image via Startup-Book.com

In 2004, Jeremy Stoppelman and Russel Simmons, former PayPal employees (part of the famed ‘PayPal Mafia’ of entrepreneurs that includes Elon Musk and others [9]), reconnected at MRL Ventures, a business incubator founded by former PayPal co-founder Max Levchin. Their goal was to come up with a new consumer Internet concept, in particular something related to looking up local businesses online.

That same summer, Stoppelman came down with the flu. He looked around online in an attempt to find a doctor, but all the information was pretty general and very unhelpful. He and Simmons started thinking about a way to combine social networking and reviews, eventually coming up with a service that let users ask their friends for recommendations on local businesses.

And thus Yelp, the San Francisco-based social review site, was founded. The site, which started as, for all intents and purposes, “another site where people review restaurants and other local businesses,” has grown into something much more—a publicly traded company, a verb (“Yelp it”), and a passionate community.

In 2012, Yelp opened on the New York Stock Exchange with a valuation of about $898 million. [5] By September 30, 2013, they had accumulated 47 million reviews, with an average of 117 million monthly visitors, according to the company’s own numbers.

When Yelp came on the scene, IAC’s local review site CitySearch was the dominant player, having been up and running for around a decade while accumulating over 112,000 restaurant reviews. Yet by early 2007, Yelp had left CitySearch in the dust. Between May 2007 and 2009, Yelp was averaging 52,274 new restaurant reviews per month, while CitySearch was averaging only 6,835.

It was also in 2009 that Stoppelman entered into negotiation with Google, which was set to acquire Yelp for around $550 million plus earnouts. In December of that year, however, Google was notified that the “all-but-signed deal” was off. [8] Despite much speculation over a competing offer, the company has remained independent, with a current market cap of $5.14 B[10]. Since then, Stoppelman has been somewhat outspoken, using words like “antitrust” and “monopoly” when discussing Google’s dominance in the local search and review space.

So, what was it that made Yelp take off? What made it different from other review sites that had been around for years prior (like Citysearch) or those with giant name recognition (like Yahoo Local)? Let’s take a look.

Gaining Initial Traction: Making Something Old New

Though the core idea was similar to several services already on the market—user submitted reviews of restaurants, cafes, shops, etc—Yelp did a few things differently, and it was these differences that fostered user engagement and helped Yelp to gain initial traction (for more about innovation, making something old new, and the 20% Rule, see Andrew Chen’s post on TTPMF).

Here’s what Yelp did differently:

They Made it Social

While earlier review sites sat and waited for anonymous reviews to come in, Yelp focused on building a network of reviewers with profiles, friends, and accolades. This was key to Yelp’s growth, because users are more likely to trust reviews from real people than anonymous internet strangers.

via via Yelp Blog

Not only that, but people love the chance to share their opinions with others. In Anonymity, Social Image, and the Competition for Volunteers: A Case Study of the Online Market for Reviews, Northwestern University economics professor Zhongmin Wang writes:

“Yelp enables and encourages reviewers to establish a social image or reputation. Yelp members can evaluate each other’s reviews, chat online, become friends, and meet with each other at offline social events. Each Yelp member has a public profile page that records her activities, including reviews written, number of useful, funny, and cool review votes received, Yelp friends made, and compliment letters displayed. Yelp also recognizes some qualified prolific reviewers as “elite” members.” [6]

Profiles gave anonymous reviews a name and a face, making them more trustworthy. A user looking for a recommendation could know that glowing review came from an actual patron and not the business’s owner, and a patron particularly satisfied (or dissatisfied) with a business could let others know. Having said that, however, it bears mentioning that some businesses actually specialize in writing fake reviews, and business owners or their friends have been known to write negative reviews for their competitors and glowing reviews for themselves as a means to “beat” Yelp’s system. While this has been an issue for quite some time, Yelp has improved their algorithm over the past couple of years in an attempt to solve this problem.

