Yelp vs. Angie’s List Represents Battle of Conflicting Business Models
Business model is a term with multiple meanings, depending on the context.
In its broadest sense, it describes the way a company has chosen to conduct business: what revenue sources does it aspire to, which markets, segments, channels, and how does it fulfill that business when it gets it?
In a more specific sense, a business model is an analytical tool that allows business managers to test the financial outcome of various business strategies or decisions described above, by mathematically modeling the cause and effect of each decision, individually and collectively. If the models are skillfully built and used, they can provide huge informational benefit, and at a fraction of the cost of actually going to market.
As such, a business model is a way to identify the most profitable set of business decisions, while avoiding a painful “trial-and-error” approach.
The Internet is still so new, we can see companies with starkly different business models battling each other in the same space. For example, Angie’s List and Yelp both went public within the last five months. Both are forums for consumer feedback on goods and services, but their business models actually could not be more different.
Yelp’s reviews are freely available on the internet, while Angie’s List reviews are only available to paid members, after a free introductory period in new markets. Angie’s List feels that a loyal membership base and strong service provider loyalty are the strengths of its business model. Yelp cited its attractive business model in its S-1 document, prior to its 3/2/2012 initial public offering, and in particular it ability “to attract a large audience of consumers with almost no traffic acquisition costs and a diverse customer base of local business and national brand advertiser.”
So far, neither company has distinguished itself as having a clearly advantageous business model. Working on the premise that its member reviews are valuable information worth paying for, Angie’s List was able to raise $114 million from investors in November of 2011, despite having been consistently unprofitable since its founding in 1995.
Embracing the spirit that reviews should be made freely available to build internet traffic, which is coveted by its advertisers, Yelp raised $96 million in early March of 2012, giving it a market cap of approximately $1.3 billion. This is a pretty rich valuation for a company which had losses of $7.4 million on revenues of $58.4 million for the first nine months of 2011. Maybe this is a market segment where the best business model is yet to be found.
The same debate between free and gated access to content is being played out by newspaper and magazine publishers. Recently I’ve been noticing that content is freely available once I find the location of the “click through this ad” button on my screen. Often it is on the upper-right hand corner of the screen, but now always. I have a sneaky suspicion that every second it takes me to find the button that lets me move on from the ad to the content is being counted by the publisher, and sold to his advertisers. This is a business model I can live with.
My wife and I recently attended a seminar on the impact of digital media on newspaper and magazine publishers, and the panelists collectively agreed that they need a better way to monetize content they put on the web. One of the ideas put forward was compensating journalists whose content is put on the web based on the amount of traffic it generates. My wife raised a concern that this is not what she is looking for from the “New York Times” and others, and the attendees burst into applause.
These days, it is harder to come up with a new business model in food retailing, but people keep trying. A few years ago, Really Cool Foods opened a store on the Upper East Side, selling only their own product – convenient, ready-to-eat, high quality – which apparently was manufactured somewhere out on Long Island. They attracted a few consumers, confused a few others, or as one Yelp respondent posted: “It looks like a market from the outside…but where is the produce section? And the kitty litter aisle? And the butcher case? “ Retail rents are so high in Manhattan that store owners have to make use of every available square foot, and this store simply didn’t. Now a couple of years later, I see a store selling prepared organic and raw foods opened up on Amsterdam Avenue in the Upper West Side, using the same approach, and again exclusively selling food made in their parent company’s factory. Is their food good enough to make this business model work for them better than it did for Really Cool Foods? Time will tell. For now, I can check out their reviews on Yelp…..for free.
