Yelp is a popular directory service that helps customers discover new local businesses and leave reviews. It makes money from advertisements and various indirect revenue streams.
Yelp primarily makes money via advertisements. The company also makes money on page upgrades, transactions, and other services.
Founded in 2004 by former PayPal employees Jeremy Stoppelman and Russel Simmons, Yelp was originally supposed to be an email-based referral network. The idea for Yelp was born when Jeremy fell ill and had trouble finding online recommendations for local doctors. However, the site focuses primarily on reviews of restaurants and stores.
In 2007, the company hit a milestone of one million total reviews. It has continued to grow and expand since – including into adjacent sectors and services. For example, in 2015, Yelp acquired Eat24 for $134 million to expand its own food delivery services.
What is Yelp & How Does It Work?
Yelp is a popular directory service that helps customers discover local businesses. Anyone can create a listing for a business, and write reviews ranging from one to five stars. Businesses can purchase premium advertising services to stand out from the competition and generate more leads.
Because Yelp is free to use and has an established history of providing quality reviews, it attracts high-value customers. The platform has a wide range of categories and hosts listings for all types of businesses. Yelp even hosts reviews of hotels, tourist attractions, parks, and educational institutions.
Anyone can create a listing for a business if it doesn’t already exist on Yelp. The service primarily hosts pages for local contractors, restaurants, and retailers. However, Yelp also supports multi-location stores and retail chains.
Businesses can claim user-generated pages by requesting verification from Yelp. The verification usually takes place via a phone call to their registered number, or an email to their business address. Once verified, the business can customize their listing by adding additional information and photos.
If a business desires additional profile customization and better promotion, they can subscribe to Yelp’s ad program. This helps businesses increase brand awareness among viewers. It also provides customers with crucial information to make better purchase decisions.
Yelp has automatic review curation and parsing that filters out hateful comments and misinformation. That’s a feature that differentiates it from services like Google or Facebook. Yelp reviews are also more uniformly distributed between the two extremes of one and five star ratings.
This makes reviews on Yelp a lot more reliable and trustworthy to customers looking for useful information. Each user on Yelp has a personal profile containing photos, reviews, and compliments from fellow users. Social features like these build trust within the community and foster higher engagement rates between users.
On Yelp, users can message each other and share information about local businesses. Users can also place quote requests on the page of a local service provider. Instead of being just another advertising space, Yelp fosters local communities by providing meaningful engagement and organic brand promotion.
Yelp’s focus on personalization and engagement generates higher quality leads for businesses. In 2021, the company received 45.9 million unique desktop visitors and 56.6 million unique mobile visitors. Yelp is taking advantage of that traffic. The same year, Yelp monetized 25% of all leads acquired through calls, requests, and URL clicks.
Business Model of Yelp
Yelp functions as a social networking site by connecting businesses with customers. By being listed on Yelp, businesses increase their growth potential and brand awareness. At the same time, customers find value in identifying and sorting through the top local businesses for any given category.
Since Yelp is completely free to use, it attracts a lot of users. What makes it unique is that a business page doesn’t have to be submitted by the actual owner. Instead, customers can create a listing for their favorite stores, restaurants, and institutions.
Yelp also differentiates itself from traditional advertising services by providing listings for things that aren’t considered traditional businesses. These include government services, parks, schools, and local tourism attractions. A business doesn’t need to have a brick-and-mortar location to be listed on Yelp.
Online businesses and services can have pages on Yelp. A listing can be created for just about any service provider or storefront, provided it doesn’t already exist on Yelp. Users can then update the listing with photos and reviews.
Yelp allows business owners to customize their free profiles by adding a personalized touch. It offers enhanced profiles for the cost of a fixed monthly subscription. With enhanced profiles, business owners can remove competitor listings from their pages, add highlights, and get license verification. Competitor listings are a feature Yelp offers customers. They suggest similar businesses that they might also want to consider.
The platform works like a search engine for local businesses. Hence, it also features sponsored ads that are paid for by businesses who wish to stand out from the competition. Sponsored ad spots are paid for on a cost-per-click basis.
Paid advertisement slots are given viewing priority and displayed above organic search results with a Sponsored ad tag. With paid advertisements, businesses get more leads and generate a memorable first impression. Yelp also offers extra customization options to businesses who pay for ads.
Yelp attracts 83 million users each month through its desktop and mobile apps. Which makes it one of the largest networking spaces for any business looking to advertise. Yelp search results also appear on Google searches, which further boosts the marketability of a business.
