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MET AD 741 Section XX The Innovation Process: Developing New Products and Services Professor Barry Unger Team Project Paper The Importance of User Experience: Yelp Inc. By Team _ Names removed Spring Semester April 24, 2014 Abstract

The purpose of this paper is to make an analysis about Yelp current situation and suggest some possible recommendations that might be useful for solving its problems. We used information from journals, articles and news to analyze and support our thought toward the case. Recently, Yelp faced a downturn of its financial situation. The company has incurred net loss over the last four years since 2010. The Yelp CEO was still struggling to find the way to improve profitability. After doing thoroughly analysis, we found several potential reasons that were contributed to Yelp’s low profit. We also provided recommendations that might help the company get back to the right path soon.

Yelp’s Company Overview

In mid-2004, Yelp was founded by Jeremy Stoppelman and Russel Simmons. They both were former software engineering employees at PayPal. The idea of Yelp came up with “efforts to find a good slice of pizza” and how they could not find a good doctor. Thereby, Yelp was driven by the need of Stoppleman and Simmons.

On March 2, 2012, Yelp went public. The stock price grew at 64% at the first day (Ortutay, 2012). Yelp became a role model for many review websites. Furthermore, Yelp has grown by getting users to write reviews of businesses, it uses programmed software to recommend the most useful and trustable reviews for the Yelp community. The company was very successful at building a community of reviewers; it has over 53 million cumulative reviews of almost every type of local businesses and an average of approximately more than 120 million monthly unique visitors used website and mobile devices.

Yelp’s Dilemma

Even though Yelp is becoming the popular reviewing platform and had grown to more than 120 million monthly visitors in 2013, Yelp was a long way from profitability. The company incurred operating loss about $10 million on $234.7 million of revenue in fiscal year 2013. Due to the financial situation, Stoppleman needed to make a decision between two options in order to improve the company’s profit. First, the company could continue using its existing monetization model and keep expanding the new markets. The second option was to completely change the revenue model and charge readers for accessing reviews. Hence, Yelp’s future remained uncertain.

Yelp’s Product Analysis

The product analysis theory is used to clarify more on the Yelp’s product and how the consumers perceive value. (See Exhibit 1 for product analysis chart.)

First of all, in fact like most social media, Yelp’s generic product is the community. The reason to attract its clients which are those local businesses is this powerful review community. All the products that Yelp developed are based on satisfying the community to share their experiences and opinions (reviews and ratings). As Mr. Stoppelman said, “We put the community first (Hansell, 2008).”

Secondly, Expected Product is what the customers hope to get from the Yelp’s services which are data and platform. Local businesses are expecting Yelp, as one of the major accessible online tools to refer customers to come. Moreover, the data that Yelp has is also useful for those local businesses. For example, Yelp provides “Activity Feed” (Holloway, 2013) for local businesses to monitor click rates on their pages in order to manage their marketing strategies.

Thirdly, the Whole Product is where Yelp generates profit. Three sources of revenue come from Sponsorship Program, Yelp Ads and Banner Ads.

Last, the Ideal Product is where Yelp put so much value on company’s advertisement and branding. However, the company is concerning too much on the long run effect instead of focusing on the current customers. Hence, the large amount of expenditure on marketing to acquire more customer bases hurts its current financial situation. Yelp should refocus on the whole products and maintain the major source of revenue instead of focusing on expanding for a jumped growth.

Yelp’s Business Model and Monetization Model

Yelp’s business model revolved around three key constituencies, the contributors who wrote reviews, the readers who read them, and the local businesses that they described and pay for Yelp. (See Exhibit 2 to clarify the relationship between the three groups composing Yelp.)

Contributors are partners of Yelp; they write reviews for the local businesses and attract more visitors. Yelp readers are product attracting local businesses to purchase upgrading services and advertising. The local businesses are Yelp's target market (where Yelp makes money). They pay to raise exposure and desire positive reviews to attract more visitors as their customers. The relationship among these three groups forms as a loop and maintains Yelp’s function.

