Learn how their business model works in-depth using the Business Model Canvas from one of their most successful ones: Yelp.

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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 articleexplains what makes Yelp appealing to local business owners. and it is the opportunity to make (additional) earnings for one side of the platform.

Revenue sources

Local 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).

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The Business Model Canvas

I 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.

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Value proposition

Platforms 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.

1. Local businesses:
   • Advertising: to promote their business and increase revenues
   • Transactions: enable and simplify online transactions
2. Users (=local business seekers):
   • Discovery of the “best” local businesses to satisfy their daily needs
   • More engaging and informative ways to browse local businesses
3. Active reviewers* (=content creators):
   • Engagement of regular reviewers who are motivated to share their experiences with others and be recognised

* Reviewers are a subset of the users. But they are crucial. They create the value that non-reviewing users consume. Normal users may write provide star ratings and the occasional brief review. Their ongoing high-quality reviews are one of the key assets of the platform, an inspiration for other reviewers and users. High-quality reviews are also the cornerstone for free organic traffic from search engines. 

In more detail

The value proposition for the supply side (local businesses):

1. Additional revenues
2. Free business listings
3. Paid, enhanced business listings
4. Paid, targeted advertising
5. Listing special offers
6. Loyalty offers
7. Gift certificates
8. Table reservation & management
9. Food delivery services
10. Simplified transaction (getting a quote, etc)
11. Local data & analytics

The value proposition examples for the regular review/content creators:

1. Engagement & fun
2. Social exchange
3. Social status gains & recognition
4. Exercise creative writing, being read/heard
5. Chance to become Yelp Elite
6. Participate in special events

Value proposition examples for the demand side (users):

1. Discovery of local services
2. Ease of search, time-saving
3. More choices
4. Lower risk of trying new places
5. Price comparison / transparency (value for price)
6. Easier transactions

Many of the above fall into what economists call reduction of search costs and transaction costs.

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Key partners

Regular 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

The Yelp percentages will differ. But that doesn’t change the fact that those who leave written, high-quality reviews, pictures or videos are crucial. They create the knowledge base that Yelp is based upon. The creators also inspire others to at least leave a short comment or rating. Yelp does a lot to keep these folks engaged – more in a minute.

Complementary local service platforms: Yelp is experimenting with partnerships with complementary local service platforms. Here just a few examples:

1. 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.

   
   

2. Yelp partners with Nowait, a local service platform that helps you eliminate waiting times at restaurants.
3. 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
4. Yelp partners with SweetIQ to provide local businesses in-depth local analytics.
5. Developers: I would add the group of developers to extended partners, Here you can see some showcases.

It is still early days for these partnerships. Some of these may turn into key partnerships depending on the revenues and complementary network effects. It is very typical for platforms to experiment through partnerships and acquisitions.

Extended partners

These 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 partners

Why 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.

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Key activities

Managing 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:

1. Enhance positive network effects, e.g. keep contributors engaged through a vibrant community local events and rewards, Elite membership and engagement on the platform
2. Keep users coming back by providing value and a great customer experience
3. Reduce negative network effects – this is very important and I am covering this extensively under “customer relationships” below
4. Sell ads & products to local businesses (the salesforce makes up ~60% of all employees)
5. 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)
6. Expand reach through addition of product channels

Here are more details on the Yelp communities directly from their annual report (page 8):

“Community Management We establish Yelp communities through a pre-launch content development phase, followed by a hiring of a Community Manager, leading to review growth and consumer activity, which, at scale, supports our sales efforts to local businesses. […] Our community management team’s primary goals are to support and grow their local communities of contributors, raise brand awareness and engage with their surrounding communities through:

• 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;
• […]

Through these activities, we believe our community management team helps us increase awareness of our platform and grow avid communities who are willing to contribute content to our platform. These active contributors may be invited to attend sponsored social events, but do not receive compensation for their contributions. This community growth drives the network effect whereby contributed reviews expand the breadth and depth of our content base. This expansion draws an increasing number of consumers to access the content on our platform, thus inspiring new and existing contributors to create additional reviews that can be shared with this growing audience.“

If you find this as exciting as I do, jump to page 8 of the annual report to read more including numbers and stats of the contribution of the communities.

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Key resources

The 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:

1. High-quality content
   1. Large inventory of local businesses with description, pictures, reviews and ratings
   2. Total business profiles
   3. Claimed profiles
   4. Businesses that advertise
2. Established vibrant communities
3. The brand
4. Captured data and insights
5. The platforms technology and algorithms
   • search & ranking algorithms
   • recommendation software & filters
   • mobile features (check-in, tips, nearby, etc)
   • Infrastructure & network security
6. Skilled employees (esp. developers / engineers)
7. The right partnerships
8. Intellectual property

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Customer segments

Yelp 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:

