Starting a small business is a brave endeavor with a US failure rate of 44%. Online review sites can drastically alter the odds one way or another.
Yelp Inc (NYSE:YELP), Angie’s List Inc (NASDAQ:ANGI), and TripAdvisor Inc (NASDAQ:TRIP), are the three go-to sites for consumer online reviews on local business, services, and travel, respectively. The one with the greatest impact on small business is Yelp Inc (NYSE:YELP).
According to a Harvard Business School study on Seattle restaurants and Yelp Inc (NYSE:YELP) by Michael Luca, a one-star Yelp Inc (NYSE:YELP) upgrade can add 5%-9% to the top line for a small restaurant. A Yelp Inc (NYSE:YELP) review by their Elite (most prolific) reviewers can have twice the impact as a non-elite review. Interestingly, Yelp Inc (NYSE:YELP) has virtually no effect on chain restaurants.
What the study didn’t address is that bad reviews can destroy a business. A negative review is more typical than something glowing. Social Media Club quoted Josh Harcus, a social media strategist, “Yelp is considered the whining platform, ” and more darkly, “Also with the ‘filter,’ Yelp removes positive reviews … at will.”
There’s little the small business owner can do in the face of vindictive reviews. Yelp offers little redress except guidelines on communicating with the reviewer. It protects consumers from fake reviews but not the business owner from vitriolic trolls or unscrupulous rivals.
A case study of how not to respond is Amy’s Baking Restaurant in Arizona and its online review firestorm that went viral filled with Amy’s management’s profanity-filled rant. The other side of the coin is that of a Yelp and Angie’s List Inc (NASDAQ:ANGI) poster alleging theft and damage to her home by her contractor is being sued for defamation to the tune of $750,000 by same contractor.
These online review sites are immune to lawsuits by businesses receiving negative reviews as they are covered under the Communications Decency Act of 1996. As these sites are not legally accountable to businesses whose reputations are defamed what’s a small business to do? In an increasingly litigious world common courtesy and common sense would prevent business owners and their customers from escalating an exchange to DefCon 1 in the face of negative reviews.
Sometimes a sense of humor can help.
photo from Reviewtrackers.com
The good news
In a 2011 Business Week story on fake online reviews, Yelp’s algorithms caught all 200 fake positive reviews purchased by an unrepentant Texas business. Trip Advisor and Angie’s List Inc (NASDAQ:ANGI) had less stellar records but all three patrol websites where businesses offer money for reviews.
Small business owners waste their time trying to “game” ratings as it doesn’t work, according to the HBS study. Yelp has anti-fraud filters for both positive and negative reviews.
Other good news is that the same HBS study concluded that Yelp was creating more demand for independent restaurants in markets like Seattle where it has 70% of reviews compared with local media in the single digits. Leery consumers can check 39 million Yelp reviews as some 100 million unique viewers do monthly. Luca also concluded that Yelp and other online review sites drive truly awful businesses to shutter their doors. Hear! Hear!
So which site is most investable?
Yelp has a forward P/E of 183.5. The company just reported Q1 results on May 1 of a smaller loss of $0.08 per share compared with $0.31 in the year ago period. Revenue growth accelerated by 68% but active business accounts while growing by 63% (yoy) are only at 45,000. The profit margin is negative as is return on equity at -9.03% and -9.22% respectively.
Yelp is trying to monetize itself with Revenue Estimator Tool to businesses. Tracking revenue per Yelp customer lead as well as average spent compared to similar businesses nationwide the Yelp business user gets a clear idea of how much Yelp is generating traffic. What it could do is estimate how much more the business could make by advertising on Yelp, which almost triples yearly revenues, from $8,000 with a free Yelp account to $23,000 for an advertiser.
As the stock is pennies shy of its median price target of $30, it’s not surprising that 13 analysts say Hold, with 3 Buys, and 2 Strong Buys. The stock is up 72% in the last year.
Angie’s List Inc (NASDAQ:ANGI), the site for service professionals and their customers, makes money from 1.7 million paid memberships. The company runs its local listings and reviews in 219 US markets. Their home page boasts “2 million households check Angie’s List Inc (NASDAQ:ANGI) before they hire!”
Highlights from Q1 results on April 24 were: 60% increase in paid memberships, a 45% increase in service provider participation, and a 12% in the cost of acquiring members. More importantly, service provider revenue grew 78% and membership revenue grew 47% year over year. The company reported a smaller net loss of $7.9 million compared to $13.5 million (yoy). The forward P/E is 74.16 and the PEG is -1.41. The return on equity is -287.38% but the stock is still up 96% over the last year.
TripAdvisor Inc (NASDAQ:TRIP), with its citizen reviews on lodging and restaurants oriented to the traveler, is the best value. Its forward P/E is only 27.96 and the PEG is 1.93 (somewhat overvalued). However, its operating margin of 38.46% and return on equity of 36.14% are more worthy of a five-star Yelp review than Yelp. Its short interest at 10.6%, is lower than Yelp’s 17% or Angie’s List Inc (NASDAQ:ANGI) at 21.9%.
TripAdvisor Inc (NASDAQ:TRIP) beat expectations on top and bottom lines when they reported Q1 results on May 9 with revenue of $229.9 million and EPS of $0.50, a 43% gain over Q1 2012.
My review of online review sites
TripAdvisor Inc (NASDAQ:TRIP) is easily the most investable as all the travel-related sites have done well, Priceline.com Inc (NASDAQ:PCLN) et al. It has the best margins, return on equity, and P/E compared to Yelp and Angie’s List. It’s also got the largest advertisers.
Small businesses can learn to go with the flow and deal with the inevitable bad review and benefit from Angie’s List and Yelp, or fight it and lose out altogether because none of these are going away.
The article Are Online Reviews Destroying Small Business? originally appeared on Fool.com.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of TripAdvisor. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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