For Yelp’s monetization model, there are three ways that Yelp generates revenue including sponsorship program, Yelp's ads and banner ads. Sponsorship program allows local businesses to update their information, update and edit photos, highlight a single review. Yelp's ads are for local business wanting to be the top of the searching list. The last one is Banner ads.

Yelp’s Difficult Path to Profitability

After trying a variety of monetization strategies, pay-per-call, and pay-per-visit as examples, Yelp finally began accepting advertising from business reviewed on site. Over 70 percent of revenue came from ads sold to local business. Although Yelp’s revenue has continued rising, the company also has continued spending heavily in expenses which prevented Yelp from making a profit. (See Exhibit 3 for revenues and expenses chart.)

The revenue model, low-profitable users review site industry and losing business clients were three reasons contributed to the difficulty of Yelp’s turning profit.

To begin with, Yelp’s current revenue model was the root of problem. Total revenue relied too much on advertising. However, Internet user observed that the business get bad review will not be interested to advertise on Yelp. It is undeniable that the company realized this problem but Yelp still continued to focus on local advertising, which required huge sales-force investments to be profitable. To increase revenue, Yelp desired to expand into new markets. In order to do that, Yelp needed to hiring more people to increase sales force, which made Yelp’s expenses continue rising. It as if Yelp could not generate revenue without spending even greater amount in expenses. At present, more than 350 of its total 500 employees were employed on Yelp sales- force policy. The more ads sale staffs sold, the more compensation expenses Yelp must pay them and the less profit Yelp could keep. Thus, Yelp’s current revenue model which has high dependence on local advertising is the major obstacle preventing Yelp to turn a profit.

Additionally, to prove that the user review site industry is low profitable and cause Yelp’s low profit, three factors of Porter five forces have been applied to explain, which are new entrants, existing rivalry, and potential substitutes. (See Exhibit 4 for industry analysis.) First, it seems that the industry has low barriers for new entrants. For instance, the basic information used to run the business is available online. New comers may not have to spend a lot of money on doing research since the information can be gathered by using search engines. This also results in lowering the capital requirement to join the industry. Judging from existing rivalry, this industry is intensively competitive. There are a lot of competitors in the industry such as Yellow pages, Citysearch, Foursquare, Chow, etc. The major revenue model for these companies is simply selling advertising to local businesses, which is similar to Yelp. It causes companies invest heavily on advertising in order to create brand awareness in customers’ mind and increasing sales force. As a result, the companies such as Yellow pages and Yelp are having low profit or loss even though the revenue keeps increasing. Moreover, this industry has such powerful substitutes such as Facebook and Google+. The features among these companies are similar but Facebook and Google+ have not yet to fully join the industry. Hence, the user review site industry is low profitable and has fiercely competition, these became barriers to generate profit for Yelp.

One possible reason that made it difficult for Yelp to make a profit is the situation of losing business clients. As Yelp manipulated reviews by rewarding or punishing businesses, there are many complaints from business owners who do not pay for Yelp’s service but receiving numerous negative reviews. (See Exhibit 5 for examples of complaints about Yelp.) However, after they began doing business with Yelp, they received good reviews. This was how Yelp force businesses to buy advertising service. Yelp also loosed its local business customers as a result of unreliability. This was because Internet users found that the company held positive reviews and added positive reviews which could be a fake comment on local businesses pages. Yelp also provided bad customer services that brought about client’s dissatisfaction and totally ruined its reputation.

Throughout several years of failed profit generating, Yelp still do not have a clearly defined plan to make the company profitable. After thoroughly analyzing to find the explanations for Yelp’s low profit, the findings were that current revenue model, low-profitable industry and losing business clients were possible reasons explained why Yelp cannot turn a profit. The future of Yelp remained uncertain. Was there possible way for Yelp to incur profit soon?

Recommendation

· Prick the Bubble of Engineer

Actually, Yelp must “prick the bubble of engineer” and be more highlighting on User Experience. First of all, we believe that Yelp should focus on recovering local business clients. Take the concept from product analysis; there are two excepted products of Yelp: platform and data.

A. Platform

For the platform, which is the major reason of losing clients, we think Yelp needs to enhance its feature.

