26 10 / 2011

Crowdsourced ratings do have a measurable impact on diners’ behavior, with a positive review being especially beneficial for independent restaurants, according to a new HBS working paper Reviews, Reputation, and Revenue: The Case of Yelp.com.

Harvard Business School professor Michael Luca determined that each ratings star added on a Yelp review translated to anywhere from a 5 percent to 9 percent effect on revenues (depending on the control variables and means of estimation)—more than he had expected.

Even more interestingly, within that number not all restaurants were created equal. Chain restaurants, in particular, were largely unaffected by the ratings, while the greatest effect was shown for independent restaurants. That makes sense according to economic theory, says Luca, since diners presumably already have some knowledge about chain restaurants, but can benefit from more information about their neighborhood spots.

Yelp is somewhat of a substitute for traditional forms of reputation. People are not using Yelp to find out about McDonald’s.

But Luca says the big chains should not be comforted by the findings. Indeed, he believes the data suggests that local eateries are starting to siphon off customers from the “Big Boys.” Why? The Applebee’s and the T.G.I. Friday’s of the world have been safe bets for diners because their fare is of an expected quality and their menu well-known—thanks in part to big-budget advertising behind the chains. But review sites are leveling the playing field by allowing consumers to learn as much about independent restaurants as they know about the chains. “This is one reason why consumer demand is shifting from chain to independent restaurants in the period following the introduction of Yelp,” Luca writes.

  1. fyietc posted this