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March 4, 2012

The State Of Local Review Sites: Yelp's Revenue Model Explianed



Local reviews site Yelp is set to price their upcoming IPO tonight.  According to a report in the Wall Street Journal, it will sell 7.15 million shares at a price of $12 to $14. That would value the company at $838.6 million at the high end of that range.
Yelp has grown by getting uslers to write reviews of businesses, engaging them through social networking features, and piggybacking on search engine traffic
Yelp's traffic exceeds 66 million monthly unique visitors, is used on more than 5.7 million mobile devices, and has collected a total of 25 million reviews since its inception in 2004 (see breakdown of reviews by business segment in the chart above). 
Yelp 's revenue model helps it earn money and it  generates almost all olf its revenue from advertising—91.4 percent for 2011. It's primarily two kinds of advertising:

  • Local advertising from businesses that want to be featured on Yelp, which is 76.8 percent of total ad revenue.
  • Brand advertising, i.e. display and text ads on Yelp.com, which gets lots of traffic from search engines.

    How do the local ads work? Restaurants, clothing stores, or beauty salons pay Yelp for the right to prominently appear first on any given search, with the review of their choice as the teaser (see screenshot). So if a Yelp user searches for “Thai food” in San Francisco, they will first be directed to the advertising restaurant before being shown organic results.
    The remainder of the company’s revenue is largely from Yelp Deals, a Groupon-like daily deals business which Yelp is scaling down. (See revenue breakdown below.)


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