1. Kick It Simple and Stupid

Yelp needs to simplify its user interface base on the purpose of different interfaces. For website, the homepage should focus on searching function and make it simpler. On the other hand, for the mobile interface, Yelp could improve the sharing feature, adding "picture menu" and "store atmosphere rate" as examples.

2. Create "Pick for Me" feature

"Pick for Me" is an advising feature. When readers use Yelp, sometimes they really have no idea of choosing restaurants. To solve this problem, Yelp can provide a new function that randomly select three four-star (or above)-restaurants for users. The local businesses want to join the program need to pay. It enhances Yelp's searching function and also helps Yelp to generate revenue.

B. Data

For the plentiful data, including click rate and reviews, we recommend Yelp uses those to build a new business model. In fact, Yelp has noticed the trend. Yelp launched "Activity Feed" in 2008. Once local businesses pay and join the sponsorship program, they are allowed to use this feature to monitor their online advertising on Yelp. However, Yelp has not begun using the review data. We suggest them to filter sorting out all controversial reviews first. And then, the user-support team, which is an only department having power to delete reviews, should take the responsibility to monitor every single controversial review. Yelp needs to delete fake reviews immediately to maintain its reputation. In addition, for negative reviews, Yelp can analyze them and find out the reasons of dissatisfaction, and Yelp could provide consulting report to paid businesses.

Moreover, in order to achieving its aim - "local service search engine", Yelp must keep accumulating local business data. Once it has enough databases, users will adapt to use Yelp to search. It will help Yelp cross the chasm.

· Prick the Bubble of CEO

It is necessary for Yelp to prick the bubble of CEO. Thus, we also provide several recommendations for whole company.

1. Reducing marketing expenses

Actually, Yelp keeps increasing its revenue, but the high marketing expenses erode its profit. Hence, we think Yelp needs to suspend expanding foreign markets. Yelp also needs to reduce the expense on Elite group. According to some complaints from Yelpers, the Elites are not really trustworthy and do not directly help Yelp contain users.

2. Collecting more users' feedback

User experience is really important for Yelp. Yelp needs to setup feedback feature on homepage to provide the complaint channel and use some incentives to encourage Yelpers to response feedbacks.

3. Building a new business model with different thinking

Developing new business model is critical for Yelp. Yelp might, for instance, host some promoting events, such as restaurant week, for local businesses. The local businesses need to pay subscription fees to join the event. Moreover, Yelp can use consulting program, the advices of negative reviews, to attract more local businesses to purchase the sponsorship program.

4. Finding a big brother: sell to Facebook

Finally, after optimizing the company, we recommend that Stoppelmen must consider about selling Yelp to Facebook. After analyzing Yelp's competitors, we discover that most of them have a strong relationship with large corporation. For example, Citysearch belongs to IAC, and Chowhound belongs to CBS Interactive. In this low-profitable industry, it's really hard for an independent company to survive. (See Exhibit 6 for details of Yelp’s competitors.)

Why Facebook wants to buy Yelp? First, Google Plus, the biggest competitor of Facebook, has bought some user-review-site and integrates into its service. Facebook has not had this feature, so Yelp is very attractive for Facebook. Furthermore, one revenue resource of Facebook is business users. Facebook can acquire Yelp’s rating system, the data of reviews and community to provide additional feature to attract more business users. As a result, we believe that cooperating with Facebook is a good choice.

Exhibit 1 Product Analysis

Exhibit 2 The relationship among the Contributors, the Community and the Local Businesses

Exhibit 3 Yelp Revenue vs. Expenses, 2010-2013

Source: Yelp annual report 2011 and 2013

Exhibit 4 Industry analysis

Exhibit 5 Complaints about Yelp

Running head: THE IMPORTANCE OF USER EXPERIENCE: YELP INC. 1

THE IMPORTANCE OF USER EXPERIENCE: YELP INC. 16

Exhibit 6 Yelp’s Competitors

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Revenue 2010 2011 2012 2013 48 83 138 234 Expenses 2010 2011 2012 2013 57 99 156 242 Net Loss 2010 2011 2012 2013 -9 -16 -18 -8

In million