How Yelp Can Get Its Groove Back

The once-thriving reviews site is facing a steady stream of subpoenas and thousands of consumer complaints, and still hasn't made a profit. Here's what Yelp can do to get its star-power back.

Last week was not a good one for Yelp.

After the Wall Street Journal asked the Federal Trade Commission about customer complaints leveled at the reviews site, the government agency revealed thousands of them, as well as a steady stream of subpoenas from lawyers trying to find out the identities of anonymous reviewers. As of this writing, Yelp's stock price is still falling—which is great news for competitors like Tripadvisor and Foursquare, but not so good for the San Francisco-based site and their shareholders. In order to get back on track, Yelp will have to radically change their business model—and do some crisis communications to reach two very different constituencies.

We'll get to that. First, some background: Back in 2011, a Harvard Business School professor named Michael Luca wrote a paper on Yelp's effect on restaurant earnings (PDF). After correlating Yelp review archives and restaurant data from the Washington State Department of Revenue, Luca identified a roughly 5% to 9% increase in revenue for every additional star a non-chain restaurant earned from Yelp reviewers. Although the Harvard analysis didn't focus on the reviews themselves, it found that the quantity and positivity of reviews posted to Yelp boosted the profits of businesses. And this is where Yelp's current problem comes in.

The Wall Street Journal's story focused on allegations that Yelp's reviews were stacked against business owners. The paper examined specific allegations that business owners were both being slandered by rivals online and having positive reviews filtered out if the venue refused to advertise with Yelp. Both accusations are highly damaging—and hard to prove. Not mentioned in the Journal article is another problem the service is facing: Astroturfing.

Late last year, 19 companies were fined for flooding Yelp with fake reviews. Investigators working for New York attorney general Eric T. Schneiderman found businesses as diverse as a strip club, a laser hair-removal clinic, and a charter bus service systematically posting fake reviews on Yelp in hopes of gaming the site. Schneiderman's team discovered compelling evidence of shady "search engine optimization companies" hiring outsourced freelance writers from eastern Europe, the Phillipines, and Bangladesh to post fake reviews on Yelp for $1 to $10 a pop.

For its part, Yelp has been proactive and aggressive in patrolling their reviews. Although reviewers can still remain anonymous, profiles have been linked with Facebook's API. A team of editors systematically consults Yelp's reviews database to remove obvious trolls and make sure that positive reviews haven't been downgraded by the service's automated filters. But in many ways, Yelp is the victim of their own success.

When Yelp was founded in 2004 by two early Paypal employees, Russel Simmons and Jeremy Stoppelman (who has previously spoken at Fast Company conferences), 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.

But becoming the top reviewing platform doesn't guarantee a company's financial success. After trying a variety of monetization strategies, Yelp began accepting advertising from businesses reviewed on the site. As of now, Yelp still isn't profitable. And when they started charging advertising fees from the very businesses they list, they opened themselves to a variety of challenges. On the one hand, they're open to allegations of giving advertisers preferential treatment; on the other, advertisers are liable to be upset and stop buying advertising if negative reviews show up.

So last year Yelp hired their first Washington lobbyist, former Darrell Issa aide Laurent Crenshaw. Crenshaw assisted the Yelp lobby for protection against lawsuits for online reviews and gave the omnipresent review site presence on Capitol Hill. The company has also teamed up with a government agency, the Small Business Association, to offer nationwide workshops for business owners on marketing insights from online reviews. The ambitious goodwill effort is aimed at winning the hearts of business owners who might otherwise be wary of Yelp.

But goodwill won't keep the lights on. So how can Yelp finally turn a profit?

Here's one answer, but it's not easy to execute: Change the monetization plan. Instead of accepting advertising from local businesses, Yelp could license and leverage their API and review listings. Foursquare is trying a version of this (although Foursquare also accepts advertising from merchants in a similar manner); the company licenses their API and location info to all manner of partners. Facebook is trying a similar strategy for their review-centric Facebook places platform—and it seems that Yelp is slowly waking up the necessity of partnerships. In March, Yelp inked a deal with Yahoo to integrate the service's reviews in local search results. Making deals with Yahoo, Bing, and a host of app developers is messier and more complicated than ad sales, but it's one way Yelp could at least turn its financial slide around.

At the same time, Yelp has to make nice with business owners who feel that they're being defamed online and customers who feel that they're being served biased reviews. If the company can do both things well, they might just see their own reviews greatly improve.

[Stack of plates: Mythja via Shutterstock]

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8 Comments

  • Richard Goodman

    Yelp is a liar..! They tell us that their filter system is designed to remove or filter away fake reviews. However it took a "sting" operation by the attorney general to find fake reviewers. Most importantly, we're a honest company "We do not use fake reviews" however Yelp continues to filter away over 80% of our positive reviews... honest reviews that were left by our customers. Basically, we've been lied to by Yelp. Their filter system is a big lie and bogus at best. See our yelp profile and check out our filtered reviews: http://www.yelp.com/biz/the-green-clean-house-company-manhattan-2

  • No Victim

    YELP is a known extortion scheme whereby businesses who decline to advertise wind up with their positive reviews filtered and their negative reviews made prominent. A cadre of so called elite Yelpers (chronically unemployed losers bought off with swag and free booze) are Yelps hired guns who do the dirty work of defaming small businesses for them and shilling for advertisers. IF you read this Class Action Complaint you will read the testimony of one such "Elite Yelper" Lily Jeung, who outlines how the extortion scheme works, how she was fired for writing a negative review on a big money advertiser and how it all comes down from Jeremy Stoppelman. Pay close attention to Class Action Complaints #47-58 http://www.scribd.com/doc/1802... This money losing business relies on small business ads for over 60% of its revenue. Their ad rates are an extortionary $600/1000 page views. The only way they ever got any advertising was from businesses who heeded to the extortion and now regret it.

  • As a business owner who has had 25 legitimate reviews filtered, I think it's high time that Yelp experience problems. Their way of doing business has been very suspect and hurtful to me. David Kagen www.davidkagen.com

  • No Victim

    We extensively tested the Yelp algorithm filter and found that if you were a small business owner who was contacted by Yelp sales staff and declined advertising, then your positive reviews were filtered, even for Yelp reviewers who had multiple reviews across the star spectrum, who had many friends and contacts. Those very same reviewers found their positive reviews stuck when given for advertisers. In other words, you were FLAGGED for not advertising after being contacted and you were defamed and damaged for failing to heed to the extortion.

  • RB Meg

    This is the main reason we have developed and created www.casetree.com; consumer protection and real reviews backed/based on real lawsuits.