Yelp Inc. (NYSE: YELP) is an American multinational corporation headquartered in San Francisco, California. It develops, hosts, and markets Yelp.com and the Yelp mobile app, which publish crowd-sourced reviews about local businesses. The company also runs an online reservation service called Yelp Reservations.
True to its mission statement, “Yelp connects people with great local businesses,” the company has built a platform that does just that. And it makes money doing so. The aggregated information Yelpers provide about businesses in their communities is valuable to consumers and business owners. This data forms the basis of Yelp’s revenue model, basically how it makes money.
The third quarter of 2022 saw Yelp report the highest-ever quarterly revenue in its history. The company posted $309 million in revenue, up 15% year over year, with a net income of $9 million. In 2021, full-year revenue was $1.03 billion, up from $872.933 million in 2020. No doubt this momentum will continue in the years ahead.
But there’s more to Yelp’s business than most people realize. If you are an investor looking to buy YELP stock, understanding how the company makes money is critical. I took the liberty of breaking down the Yelp revenue model, and here’s a detailed look at what I found.
Bottom Line Up Front
Yelp makes money by selling advertising space to local businesses on its platform. It also generates revenue from transaction fees and other business services. Advertising revenue accounts for more than 95% of Yelp’s total revenue. Given the company’s continued strong growth in this top-line metric, it’s safe to say that Yelp’s aggregating business model is working well.
How Does Yelp Work?
Yelp is an online platform that helps people find and connect with local businesses. It’s an excellent resource for consumers looking for recommendations on where to eat, drink, shop, or receive services. By offering reviews, photos, and other user-generated content, Yelp provides valuable insights to help people make informed decisions.
Yelp also helps businesses of all sizes by providing a platform to showcase their products and services. Customers can book appointments or make reservations directly on Yelp. This convenience drives traffic to businesses, which is good for business owners and the local economy.
Users can filter their search results by location, distance, business type, and rating to find what they want. Yelp also offers a mobile app for iOS and Android, making finding and connecting with local businesses easier.
Yelp’s website and app are free to use. As you read, you’ll see how the company generates revenue to keep the lights on and continue building a great product.
Yelp Founding History and Funding
Two former PayPal employees, Russel Simmons and Jeremy Stoppelman, founded Yelp in 2004. Initially, Yelp was an email-based referral network for local businesses in the San Francisco Bay Area. The idea came about after Stoppelman failed to find online recommendations for a decent doctor in the area after contracting the flu.
Max Levchin, founder of MRL ventures, an angel investment firm, provided the startup’s seed funding of $1 million. The name “Yelp” was the brainchild of David Galbraith, co-founder of MRL ventures. He suggested the word “yelp” because it is short, easy to spell, and one could easily remember.
The initial email-based system was not very successful. Users were more inclined to the “real reviews” features that allowed them to write unsolicited commentary about their experiences with local businesses. The company was redesigned in 2005 and raised an additional $5 million from Bessemer Venture Partners.
Pre IPO Financing
Later in 2006, Yelp raised $10 million in Series C funding led by Benchmark Capital. Towards the end of 2006, Yelp had more than one million monthly visitors from 12,000 in 2005. DAG Ventures led a Series D funding in 2008 that raised $15 million. Elevation partners invested $100 million in the company, $75 million of which Yelp used to buy equity from investors and employees. Yelp used the remaining $25 million on staff and expansion of the company.
According to Crunchbase, Yelp had raised about $56 million before going public. The total funding excludes the $75 million used to buy off equity from investors and employees. As of 2010, Yelp’s revenue was about $30 million, with more than 4.5 million reviews. The Yelp revenue model worked, and some large companies saw it as an acquisition target.
Google tried to acquire Yelp in 2009 by offering $500 million, but the two failed to reach an agreement. Reportedly, Yahoo had offered $1 billion for the company. Yelp dropped both offers after the board of directors disagreed about the company.
Yelp expanded into the UK in 2009 and later into Canada. It launched its first non-English site in France in 2010 and later expanded into other areas, including Austria, Germany, Netherlands, and Spain. The company CTO Russel Simmons stepped down in 2010 and took an advisory role. By 2011 the platform had more than 22 million reviews with close to 530,000 locations covered.
