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New Study Reinforces the Value Of Yelp For Businesses

A recent study by two UC Berkeley professors found that “Yelp ratings
affect both customer flows and the probability of booking a reservation”
for restaurants. While this new research has been generating some buzz,
the findings are actually quite similar to a study conducted last year
by Michael Luca of Harvard Business School. Both sets of independent
research reinforce an important fact: Yelp can be a valuable tool for
businesses looking to increase their revenue.

Here’s a quick breakdown of the two studies.

Michael Anderson and Jeremy Magruder, UC Berkeley:

  • This study looked at the effect of positive Yelp ratings on restaurant reservation availability in San Francisco, CA.
  • An
    extra half-star rating causes restaurants to sell out 19 percentage
    points more frequently (increase from 30% to 49% of the time), and up to
    27 percentage points more frequently when alternate information is more
    scarce (e.g., Yelp is the only source of information about the
    business).
  • “Because
    Yelp collects and aggregates the experiences of a large number of
    patrons, Yelp provides a convenient forum to solve asymmetric
    information problems about the quality of unfamiliar restaurants.” In
    other words, Yelp is a great source of info when researching a business
    you’re unfamiliar with.

Michael Luca, Harvard Business School:

  • This study looked at the positive correlation between an increase in Yelp ratings and revenue for restaurants in Seattle, WA.
  • “[A]
    one-star increase in Yelp rating leads to a 5-9% increase in
    revenue…[and] this effect is driven by independent restaurants.”
  • One
    under-reported component of the study: using a statistical analysis,
    Luca debunks the assertion that “gaming” (fake reviews from business
    owners) is skewing the data. (Thanks, Review Filter!)
  • Yelp’s review penetration within the Seattle market far exceeds other sources of restaurant reviews.

When
asked about his thoughts on the Berkeley paper, professor Michael Luca
had this to say: “That paper does a nice job confirming the results from
my work. The findings don’t surprise me, per se, but do demonstrate
that the impact of Yelp extends well beyond Seattle (where my study took
place), using a similar method but a different measure for demand.
Crowdsourced information, and Yelp in particular, is a phenomenon worth
studying and I think there is a lot more to learn.”

Although both papers focus on the restaurant industry, it’s important to note that restaurants only make up 21% of the reviewed businesses on Yelp.
If there’s ever been any question about the correlation between online
word of mouth and consumer purchasing decisions, the findings from these
studies should remove any doubt. For businesses, the best strategy to
build a strong reputation and take advantage of a great rating starts in
the offline world with great customer service, allowing reviews to build on Yelp organically. This video highlights the story of a few business owners who have had success on this front.