Based on a June 2019 survey, 90% of Yelp users make a purchase within one week of searching on the platform. More than 50% of Yelp users have an annual household income above $100,000. This makes the platform extremely lucrative to advertisers who are targeting high-income and high-intent customers.
Yelp also allows businesses to target specific subsections of their customer base. Machine learning algorithms analyze behavioral patterns and spending history to provide customers with personalized recommendations. This increases customer satisfaction and they leave a higher star rating on their reviews.
A high review rating increases the reputation of a business, helping it attract more customers. As the number of users increases, businesses generate more engagement on Yelp. Brand awareness is also organically boosted when users share photos, reviews, and experiences with each other.
Businesses can use custom location targeting and keyword boosting to generate more leads. There are currently 244 million cumulative reviews posted on Yelp for 5.8 million active businesses. User reviews are automatically scanned to remove hateful speech and misinformation, guaranteeing a safer and more enjoyable experience for everyone.
Around 90% of searches and pageviews on Yelp are driven by retailers and restaurants. However, this constitutes only 40% of the advertising revenue Yelp generates. In contrast, services make up 10% of the total page views and searches but they generate 60% of the total ad revenue.
Yelp therefore generates the majority of its traffic from people searching for retailers and restaurants and then monetizes that traffic to boost businesses offering services. High search frequency categories on Yelp and designed to drive traffic to high ad value categories.
There are not a lot of local review sites with enough traffic to compete with Yelp. However, there are companies like OpenTable which also host restaurant reviews. OpenTable, however, has a different business model. Only restaurants that subscribe to OpenTable are listed on the site. But OpenTable verifies that reviewers actually ate at the restaurant before they can leave a review. That cuts down on review fraud.
Yelp competes with companies like Google Ads, TripAdvisor, and Facebook business pages for ads. Google Ads is another kind of ad network that offers localized ads and has more campaign types and ad formats. It also guarantees higher visibility since Google is the world’s most popular website. These ads can be integrated with Google Maps business profiles and listings.
However, Google Ads doesn’t offer the profile customization and personalized ad matching of Yelp. It also doesn’t have the automated review curation and filtering system that Yelp offers. Fewer people leave reviews on Google Ads, meaning that customers are less likely to go to Google to read reviews.
In addition, Yelp’s userbase consists of a high-income demographic that is very valuable to advertisers. Google attracts a wide range of people, many of whom may or may not have a job. The lead generation Google Ads offers businesses isn’t as reliable when compared to Yelp.
TripAdvisor also hosts reviews and sells ads. However, it is geared specifically toward travel and recreation, so it’s not as comprehensive compared to Yelp. Travelers also have different priorities and needs compared to local customers.
Facebook business pages also offers businesses a page where people can learn more. While it can be effective at generating traffic and brand awareness, the business is in control of the content that page. Reviews are usually not allowed and comments can be deleted by the page owner.
Yelp has significant costs associated with its business model. In 2021, the company generated total revenue of $1.03 billion. It also spent $1 billion on operating and revenue costs. Sales and marketing cost $454.2 million. Product development took up $276.4 million. General and administrative costs accounted for a further $135.8 million.
In 2021, Yelp had a global workforce of 4,400 employees. Of that number, 63% worked in sales and marketing, 28% worked in product development, and 9% worked in administrative departments. Much of Yelp’s expenses are likely related to ongoing growth into new markets. However, for Yelp’s company stage and traffic, the company is not bringing in as much money as one might expect.
How Does Yelp Make Money?
Yelp makes money from four different revenue streams. These include advertisements, page upgrades, transactions, and other services.
Yelp offers two types of advertising services:
- CPC Search Advertising: Business pay for these on a cost-per-click (CPC) basis. Whenever businesses apply for sponsored advertisements on Yelp, they are asked to choose a campaign goal. There are three campaign goals: phone calls, website visitors, and messages. The company gets paid for every click or action.
- Multi-Location Ad Products: For businesses with more than five locations across the country, Yelp offers specialized showcase ads. These highlight limited-time offers and seasonal promotions. Multi-location ads are promoted to high-intent viewers both on and off Yelp, with detailed analytics to measure the relation between online activity and store traffic.
In its annual report, Yelp merges the revenue generated from advertisements and page upgrades. In 2021, Yelp generated $985.2 million in advertising revenue and page upgrades.
Service advertisements contributed $607.7 million, forming the majority of Yelp’s ad revenue stream. Advertising for restaurants, retail stores, and other businesses contributed a further $377.4 million.