They Incentivized “Good” Behavior

It turns out that people really liked receiving recognition for their reviews of local businesses. They were more likely to write in-depth, well crafted reviews when their names appeared alongside them. Yelp leveraged this inherent user behavior, offering special recognition to users who are first to review a business, and letting other users give kudos for reviews that are useful, funny, or cool. The most engaged Yelp users are awarded “Elite” status.

All this is reflected in the numbers that Wang’s study reports. While only 4.8% of users on CitySearch and only 11.1% of users on Yahoo Local contributed six or more reviews, the vast majority of Yelp users (65.8%) have contributed six or more reviews. By contrast, the majority of CitySearch (71.2%) and Yahoo Local (56.4%) users left only one review, while just 9.2% of Yelp users have contributed a single review. [6] Wang dissects the reward mechanism that has led to this disparity, explaining:

“By writing a large number of high-quality reviews, a Yelp member can signal to fellow community members that she is ‘good’: intelligent, fair, knowledgeable, public-spirited, and even ‘cool.’ As other members’ perceptions of a reviewer, review votes and compliment letters are direct measures of a Yelp member’s social image. We find that more prolific Yelp reviewers have more Yelp friends, receive more anonymous review votes per review, and display more compliment letters per review.” [6]

In fact, at the time of the study a full 44% of reviews on the site were contributed by Yelp Elite. The company explains that the Yelp Elite Squad is:

“... our way of recognizing and rewarding yelpers who are active evangelists and role models, both on and off the site. Elite-worthiness is based on a number of things, including well-written reviews, great tips on mobile, a fleshed-out personal profile, an active voting and complimenting record, and playing nice with others. Members of the Elite Squad are designated by a shiny Elite badge on their account profile.”

Dave Kim, a six-year Yelp Elite user with over 900 reviews, explains:

“I was an active member of the Bay Area Yelp Elite so we were rewarded pretty well in the beginning. Not monetarily, but through rank and recognition. Yelp does a good job of finding ways to reward people, again not through monetary means, but little perks … At regular Yelp Events, Elites often got first-chance to RSVP and even got in an hour before everyone else. There are specific events just for Yelp Elite that offer free food and drinks and swag.” [1]

In addition to the Yelp Elite, the company designated particularly engaged users as Community Managers. These users worked to foster online and real-world engagement in their cities via event planning, reviewing businesses, writing newsletters, and more. One of the most important traits for Yelp Community Managers was the ability to throw a party, and they did a great job throwing cool, exclusive events for Elites.

via Yelp Blog

These events fostered a sense of community among Elites and a sense of loyalty to Yelp as it expanded into new cities. The company emphasized to Elites the importance of their reviews, further reinforcing this sense of loyalty.

Though it’s become somewhat easier, in the early days it was challenging to earn and maintain Elite status—users had to maintain both the quantity and the quality of their reviews. This ensured that both the Elite and those who wanted to achieve Elite status contributed a high volume of excellent reviews to Yelp.

This combination—Elites driven to contribute high quality reviews and Community Managers who helped provide incentive and community validation and support for them to do so—is one of the major factors that helped Yelp to so quickly surpass CitySearch in both quality and quantity of reviews.

They Started Local

In our analysis of Uber’s growth engine, we talked about the merits of the city-by-city approach. Yelp, too, took advantage of the start small mentality, launching in San Francisco in 2005 and making the city its sole focus for that first year. Of that first year, Stoppelman says:

“We didn't have a lot of money, only $1 million in seed financing. We focused on marketing and making the site useful just in San Francisco. We thought that pattern of expansion might be the right one from looking at Craigslist, which started in the Bay Area and then expanded from city to city.” [7]

This proved to be a smart move for Yelp, as Saul Hansell explains, “the new generation of Web workers took Yelp to be their entertainment bible, and that helped generate enough critical mass that others joined in.” Once they had thoroughly exploded in the Bay Area, next came Los Angeles, Chicago, and New York. As early as 2008, Yelp had isolated a series of metrics that helped them determine which cities had grown enough to warrant a Community Manager—which, as we’ve already discussed, only served to further increase growth in those areas by fostering loyalty among the local Yelp community.

