How Does Yelp & Groupon Make Money?

There is a hair salon at the corner of your street.

It doesn’t make sense for them to buy an advert on Google. For years, Google has consistently said that they were targeting local. That they wanted to grab the marketing spend of the thousands of little shops and salons dotted around your neighborhood.

But they never managed it. Their targeting is not good enough.

In contrast, Yelp and Groupon figured it out, by effectively taking extremely old business models and putting it on the internet.

This is not to do down what they have achieved. Because they both did something we all knew about and did it better than anyone.

how does yelp make money

Image source: Dee, flickr commons

Three measures of Stuff

There is quantity. There is quality. There is price.

Quantity is easy. You choose how much you want. Generally the only way a company has to influence how many you buy is to give bulk discounts.

People care about price because we don’t have infinite money. As we go through life, we turn our hours into work and our work into money. If you are part of the rat race, then everything you do can be equated to a dollar value.

It is an unpleasant reality, but no one has implemented a sustainable alternative.

Vouchers are a proven way to get Person A, let’s call him Pankaj (thanks for subscribing!), to part with money they would have otherwise spent elsewhere.

Pankaj gets a haircut at a good price, and the salon gets cash.

That je ne sais quoi

Quality is a little more complicated. There is no perfect measure of quality. Different things are of different value to different people. An Apple Watch may be worth $17,000 to you, and $15 to me. The fact that price can become the best measure of quality is both bizarre and true.

Yelp uses the internet’s favorite measure of quality – the user review.

5 stars, 10 out of 10, 100%.

Yelp lets users rate and review the small businesses they have visited.

Now if we review reviews, they are actually a bit rubbish.

It is hard to know reviews are genuine. Most people don’t leave reviews. People complain that AirBnB’s reviews are too generous.

How does Yelp make money?

  1. Create a platform for users to review businesses
  2. Call up businesses offering upgrades to their listings
  3. Enjoy a feedback cycle of increasing user generated content and more business subscribers

Yelp charges $300-1,500 per month for a variety of listing and advertising services. The negative is that businesses hate it, often equating this to blackmail. They complain that Yelp will filter out great reviews, unless they start to pay up.

It is hard to know what is really going on, because reviews are a joke. When I was in South Korea, I stayed at a hotel that had hundreds of 5 star reviews on TripAdvisor. When I got there it was empty and in the middle of nowhere. I took a look at the guest log. It had five names. Over a three year period.

It is too easy to get your friends to review your business positively.

Equally it is too easy to get trolled by a customer with a persecution complex.

A common complaint about AirBnB is the lack of negative reviews. However I suggest AirBnB doesn’t need to hide one star reviews. The reality is that rooms can be relisted so easily, hosts who get a terrible review can simply hit delete and start again.

Reviews are, at best, only part of the picture.

How does Groupon make money?

  1. Call up local businesses and promise 100 new customers if they offer half price vouchers. Say it is $50 normally for a haircut, the hair salon is promised $2,500 of sales.
  2. Groupon takes up to half of this for themselves, $1,250.
  3. Groupon sends out the vouchers via email and subscribers snap up the great deal.
  4. The hair salon is overwhelmed with customers and receives $1,250. Normally they do 25 haircuts for this. Today they do 100.

how does groupon make money

Image source: Groupon flickr

Groupon did what Google was unwilling and unable to do. They hired thousands of salespeople to call up businesses. They hired them in the middle of a recession. Unfortunately the businesses they were helping quickly realized deals like these are hard work.

The daily deal email lists themselves rapidly became spam.

Problems

Both Yelp and Groupon’s stock prices are far below their highs. They are real businesses, but expectations ran way ahead of reality.

Groupon’s revenues in 2015 were $3bn, with billings (total value of vouchers) of $6.2bn. They have almost 50m active customers.

Yelp’s revenues in 2015 were $550m. It has 110k local advertising accounts.

Both companies are losing money. The stock market is telling both of them that they’re past the high investment growth phase, please now make some profit. When your revenue is accelerating and your stock price is going up the market will believe anything. When your stock price is going down they’ll wonder if you own your shoes.

The fact is, businesses are happy to pay for new customers. But at some point they’ve got to make money on those customers. When Yelp and Groupon went viral, that became too hard to stick to. It was too easy to take advantage of the shop on the street corner. Hopefully now that they have both come back to earth they can do a better job of this.

Business idea

Local is a big deal and arguably not yet solved. Google for one continues to invest. If you can figure out a better way to measure quality than price, quantity and user reviews, then you are on to a huge business. Good luck and if you figure it out, get in touch, I’d love to work with you!

Curious as to why I think Gold is going to be the best investment of 2016? Check out my article here.


Or more interested in why Microsoft’s acquisition of LinkedIn?

Yuen Lo

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