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Takeaway: YELP threw out a +500% ROI figure on its CPC ads. Before drinking the Kool Aid, let's take a look at its fuzzy math, and prior ROI claims.

KEY POINTS

  1. YELP'S FUZZY MATH: YELP provides a dashboard to businesses that attempts to quantify revenues generated off of its platform.  There are two inherent flaws in its calculations: business revenues are calculated primarily off leads (not transactions), and those leads are not mutually exclusive events.  It's likely that YELP's stated CPC ROI figure is generated using the same kind of fuzzy math, especially since...
  2. PRIOR ROI CLAIMS GROSSLY EXAGGERATED There is a reason why YELP isn't publishing any supporting data behind its +500% CPC ROI figure.  It made that mistake with its BCG study, which we tore apart last year, and found that its core CPM ad product produces a negative to limited ROI at best across most business categories.  

YELP'S FUZZY MATH

Yelp provides a dashboard for "Businesses to Measure Success".  Note that red boxes in YELP's graphic below: the top box is the sum of all the customer leads from the bigger box below.  Revenues are calculated by applying an ASP to each of those leads.  

YELP: Grand Tales of ROI - YELP   Dashboard

There are two major flaws in its calculations that grossly exaggerate revenues

  1. Revenues are calculated primarily off leads (not transactions).
  2. Those leads are not mutually exclusive events.  

For example, a website click doesn't guarantee a transaction, and is counted as such.  Further, each one of those "leads" is assumed to be a unique user, but that's not always the case.  For example, one person could click the website, make an online reservation, and pull up directions/map all for one transaction, but Yelp is counting each event individually as 3 distinct transactions. 

This type of fuzzy math is likely the basis for its +500% CPC claim (e.g. assuming every click results in a transaction).

prior roi claims grossly exaggerated

BCG conducted a survey on YELP's behalf to illustrate the revenue benefit of Yelp to small businesses in the US (link).  However, BCG's calculation of "Incremental Revenue" is inherently flawed to the point where one could consider it intentionally misleading (same could be said for the above-mentioned Dashboard).  

YELP: Grand Tales of ROI - YELP   BCG Study

The metrics in the chart above compare incremental revenues for businesses that either advertise (green bars) or have claimed pages (blue bars) vs. businesses without a Yelp presence at all.  Naturally, incremental revenue in this case should be based on what an advertising business generates over a non-advertising business on the platform (essentially the difference between the green and blue bars), which is what we did in the table below.

We aggregated BCG's figures from the reported figures and chart data.  We then netted out YELP's stated average ad revenue from that study to arrive at net revenue.  We also layered in a gross margin scenario analysis to determine the actual return these businesses are generating from YELP advertising.

YELP: Grand Tales of ROI - YELP   BCG Analsysis table

In summary, BCG's study (which YELP helped finance) suggests that for certain categories, if there is any cost associated with the transaction, advertising with YELP will produce a negative ROI.  In aggregate, the ROI will be highly dependent on that business's gross margin.  Remember YELP's core market is local businesses; many lack economies of scale and inherently have lower profit margins.  For context, many of the largest public retail companies struggle to generate north of 40%.

YELP: Grand Tales of ROI - Retail Gross Margins 2014

Let us know if you have any questions, or would like to discuss in more detail.   

Hesham Shaaban, CFA

@HedgeyeInternet