Does Yelp Increase Restaurant Revenue 5-9%?

yelp-iconMy friend Wil Reynolds from SEER Interactive alerted me to a Harvard Business Review study published in 2011 which claims that “a one-star increase on Yelp leads to a 5 to 9 percent increase in revenue.”

The author of the study looked at ratings on Yelp for Seattle restaurants over the course of several years and compared them to the revenues these restaurants reported to Washington State.

While I don’t dispute the possibility of an increase in a restaurant’s average Yelp rating having this kind of effect on bottom line revenue, I am surprised that the author thinks he can draw causation conclusions from this study.

Yelp is certainly a popular destination for consumers looking to decide where to eat, drink, and be merry. But it’s far from the only opportunity for restaurants to market themselves online, and I don’t think that obsessing over an extra star on Yelp is worth the increase in an average restaurateur’s blood pressure when so many other less stressful opportunities exist that can improve revenue just as much, if not more. Obsessing over Yelp ratings is also a very dangerous game, as the site’s notoriously strict review filter and aggressive stance against review solicitation lead to lots of frustration for business owners.

Yelp ratings simply can’t be considered in a vacuum as the author of this study attempts to do, as far as I can tell. There are so many questions that this method leaves unanswered for me:

  • What other kinds of marketing is a restaurant doing?
  • Is it the star rating that causes the increase in revenue, or improvements in other factors that increase rankings (and thus visibility to prospective customers) in Yelp’s internal algorithm?
  • What does their profile look like on other sites across the internet (say, Google for example)? In his appendices, he hardly looks at Yelp’s strongest competitors (Zagat prior to their purchase by Google, Seattle Times, and Food-and-Wine).
  • How is he demonstrating that 5-9% of increased revenue is coming from people who actually saw the restaurant on Yelp?

To be fair, as a non-statistician, I don’t fully understand the “Regression Discontinuity Estimate” the author says he applies to label this effect as causal rather than correlational. It seems like a highly-flawed study, though, and I’m surprised Harvard would put this out.

As a result, I have a couple of questions for the Local U Community:

  • Can someone who understands statistics better than I do explain why this is a viable study?
  • Do you buy the author’s conclusion of a causal effect of an increase in star ratings?
  • Would you recommend that a restaurant owner start his marketing with Yelp?

3 Responses to “Does Yelp Increase Restaurant Revenue 5-9%?”

  1. I would agree there are so many variables you would have to pin down to get close to a conclusion. It makes sense to me to set up a test examining a sample size of like restaurants with the same Yelp Score, Rank in Yelp, Very similar first page of reviews and same user interactions and impressions track record. At least there is a somewhat of a neutral base. Once someone in the sample has an increase of a star you can gauge the impact of user interactions. Measuring more calls, driving directions, clicks to website (then what they did on the website). As for the value of the increase I would imagine that you would need to study the average life time value of a customer and what the bump in Yelp interactions means in terms of converting new customers. It wouldn’t surprise me if it’s a 5% – 20% net increase. But I think that you could achieve a similar result with beautiful photos and glowing first 5 reviews. Would love to see that test done. Thanks for the post.

  2. Yep, seems like too many variables to me also :) Thanks for commenting, James!

  3. Anytime David, Thanks for the great post.

    I just found something else worth looking into regarding a Yelp account that was paying for advertising. E-mail me if you’re interested.

    P.S. It was great to meet you at Local U. MD

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