They Put Users First

Unlike Citysearch, which displayed professional reviews more prominently than normal user reviews, Yelp leveled the playing field by eschewing professional reviews altogether. They also put users before businesses, which helped to foster a friendly environment, encouraging users to contribute even more reviews. So long as they were within the guidelines, Yelp even made it difficult for businesses to have negative reviews taken down.

This, in particular, created strife between Yelp and businesses, especially when those businesses had purchased ads from Yelp. While most companies in and outside of the review industry would bow to advertiser pressure to remove negative reviews, Yelp made it a point not to.

Staying true to the users kept the community engaged and participating, while differentiating Yelp from other review services. Yelp became known as the place to get real, unfiltered information about local business.

They Offered Something People Wanted

As always, we can’t ignore the fact that Yelp provides a valuable service to its users. This excerpt from a 2006 case study of the company illustrates the delight Yelp users feel upon discovering a local “gem”:

“I had never heard of Yelp before, and somehow ended up finding the most amazing sushi restaurant through it. The sushi restaurant I found, via google’s municipal wifi in Union Square (SF), was called ‘Sushi Zone’, hardly visible from market street, only open 5pm to 10pm, and the line starts forming before 5, what a treat. The person I was standing in line next to said he had lived in San Francisco for several years before he found this place, and I had only been there for 2 days, and it was brilliant. Interestingly Sushi Zone garnered 77 reviews on yelp and a 4.5 out of 5 star rating, Citysearch on the other hand had only had 17 reviews, and although still a healthy 9.5 out of 10 rating.”[2]

In addition to perks like Elite status, parties, and profile badges, the aforementioned joy of discovery fosters engagement with the community and creates instant loyalty to the product.

They Knew When to Pivot

Yelp was not only good at making something old new and delivering a fun service. It is perhaps as integral to their success that they also understood what users didn’t want, and the importance of pivoting to deliver what they did.

The first version of the site, which came out in October 2004, encouraged users to ask friends for recommendations. Though people seemed to like the idea of recommendations and reviews from actual people, Stoppelman admits that the mechanism for requesting recommendations came off as “painful, noisy, spammy” [7], and users who actually needed the recommendation didn’t always get one—after all, how long can you wait for a doctor recommendation when you’re legitimately sick?

While solicitations were unwelcome, the “Write a Review” feature—though quite hard to find—became really popular with users. Stoppelman explains, “People got addicted to it. It was pretty obvious to us, from looking at the data, that people wanted to write their own reviews.” [7]

So they pivoted the site toward sharing reviews, relaunching in February 2005. Stoppelman describes the difference as “night-and-day,” as users began to pour in to review local businesses.

Yet another area in which Yelp has tried, failed, and moved on is paying for content. Early on, the company experimented with paying for reviews to help encourage activity in cities other than San Francisco, emulating competitors like InsiderPages and Judysbook by offering small compensation like $5 Starbucks or gas cards.

Stoppelman says the result was, “relatively low quality participation from people that didn’t care all that much about Yelp.” Thus, the company no longer pays “for reviews directly anywhere anymore” , choosing to focus on review quality over quantity, and letting the built-in social perks serve as incentive (more on those in just a minute).

Today’s Growth Engine

While all these factors continue to work together as Yelp’s growth engine, we can’t ignore a few more.

They’re Good for (Good) Businesses

There’s no denying that Yelp has made it easier for local spots, which couldn’t afford to out-spend chains when it came to advertising, to thrive based on word of mouth from happy customers. Stoppelman explains, “We’ve created a trust mechanism with Yelp. Customers can make the decision to patronize better businesses, and local businesses are able to compete with larger ones.” [2] The data backs this up.

