YELP Stock tumbles based on high customer churn

YELP Stock tumbles based on high customer churn

What are the costs associated with negative reviews? Just ask YELP! YELP, the popular and controversial local business review site just released its latest earnings report sending their stock price crashing more than 20%. The problem? Advertiser Churn. According to reports, YELP changed their advertising model last year from a CPM (Cost-Per-Impression) model to a CPC (Cost-Per-Click) model. According to reports, now that those customers who were sold in Q1 of 2017 are coming up for their annual renewals, more than expected are not seeing the value of the new model and not renewing.

All of this was unwelcome news to investors who were expected better sales performance and YELP is now paying the price. At the time of writing, their market value has declined over $500 Million on this news – ouch!

But is slowing new customer growth and renewals really the only problem with YELP? Anybody who does Google searches for local businesses knows the visibility and potential power that YELP presents online. But is their claim that they got it wrong and now will be corrected enough to satisfy shareholders? Recent reports of lawsuits against YELP’s previous outlook may be taking shape. But this isn’t the only time YELP has dealt with legal matters.

Not only has YELP for years had to deal with allegations of unethical business practices and potential legal action against the company, but more and more companies are coming after YELP and negative reviewers for posting negative reviews about their companies on YELP.

And there is good reason for businesses to be concerned here since studies show that fully 8 out of 10 people have indicated they will NOT do business with a company that has negative reviews. Studies also show that it can take 10-12 positive reviews to help offset one negative review. So what are the total cost implications for this? In the US alone there is an estimated $536 Billion of lost business each year due to unhappy customers alone. And where do most of these unhappy customers go to vent? Online. And when you are in control of how these reviews are published online, like YELP is, you can see the potential problem.

Many online review platforms have chosen to take an easier route in managing reviews by providing a simple 5-Star rating system instead with the option to leave comments. Although easier, the average star rating received by a business online today is a 4.3. Is this good or is this a bad rating? Moreover, what do consumers consider a 4.3 to be? Since most people have no basis for comparison, little is gained and lost through this alternative model for the average company. But not all companies.

I have a number of clients who have a disproportionately large number of reviews, most of which are positive, relative to their local competition online. As a result, many of these clients tell me that fully 20%-35% of their customers that come from search indicate that the leading factor that led them to my clients was their superior reviews and rating alone. Now that is a hard number to ignore!

In summary, consumer reviews are not going away – nor are the potential pitfalls and problems associated with the management of them online – as YELP is learning the hard way. As I have previously written, online reviews can provide you with a significant competitive advantage since most consumers today will research you online before they contact and/or buy from you. Some companies like YELP are trying to build a billion dollar business from this process. The question for YELP is how will their own customers and investors will now review their own performance and better yet, what will (and will not) be reviewed and published about YELP and how will it affect their own business moving forward? Maybe the reviews about YELP on YELP could have warned investors in advance…

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