1. Segmentation by location:
   • Country, city, suburb
2. Segmentation by category:
   • Around 20 categories from restaurant, real estate, pets to public services and more
3. Segmentation by price category
   • From “inexpensive” to “ultra-high end”
4. Segmentation by opening hours
5. Segmentation by meal type (for restaurants):
   • breakfast, lunch dinner, serving alcohol (Y/N)
6. Segmentation by features (close to 40 features at this stage), e.g.
   • Suitability for kids/groups, accessibility, parking, Wi-fi and many more
7. Segmentation by vertical (as per their data sheet):
   • Restaurants
   • Beauty & fitness
   • Health
   • Shopping
   • Home services
   • Other
8. Segmentation by suitability of Yelp products:
   • Advertising
   • Transactions

Users (=local business seekers):

1. Demographics,
2. Home location, work locations and other frequent locations
3. Verticals they are interested in
4. Price categories
5. Interests
6. And many more

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Customer relationships

This 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 reviews

In 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.

We can be certain that Yelp filters work independent of the fact whether or not a business advertises on Yelp.

Yelp works on several layers against fake reviews

The other source of negative externalises are fake reviews. Yelp works on this in several ways:

1. 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.
2. Sting operations to uncover providers of fake reviews and investigate suspicious cases.
3. 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.
4. 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 on

The relationships Yelp needs to manage are:

1. Local businesses and business owners
2. Users, raters, review writers as mentioned throughout this article
3. Elite members
4. The media
5. Relations to the respective administration/jurisdiction as well as the legislator (through lobbyists)

The ways to do this are:

1. Pro-active communication through their channels
2. Responsiveness to customer and user issues
3. Staying on top of legal cases
4. Provide transparency (to the degree possible)
5. Communicate through your promoters
6. Community pages
7. Customer support
8. Social media pages
9. Manage the platform’s image
10. Monitor media landscape and sentiment
11. Review transactions that failed badly and react quickly to avoid any viral spread of it
12. Liaise with cities, communities, regulators as required

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Channels

By now you are very aware of Yelp’s channels. Here’s a quick overview:

Product & transaction channels:

1. The Yelp app
2. Yelp webpages for users (Yelp.com)
3. Yelp is experimenting with offering their services through new channels:
   • automobile navigation systems
   • wearable devices
   • home virtual personal assistants

Communication channels:

1. Yelp webpages for business owners
2. Yelp blog webpages
3. Yelp developer pages
4. Yelp Facebook pages (by city)
5. Other Yelp social media channels
6. Free media coverage based on the novelty factor

Ad channels:

1. Digital or traditional ad campaigns
2. Direct campaigns, e.g. vouchers
3. Emails & notifications: engage, stimulate participation; reinvigorate/recover (special offers, reminders, …)

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Cost structure

Most 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%)

The other big cost for start-ups is the Weighted average cost of capital. Yelp is already publicly listed. Yelp’s WACC (based on the methodology described in the source) is a reasonable 9.09% (it has come down from >20% in 2014).

Unlike the platform businesses we have looked at previously, Yelp is already post-IPO and thus obliged to lodge a form 10-K with the SEC annually (here is the 365-page pdf version and here is a simplified investor presentation). I recommend having a look at the full form 10-K (only the first 60 are interesting) if you are interested in learning in-depth about Yelp.

In any case, we get an excellent insight into their cost structure. Here from the 2016 full year report:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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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Revenues

Most of Yelp’s revenues come from advertising sold. As per their Q217 financial report:

Total revenues: $208m (quarterly), comprised of:

1. Revenues from ads: $186.6m (=89.7%)
2. Transaction revenues: $18.4m (~9%)
3. Other: $3.8m (~2%)

And the last full year result (2016) being $716m.

By vertical, it looks like this:

1. Home & local: 31%
2. Restaurants: 14%
3. Beauty & fitness: 13%
4. Health: 11%
5. Shopping: 9%
6. Other: 22%

As you know from my previous business model analyses, we always need to ask where these revenues come from. Yes, they are advertising revenues. But that’s not the whole story …

 

Yelp will aim to focus on enhancing their network effects by increasing engagement and value (content, algorithms, transactions) of the platform. They have reduced significantly their marketing activities on many international markets so they can better focus on the US. This can be a good strategy to get to critical mass as I have explained before. One competitor on the transactions business – OpenTable – has gone through the same learning when they have withdrawn from many cities in the US to focus on their 4 largest cities to then expand once they had reached critical mass there.

 

Yelp is likely to try to improve their value proposition in the US to increase their market share.

Economic value-add to the participants

For 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.”

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Yelp Business Model Canvas

So, now finally we can put all of the above into the platform business model canvas.

Have you found this as fascinating as I have? Here is a challenge for you:

• Use a platform of your choosing and at least on a high level put together their business model canvas. Great companies that are similar to Yelp are:
  • Tripadvisor
  • Expedia
  • Priceline (parent of Bookings.com as well as OpenTable)
• They are all public companies and thus you can start with their annual report (their revenue tactics are different to Yelp). Plus there are also tons of articles about them for your research. This exercise would take you a good 4 hours using this article as a starting point.

 

Source: Innovationtactics.com