Yelp went public on the New York Stock Exchange on March 2, 2012, with the stock symbol “YELP.” The IPO saw the company raise $107.25 million, with shares priced at $15 each. The valuation of Yelp was about $900 million.
With immense success came the need to expand. Yelp acquired Qype, its then-biggest European rival, for $50 million. Later in 2015, Yelp ventured into the food business by acquiring Eat24 for $134 million. However, it later sold a majority stake in Eat24 to GrubHub for $288 million. The deal saw Yelp integrate Grubhub’s delivery services into its profile of restaurants.
Today, Yelp is available in more than 35 countries and continues to grow. The company has more than 178 million monthly unique visitors on its mobile app and desktop website. As of November 5, 2022, Yelp had a market cap of $2.13 billion.
How Yelp Makes Money: The Yelp Revenue Model Explained
Yelp uses an aggregator business model. Essentially, this model entails collecting customer-generated content and then selling access to this data. From its quarterly form 10-Q filing with the Securities and Exchange Commission, we know that Yelp segments its revenue into three main categories:
- Transaction revenue
- Other services
Let’s take a closer look at each category and how it disaggregates the segments into smaller divisions:
Advertising is the primary source of Yelp’s revenue. In the third quarter of 2022, this segment made up about 95% of Yelp’s total revenue. Given the millions of monthly unique visitors the platform boasts, it’s not surprising that this segment generates the vast majority of Yelp’s revenue.
Yelp uses a cost-per-click (CPC) model to generate advertising revenue. The CPC model is a type of auction in which advertisers compete against each other to have their ads shown on the Yelp platform. The advertiser willing to pay the highest amount per click wins the auction and has their ad displayed.
When a user clicks on an ad, Yelp charges the advertiser the amount they bid in the auction. The CPC model benefits Yelp because it guarantees that the company will generate revenue whenever a visitor clicks an ad. It’s also beneficial for advertisers because they only have to pay when a potential customer takes action on their ad.
Apart from the CPC model, businesses can also upgrade their profiles to feature their business more prominently on the Yelp platform. The company offers two packages for this:
- Branded profiles: This package allows businesses to add image slide shows, about sections, and enhanced call-to-action (CTA) buttons. Companies can also add videos to their profiles.
- Enhanced profiles: This package is an upgrade from the branded profiles. In addition to all the features offered in the branded package, companies can remove ads from competing businesses from their profile pages.
These packages come with a stamp of authentication. Each premium profile will have a blue shield checkmark next to it, reinforcing the business’s legitimacy to Yelp users. Yelp charges a monthly fee for these packages. The amount charged depends on the amount the company spends on ads. The more a business spends on advertising, the lower the monthly fee for its profile upgrade.
Yelp also has an advertising partner program. This program allows third-party companies to advertise on the Yelp platform. For example, a pet-sitting company could become a Yelp advertising partner. Once Yelp approves the company, it would then be able to create ads that target users searching for pet-related services on Yelp.
Yelp sub-segments the advertising segment in two ways:
- Restaurants, retail, and other
The first category, services, includes businesses such as auto, salons, and auto repair shops. The second category, restaurants, retail, and other, has restaurants, grocery stores, and fitness. In the third quarter of 2022, Yelp’s advertising revenue was $293.664 million, up from $256.830 million. Services had $180.957 million, whereas restaurants retail and other reported $112.707 million.
Transaction revenue includes income from the company’s partnership with Eat24 and GrubHub, Yelp deals, gift certificates, and trades on the Yelp platform.
- The partnership deal with Eat24 and GrubHub: When Yelp sold Eat24 to GrubHub in 2015, it entered into a partnership with the food delivery service. Under this agreement, users could order food from Eat24 restaurants directly from Yelp. In return for the referral, Yelp would get a cut of the delivery fee. This revenue-sharing agreement was beneficial for both companies. Yelp got a new source of revenue, and GrubHub gained access to Yelp’s large user base.
- Yelp deals: Yelp also offers daily deals on its platform. These are discounts and coupons that businesses can provide to Yelp users. For example, a restaurant might offer a 20% discount on meals ordered through Yelp. When a user buys a deal, Yelp receives a commission.