According to the Yelp Blog, Michael Anderson and Jeremy Magruder of UC Berkeley report that an extra half-star rating results in restaurants selling out 19% more frequently, from 30 to 49% of the time, and up to 27% more frequently when Yelp is one of the only sources of information about the business.

In that same blog post, Yelp cites Michael Luca of Harvard Business School, who reports that “[a] one-star increase in Yelp rating leads to a 5-9% increase in revenue...[and] this effect is driven by independent restaurants.”

Thus, as Yelp has increased in popularity, so has their authority as a local guide, meaning that yet another factor we must consider is how the positive relationship between a high Yelp rating and good business has led to restaurants actively promoting Yelp in order to gain positive reviews, further driving user engagement with the site.

When people love a restaurant or establishment on Yelp, the businesses love to promote that fact. The “People Love Us on Yelp” stickers have become ubiquitous in the windows of small businesses everywhere, driving a positive cycle of marketing and awareness for the site.

This is, of course, a double-edged sword, as negative reviews can definitely hurt smaller businesses as much as positive reviews can help, and Yelp has received criticism from business owners over the fairness of some reviews. In 2008, the company introduced a way for business owners to contact reviewers about their comments. Still, if users don’t respond, businesses can’t contact them again.

Just as in the early days, Yelp puts users first. Stoppelman claims, “We put the community first, the consumer second and businesses third.”

SEO

Yelp has consistently made Search Engine Optimization a priority, consulting both Moz (from 2005 to 2007 [10]) and Distilled (two of the industry’s most respected search firms) on SEO. For starters, Yelp has a ton of high-quality reviews and in-depth profiles, all of which generate an endless supply of fresh, indexable content for Google.

Yelp’s business pages are structured well for SEO. Yelp augmented this core content with their own, launching local blogs, city pages, user generated lists and other content all aimed at reaching more users through search.

As with both YouTube and SlideShare, the embed feature can be a powerful traffic driver, and Yelp’s embeddable review widgets were no different. Businesses added the widgets feature to show off their Yelp ratings, and Yelp got a ton of links and great anchor text in return. It was a double win for Yelp, as their efforts ranked many business Yelp pages well above the business’s own page (and other directories) relationship was further reinforced as businesses learned that their Yelp pages were ranking above their actual business sites, which was an amazing selling point for Yelp’s sales team.

The Mobile Explosion

There’s no denying that ever-increasing smartphone use has been a boon to Yelp. In fact, in November 2012, the company reported that 45% of its web traffic was from mobile devices. [6] Furthermore, as of June 2013, Yelp’s mobile users had reached 1.4 million.

The very first Yelp app was launched for iPhone in 2008. Since that time, mobile Yelp users have come to use the app for everything from finding local businesses—in particular, the “Nearby” feature means that a great cup of coffee or bite to eat is always within reach—to making reservations and appointments while out and about.

Many businesses offer users who check in via Yelp promotional codes (like a free glass of wine or $5 off). And Yelp continues to invest in mobile. Finally, after five years, Yelp finally allowed reviews to be submitted direct from mobile devices in August 2013.

Ad Revenue

The mobile explosion hasn’t just been good for user engagement—it has also meant increased ad revenue for Yelp. In the last quarter for which data is available, local ads on mobile devices made up 40% of Yelp’s overall local ad inventory, up from 25% just two quarters before. It’s worth noting that the company has received some criticism from businesses over its advertising policy, which they’ve addressed via their website.

In addition to sponsored listings, Yelp sponsors can offer users coupons and daily deals such as a glass of wine on the house or $5 off the check. And while Yelp’s own version of daily deals (a la Groupon) started off strong, they were quietly deemphasized not too long after, most likely due to competition in the daily deals space.

The Remaining Pieces of Yelp’s Growth Engine

We hope that this analysis will be instructive for startups attempting to find traction in a market saturated with similar products or services. Yelp not only proves that it’s what you do differently that matters, but also that having guts—to pivot your entire company around a hidden feature and spurn a big buyout—can really pay off.

Contributing Authors:

Jon Bishop