yelp Revenue Scenario
The local business review platform, Yelp, generated revenue in 2020 was almost $873 million. It’s a significant drop from the $1.01 billion in the previous year due to the pandemic effect. Even in 2018 also, the company was able to make a huge profit of $943 million.
Here is a brief highlight of Yelp’s revenue scenario in 2019 and 2020.
- The revenue in the Q1 of 2020 is $250 million, whereas, in 2019, it was $236 million in the same quarter.
- The revenue in the Q2 of 2020 is $169million, whereas the company earned $247million in 2019 Q2.
- The revenue in the Q3 of 2020 is $221million, whereas it was $262million in 2019 Q3.
- The revenue in the Q4 of 2020 is $233million, whereas it was $269million in 2019 Q4.
In terms of giving opportunities to small businesses and priority to the customers’ opinions, Yelp is surely a great platform. In the long run, it can cover a vast region like entire Asia and Africa as a multinational company.
However, the company has faced many controversies like manipulating reviews, complicated relationships with businesses etc. But eventually, it was able to maintain its position in the market.
Moreover, the trust factor is the key to its success. When real people give real reviews on Yelp, people easily depend on this platform. No matter what business it is, Yelp has become an important marketing strategy for all.