Why Yelp Is Too Expensive For Local Businesses

In a report published Monday, Pacific Crest Securities analyst Evan Wilson discussed why he thinks Yelp Inc YELP's services is too expensive for many independent restaurants and local businesses.

Wilson led a multi-month study in to the restaurant industry and conversed with many CIOs and CMOs from restaurant chains to determine their use of spending on technology. The analyst's study concluded that, on average, independent restaurant operators spend approximately $7,200 per year on local advertising (exceeding Yelp's average revenue per local account of $4,600), indicating that a restaurant operator would likely have to commit a significant portion of its total advertising spending to Yelp.

Spending on Yelp is difficult to justify if the ads don't drive a meaningful uplift in sales, or even if it's just too difficult to determine the ROI of the spending, according to Wilson's findings.

One participant in the study had the following to say about Yelp's services: "Annoyingly persistent sales team at Yelp. We are not confident that spending money on advertising with Yelp will have any more impact than a strong review."

In fact, Wilson noted that Facebook Inc FB and Google Inc GOOG GOOGL "are more important to restaurants" as one participant in the study stated: "Our digital campaigns with Google AdWords and Facebook have driven a significant increase in online ordering."

Wilson concluded that Yelp will continue to see slower growth as the limits of restaurants and other businesses interested in advertising on review sites are reached. In addition, chains with sufficient marketing budgets have not invested in Yelp advertising as its traffic has proven small versus TV commercials, social media and search while at the same time reviews for chains are "typically not favorable."

Bottom line, Yelp disclosed that its revenue from restaurants is 15 percent, as such the analyst isn't expecting any growth from this level.

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Image credit: Nan Palmero, Flickr