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.