Advertising accounted for 95.5% of Yelp’s total revenue in 2021.
Advertisements put business’ services at the top of search results. Page Upgrades make them stand out from the competition, and turn visitors into customers. With page upgrades, a business can offer unique information to Yelp users who visit their page.
Whenever a business claims their page on Yelp, they are given a free online business account. Through this service, they can update listing information such as addresses, phone numbers, hours, and more. Businesses can add extra features to their profile by purchasing a subscription-based page upgrade plan.
These are the page upgrade options currently offered by Yelp:
- Restricting Competitor Ads: Businesses can prevent competitor ads from appearing on their page. This helps with lead generation and ensures that a business gets the viewer’s undivided attention.
- Content Slideshow: This allows businesses to rearrange the photos and videos on their page into an automated slideshow. The order of these photos and videos can be decided beforehand. Photos and videos can be uploaded by the business, or customer generated.
- Call to Action: A call to action (CTA) button helps with conversion rates by turning visitors into paying customers. Once a customer clicks on the button, they’re redirected to a location predetermined by the business. This could be a form, website, or storefront.
- Business Highlights: Through highlights, businesses can attach tags that describe what makes them unique. Highlights take the form of badges such as ‘family owned’ or ‘pet friendly.’ They appear on search results and the profile page.
- Verified License: Businesses with verified trade licenses have a blue shield and checkmark on their profile. Yelp manually verifies the trade license of any business that applies for this service. It helps customers make better choices while selecting something like a contractor or daycare service provider.
- Portfolios: A showcase that displays photos and details of successful projects completed by a business in the past. Customers can also view additional details. Such as project costs and timeline estimates provided by the business.
In addition to advertising and business profiles, Yelp also has its own delivery services. It partners with both local and national businesses to deliver items directly to a consumer’s doorstep. Yelp’s largest partner in terms of revenue and transaction volume is Grubhub.
Whenever a customer orders food through Yelp, the company charges service and delivery fees. It is currently unknown what percentage of the revenue goes to Yelp. But the company made $13.2 million from transactional fees in 2021. Transactions made up 1.3% of Yelp’s total revenue that year.
Yelp provides a variety of ancillary services that are built upon the same infrastructure as its advertisement and transaction systems. For example, many companies use customer and business data collected by Yelp to improve their own market analytics and services. Through the Yelp Fusion program, Yelp shares its data with companies such as Apple and Mercedes-Benz.
In addition to data sharing, Yelp also provides content licensing for third-party data providers. These providers update and manage the listings on behalf of businesses. Yelp generated $33.4 million in 2021 by providing these and other services. Other services formed 3.2% of Yelp’s total revenue that year.
Yelp Funding, Valuation & Revenue
Yelp (YELP) is currently a public company trading on the New York Stock Exchange (NYSE). The company launched its IPO in 2012 at a price of $15 per share for a valuation of $1.47 billion. As of September 2022, the company’s stock traded for just over $35 at a valuation of $2.5 billion.
Prior to going public, the company went through six successful funding rounds and raised a total of $56 million. Notable Yelp investors include Elevation Partners, DAG Ventures, Benchmark, and Bessemer Venture Partners.
Yelp’s annual revenue has been around $1 billion since 2019. However, the company’s revenue dipped during the height of COVID-19 pandemic restrictions to $872.9 million in 2020, which is also the year it booked a net loss of $19.4 million.
Is Yelp Profitable?
Yelp is profitable. However, its net income has not increased significantly since 2019. The company turned a net loss of $19.4 million in 2020. But bounced back with a profit of $39.7 million in 2021. Yelp is focused on decreasing operational costs and increasing conversion rates from advertisements.
In 2021, Yelp succeeded in monetizing 25% of its service leads. That is a significant increase compared to the 10% lead monetization in 2018. Yelp has also been transforming its business model by focusing more on revenue generated by services rather than retailers and restaurants.
Despite these increases, Yelp generates very little profit from their activities and revenue due to the company’s high expenses. To be more profitable in the future, the company will have to decrease their expenses while finding new ways to growth revenue or monetize their users.
Yelp has made a name for itself in the highly competitive world of online reviews because it is a company that believes in the importance of customer service and strives to deliver a product that is better than the rest. The company’s end goal is to make their customers happy, and this shows in their website design and overall business model.
We hope that this article has been helpful to you, and we’re glad you’ve had a chance to learn more about the business model of Yelp and how it makes money!
What do you think about the future of Yelp? Do you think it will continue to dominate the market in local search? We’d love to hear from you!