Michael Luca, a professor at Harvard Business School, released a working paper that examines the effect Yelp has had on the restaurant industry in Seattle. The study pairs content and ratings information from Yelp with the Washington State Department of Revenue’s restaurant data. By examining the two data sets, Dr. Luca was able to uncover some exciting results. Among the study’s findings:
- “Yelp as a new source of information is becoming an important determinant of restaurant demand.”
- “[A] one-star increase in Yelp rating leads to a 5-9% increase in revenue…[and] this effect is driven by independent restaurants”
- “Yelp causes demand to shift from chains to independent restaurants…This can be viewed as a welfare gain resulting from either better restaurants or better sorting between consumers and restaurants.”
- One under-reported component of the study: using a statistical analysis Luca debunks the assertion that “gaming” (fake reviews by business owners) is skewing the data. (Thanks, Review Filter!)
- Yelp’s review penetration within the Seattle market far exceeds other sources of restaurant reviews.
(From Appendix 4 of HBS/Luca Study)
The Harvard study is exciting because it offers empirical weight to something we already knew: Yelp is a transactional website. The 63 million people who visited Yelp last month were using the site for a very specific reason: to conduct research online before spending money offline.
During a period when one can’t turn on CNN for a few minutes without hearing grim news about our economy, it’s heartening to learn that a little website created in 2004 to help a guy find a doctor is driving new customers to “Main Street” small business owners.
Here’s the working paper in full, if you’d like to read it yourself: