As the owner of a small business, I can confirm that this happens purely as the result of ignorance on the parts of business owners. I've been advertising on Yelp using their cost per click program for about a year now, and was paying about $3.50 per click up until a couple months ago.
I recently got a number of sales calls from reps that attempted to sell me on their new impressions program. They wanted me to pay them $600 for 1000 monthly impressions. I quickly ran the numbers and figured that even if I assumed a generous 5% click through rate, I would still be paying nearly 3.5 times more per click than I was with their PPC program. I would need to be getting a CTR of 17% just to break even, which is highly unlikely. And that's without considering the addition of an onerous 12 month contract, which I didn't have to sign under their PPC program.
Their impressions program does come with an added benefit though, which is the removal of competitors ads from your Yelp profile page. I'm sure this helps overall conversion rates somewhat, but there is no way it has enough impact to justify the massive increase in cost per click.
Ultimately though, my PPC ad impressions have gradually dropped off despite maintaining the same ad budget with Yelp. This is because they give display preference to business owners who have signed up for their impression-based program. I can only assume that means they have managed to con enough ignorant business owners into signing up.
I'm both vexed and pleased with this development. :)
I worked at Matchcraft, which has the best tools out there for buying ads for local businesses and provides the software for a lot of Yellow Page/directory sites. Most of their revenue comes from the directories, but originates from small, local businesses. I got to know the "local business" business and the players quite well, and this doesn't surprise me. We always tried to get the best conversion rates for the small businesses, but the sales tactics of some of the local listings companies are not in good faith and their customer churn rates reflect that.
WRT reasons to not get into local, it's not that the big sites like Yelp and Groupon are sucking their small business customers dry, it's that they can't help it. The only way to reach these small businesses is with large sales forces. The process just can't scale. "Local" is an absolutely horrible business to be in and I doubt anyone will ever crack it (hasn't worked for the past 15 years...). If you want to sell software to shops and restaurants, sell to franchises.
You might say OpenTable is an exception and cracked "local", but it's not - they effectively built their own franchise network of restaurants by giving away turnkey reservation system terminals to restaurants.
The only way to reach these small businesses is with large sales forces. The process just can't scale. "Local" is an absolutely horrible business to be in and I doubt anyone will ever crack it (hasn't worked for the past 15 years...).
What about Craigslist? It seems to have scaled some local small business needs (e.g. jobs and housing).
I think local is tough because there just isn't a big market for many of the things small businesses are trying to sell.
But as we've seen, if you heavily discount them, that changes things.
Jobs and housing are different because people actively search for them. People need shelter, and need income.
They need food too, but they don't necessary need to go to a restaurant---much less a particular one of many in the same flavor variety. If you're trying to sell something people don't have a stake in taking up, you need a sales team because they won't search for you.
That's a good explanation. Note how craigslist works for apartments and jobs postings, but not events (nothing works for events, the other favorite "local" startup idea).
The quintessential small business owner we had was the plumber. People need plumbers and search for them, but how do you get them into your directory? I don't know how well craigslist works for plumbers, and I don't think we ever considered craigslist as competition.
"Even as Groupon’s toughest critic, I can list scenarios in which it makes sense to run a Groupon. I cannot think of any scenarios where I would advise businesses to advertise on Yelp at these rates."
If I owned a small business I would want to ramp my customer base quickly since I would have a variety of other expenses which would be killing me until my revenue was high enough. (Fixed monthly costs like insurance, rent, utilities etc.)
Yelp is a service I and many other people are using more and more to decide where to eat, shop, even use the dentist.
Yelp is not charging for just an ad for a user, they are charging for an ad to a Yelp user who has the ability to put a yelp review up which can help drive business in the future.
It is important to get Yelp users to try your business so you can get those stars so you can get more customers. No business owner is worried about getting bad reviews since they naturally believe their service/food/etc. is the best in the market so that isn't a factor either.
So, yes on a CPM basis this is a terrible deal, but on a CPM basis for a yelp user the economics might look much differently.
The main reason to advertise on Yelp is extortion. If you don't pay Yelp their extortion fees, they only allow a small number of reviews for your business, and even worse, their algorithms pushes the negative reviews to the top. One of my friends' businesses currently has 200 "filtered" reviews and 19 posted reviews which in itself makes his business look incredibly shady (sure, he runs a dispensary, so he might be shady, but that's besides the point).
I think they can get away with this because to someone who is thinking about ads in an offline way, outdoors and newspapers etc the language makes it sound like your getting 3000 ads for example. When you think about it in terms though that your newspaper ad, while beng one ad, was seen by thousands of people.
A Yelp impression is much more valuable than a newspaper impression. When people see an ad on Yelp, they are generally looking for a place to eat right now. They are trying to make a purchasing decision. When they see an ad in a newspaper, it is generally incidental. In addition, newspaper CPM is based on distribution, it's pretty likely that only a small percentage of those papers are read cover to cover, and only a small percentage of those readers look at any individual ad for more than a second. The last time I looked at newspaper advertising, a 1/4 page for one day in a paper with a distribution of 40,000 was about $600. If you are advertising a restaurant, I think you'd be better off giving the money to Yelp.
Many of the comments I'm reading here assume a much higher level of ignorance on the part of small business owners than is really the case. While it's true the average SBO typically does not understand internet advertising, they do understand ROI. They know how much they spend on various forms of advertising. And they know if they're getting a good return because they see the impact the next day in their cash register. And more importantly, they talk to their customers to find out what's working. The irony is, with all the sophisticated technological tracking we can implement with our startups, we often know less about what forms of advertising is producing results than does a supposedly unsophisticated restaurant owner. Ignoring Yelp's 'extortion tactics' for the moment (I'm not qualified to comment on those accusations), I don't think they could sustain premium prices for long if the ads were not yielding commensurate results.
There was a great comment in the VB comments about how the ads are more distinctly targeted--and that makes a lot of sense and is reason enough to pay a bit more per CPM, but in no way should it be a 100x type situation that is going on. Oddly enough, there was a post the other day featured on HN about how not to get into "local" because of issues like Small Business Owners were not likely to adopt-- I can't help but think part of the reason there is this apathy at that level is because all of these titans of this industry are sucking their early adopters dry with reckless cost demands.
Don't use Yelp advertising. The problem is that you pay this crazy rate, then when you search for your business name (even verbatim), they throw an ad for your competitor above the search result for your business. Way more effective for a business to use Adwords and get like 100,000's impressions for the same price. Also the staff at Yelp advertising don't know shiat. Throw them a mildly technical question and they'll answer it like a politician.
> Way more effective for a business to use Adwords and get like 100,000's impressions for the same price.
I've never in my entire life picked to go to a local business based on AdWords. When I want to find a local business, a restaurant, dentist, gym, etc., I always go to Yelp. If the business isn't on Yelp I will never know about them. The Yelp ads are highly targeted. If a business doesn't already have a strong presence on Yelp, the best way to make me aware of their business is to advertise on Yelp.
Maybe the article was written by someone who doesn't use Yelp. It mentions that it's a negative that the Yelp ads link to the business's Yelp page. To me that is a huge plus. If the ad linked to the business's website I would never link on it. In general local business sites are pretty useless, the Yelp page is generally much more useful for finding out about the business. Hours, phone number, neighborhood, map, reviews, price range, dress code, that's all info I want, and it's usually hard to find on business websites. If that info is readily available I'm more likely to go there.
Last week I met with a friend of a friend that owns a commercial door distribution and installation business. He's been in the business for 20 years, but is clueless about anything internet related. I went over his monthly bills for advertising (all of it) and web hosting costs. Turns out, he spends about $3,500 per month on hosting and advertising. Most of the advertising is for DEX, and his site is a crappy little static site.
I don't think the average small business owner really understands the internet, and I don't think the average HNer really understands small business.
I recently got a number of sales calls from reps that attempted to sell me on their new impressions program. They wanted me to pay them $600 for 1000 monthly impressions. I quickly ran the numbers and figured that even if I assumed a generous 5% click through rate, I would still be paying nearly 3.5 times more per click than I was with their PPC program. I would need to be getting a CTR of 17% just to break even, which is highly unlikely. And that's without considering the addition of an onerous 12 month contract, which I didn't have to sign under their PPC program.
Their impressions program does come with an added benefit though, which is the removal of competitors ads from your Yelp profile page. I'm sure this helps overall conversion rates somewhat, but there is no way it has enough impact to justify the massive increase in cost per click.
Ultimately though, my PPC ad impressions have gradually dropped off despite maintaining the same ad budget with Yelp. This is because they give display preference to business owners who have signed up for their impression-based program. I can only assume that means they have managed to con enough ignorant business owners into signing up.
I'm both vexed and pleased with this development. :)