Yelp Heads Toward an IPO, But Can It Thrive on the Social Web?

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It’s four o’clock, and you need to make a dinner reservation. The problem is, you have no idea which restaurants are the highest rated in your area. Chances are that you’ll do what 66 million others do each month: search Yelp.

Yelp offers in-depth user reviews and ratings of everything from restaurants to churches to pet hospitals. To date, it has amassed more than 25 million reviews, making it one of the most popular sites of its kind. Users create individual profiles and increase their status (i.e., the perceived value of their reviews) by remaining active members over time and through other users’ ratings of the helpfulness of their reviews.

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Last week, the company indicated that it was aiming to sell shares at between $12 and $14 in an early March IPO — part of an effort to raise $100 million. At the higher price, the firm would be valued at $838.6 million, according to an article in The Wall Street Journal.

That’s a far cry from the $100 billion valuation that some foresee for Facebook following its expected IPO later this year. With that in the air — along with recent declines in share prices for Groupon, Zynga, Pandora and LinkedIn — many are wondering if Yelp is yet another in a string of potentially over-valued technology companies planning to go public.

Yelp is still not profitable. Last year, the company lost $17 million, although revenues from local advertising increased by 74% to $83.3 million, according to the Journal. The company has warned that growth will likely moderate as the company matures in its current U.S. markets. (The firm plans to continue expanding internationally.)

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Still, some analysts point out, the company has a strong foothold in the online recommendation field for a number of reasons. “They have the breadth of coverage and the richness of millions of reviews,” says Wharton marketing professor David Reibstein. The depth of feedback on the site “cannot be bought overnight” and would be “hard for [competitors] to replicate.” In a previous article in Knowledge@Wharton, Reibstein noted that group buying site Groupon, for example, suffered from intense competition among copycat sites offering similar deals. However, “customers are now loyal to using Yelp. There will have to be a motivation to switch. It is unclear what that would be.”

Also, some online activities are more easily monetized than others, notes Kendall Whitehouse, director of new media at Wharton. “One of the things that is attractive about Yelp is the site’s closeness to the user’s purchase decision,” he says. “Someone looking up a restaurant review in Yelp is very likely planning to go out to eat somewhere. And that should be easy to monetize. Like search, Yelp reveals its users’ intentions, and that makes these sites attractive to advertisers.”

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Reibstein notes that unlike a company such as Google, which “is focused on everything,” Yelp’s success is based on the fact that it is focused on something very specific — local user reviews. Wharton marketing professor Eric Bradlow agrees that Yelp has served its niche well, particularly as an early player in the realm of online restaurant reviews. “There are some products and services for which product recommendations are not central. But, for restaurants, which are an experiential good, they are paramount.”

However, Bradlow sees a potential change that leaves a question mark over whether Yelp’s current business model is sustainable. “The next big thing will be target recommendations based on people’s social network.” As soon as word-of-mouth content becomes “Face-bookable,” he says, “then general word-of-mouth sites [like Yelp] will struggle. People want recommendations from their network.”

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

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