- Gift certificates: Business owners can sell gift certificates on the Yelp platform. The company gets a small commission from each sale.
- Trades on the Yelp platform: The Yelp platform also allows users to buy and pay directly for services on the site or app. For example, a user could book a haircut appointment on Yelp. The company takes a small cut of each transaction.
The third quarter of 2022 saw transaction revenue increase from $3.001 million in 2021 to $3.652 million in 2022.
Yelp also generates revenue by offering software solutions to businesses. The company has several products that fall under this category, such as Yelp Reservations, Yelp Waitlist, Yelp knowledge, and other partnerships.
- Yelp reservations: Yelp Reservations is a software solution that helps businesses manage their reservations. The product includes online bookings, table management, and reporting. Companies can use Yelp Reservations to track their reservation data and optimize their operations.
- Yelp Waitlist: Yelp Waitlist is a tool that helps businesses manage their waitlists. Customers can add themselves to a waitlist online or through the Yelp app. The product also includes features such as text notifications and estimated wait times.
- Yelp knowledge: Yelp Knowledge is a data platform that provides insights about businesses to help them make better decisions. The product includes data about customer spending, visit frequency, and review ratings.
- Other partnerships: Yelp partners with third-party companies to offer access to data and tools. These non-advertising partnerships help business manage their listing, track their performance, and connect with customers.
Revenue from this segment was $11.575 million for the third quarter of 2022, up from $9.324 million in 2021.
Given the trajectory of Yelp’s advertising, transactions, and other revenue, it is clear that the company is on solid financial footing. Each of these segments is growing, and they are all important sources of revenue for the business.
Yelp’s Market Cap and Stock Performance
As of November 5, 2022, Yelp had a market capitalization (net worth) of $2.13 billion. Market capitalization represents the value of a company’s shares of stock. So, Yelp’s market cap means its shares are worth $ 2.13 billion.
At the close of business on November 4, Yelp’s stock was trading at $36.34 per share. The 52-week range for Yelp’s stock price as of November 6 was $26.28 to $40.38. When Yelp went public in March 2012, its stock was trading at $15 per share. As of November 5, 2022, the stock has more than doubled in value. Given the stock’s strong performance, it is clear that investors are bullish on Yelp’s future.
If the company can continue to grow its advertising, transactions, and other revenue, then there is no reason to believe that the stock price will not continue to rise. Remember, the company had a 52-week high of $40.38 per share, which means the stock is still well below its all-time high. Also, Yelp is a profitable company, with a 2021 net income totaling $40 million.
2022 net revenue forecast ranges from $1.16 billion to $1.18 billion. As of September 30, 2022, cash and cash equivalents were $332.116 million. That means Yelp has plenty of cash to continue growing its business and expanding into new markets. With a solid financial position and a bright future, Yelp is poised for continued success. The company’s stock is a good investment for anyone looking to grow their portfolio.
How Does Yelp Make Money (FAQs)
Question: How do companies like Yelp make money?
Answer: Companies like Yelp make the most of their revenue by selling advertising. Businesses can buy ads on Yelp to improve their visibility and reach more customers. Yelp also makes money by offering software solutions to businesses and partnering with third-party companies to provide access to data and tools.
Question: Does Google own Yelp?
Answer: Google doesn’t own Yelp. However, Google tried to buy Yelp for $500 million in 2009. Yelp turned down the offer after Yahoo offered $1 million to buy the company instead. Today, Google is a direct competitor of Yelp through its reviews and listings offering.
Question: Do Yelp reviewers get paid?
Answer: Yelp reviewers don’t get paid. The platform’s goal is to provide users with honest reviews of businesses. If Yelp reviewers were paid, it would compromise the platform’s integrity. Therefore, Yelp doesn’t allow companies to pay for reviews.
How does Yelp make money? This in-depth analysis shows that the company generates revenue from advertising, transactions, and other services. Each of these segments is growing, and they are all important sources of revenue for Yelp. Given the company’s strong growth in recent years, it’s likely that these segments will continue to be major drivers of Yelp’s business in the future.
Any investor looking for a stock with potential should consider Yelp. The company is profitable and has a solid financial position. It also has a strong track record of growth, with revenue increasing year over year.