The Yelp Factor and Independent Businesses

I recently read a good study at the Harvard Business School site entitled “The Yelp Factor” (ok, I actually just read the summary of the study, here). The research is asking a simple question that has enormous potential in the world of ecommerce and, increasingly, brick and mortar commerce: Do online reviews influence business? And, if “yes” by what margin? Since they first have come into play, I think that most marketplace participants have a gut “yes” on this.  Michael Luca has brought in real data points via Yelp, however, to help quantify what we assume to be true. 

One significant observation that the study yielded was that local businesses are most affected by reviews while chain venues (think Burger King) are the least affected. This means that if they provide good quality and establish some sort of review optimization effort, independents can gain ground against the big guys. This is a strong insight, but why is it occurring? McDonalds (and all those who followed) became such an enormous success because consumers came to learn that a McD's cheeseburger in Ithaca, NY will taste exactly the same as in Tuscaloosa, AL. While some people really love McDonalds for what it is, most people go to McDonalds because they know what to expect. They have enough information on McDonalds to enable a decision. With Yelp and all other online reviews, nearly that same level of information is available for local (ie: “unknown”) venues, too. End result: small guys can compete with big guys b/c they are known quantities now. 

This "tilting of the scales" towards independent venues also aligns well with a significant cultural shift in America that has been trending towards "connoisseurism". That is, our shift towards treating everything like people have traditionally done wine. Think micro-brew beers, OXO utensils, specific types of cow for steak, narrowcast popular music…  You know, long tail stuff making it a little more big-time. The connoisseurism trend shows a growing native preference for unique services of high quality, and online reviews are enabling this via a virtuous cycle that also yields more reviews.

While these reviews are certainly opening up opportunity for independent venues, Mr. Luca seemed challenged by the fact that the reviews might not necessarily represent actual quality. That is, there can be a gap between actual quality and described quality (via reviews). Where Mr. Luca sees fog, however, I see opportunity: It means that operators have the opportunity to control described quality (to a certain extent) or otherwise become victim to it. It makes a very strong case, again, for Review Optimization and largely puts the power in the hands of those who run quality operations.

Beyond these major points, the study confirms a lot of what we know and preach already at DSS: Review Optimization is a must. More reviews are better. Ratings affect revenue. Have a look at the study; if you see other thoughts in there (perhaps regarding Yelp’s rounding rules?), let’s discuss!