Case Practice: Should Yelp Enter the Advertising Business?

Clarify the Question

When answering any scenario or case questions, always clarify the goal of the question and ask for secondary goals or considerations.

Candidate: Okay great, I’d love to ask some clarifying questions about the purpose of this question. First, is the goal to grow revenue, profit, or something else?

Interviewer: Assume we care more about revenue and market share than profits right now.

Alright. When you say advertising business, is there a specific feature or business model in mind? For instance, I can imagine creating ads on Yelp itself or sharing our user data with other tech companies to enhance ads targeting and those would probably look very different as business cases.

Interviewer: That’s a great question. Let’s imagine creating ads on the Yelp product itself for now.

Great. Can I have two minutes to think it through?

Always ask for time to structure your problem-solving approach and share that approach with the interviewer, so the conversation is easier to follow.

Adapt the Framework

Don't be afraid to get creative with frameworks when answering case questions. The real world is often too messy for an "off-the-shelf" framework, so adapt as needed. Interviewers look for this!

I want to explore three questions.

First, I'd like to establish whether the ads business model is worth pursuing. To answer that, I have three main questions. Does this business model align with Yelp’s mission and values? Is the ads business big enough and seeing enough growth for it to be a worthy target? What is the immediately addressable revenue opportunity for Yelp based on our current engagement?

Second, if we do decide it’s a worthy opportunity, what’s Yelp’s chance of succeeding? I’ll think about Yelp’s unique position in this market in terms of our assets internally and competitive position externally.

Finally, I want to think through the risks and trade-offs of this initiative, such as the opportunity cost of resources we’d be taking away from other initiatives.

How does that sound?

Keep checking in with the interviewer to ensure they’re following the conversation and give them the opportunity to nudge you in one direction vs. the other.

Interviewere: Sounds great.

Assess the Opportunity

First, I want to assess whether the ads business is worth pursuing. Yelp’s mission is to help consumers and businesses connect and find each other. In my head, the ad model would allow businesses to make themselves more prominent in the consumer experience. For consumers more in a discovery mindset, promoted businesses that are relevant to their needs can be very helpful. For consumers searching for very specific things, these ads can be a distraction from their goal. So I think whether this feature aligns with Yelp’s mission depends on how we implement it.

Mission alignment is huge in tech. Also, use this opportunity to demonstrate awareness of common tech designations like search vs. discovery.

From an industry point of view, I know the ads business is the primary revenue source for tech giants like Meta and Google, so I bet the pie is big enough for Yelp to pursue. But I would especially love to understand how much revenue opportunity Yelp can access through businesses that are currently on our platform through an opportunity sizing - is that something you’d like for me to do? Do you have any data we can work off of? Otherwise I can make some assumptions.

Not all tech interviews involve sizings, so check-in with the interviewer to see whether that’s something they’d like to see and whether they have information you can use.

Interviewer: Sure. We can assume the breakdown would look something like this:

Okay great. This data is super interesting - basically the larger the business is, the more likely they are to advertise on Yelp and the more they spend on that advertisement. That makes sense, since larger businesses just have more budget.

If given data, feel free to comment on some trends you’re seeing and verbalize whether they validate your business intuition.

So for small businesses, 5% of 20M businesses will advertise, which is 1M businesses. At $500 / year budget, that business opportunity is $500M. For medium businesses, it’s $1B. For large businesses, it’s $800M. The total is $2.3B. That’s certainly big enough for Yelp to pursue! I would want to confirm though that if we do sell all these ads that our consumers aren’t just seeing only ads and none of the organic content, so that $2.3B may not be realistic immediately.

Provide some caveats and follow-ups that would make you feel more confident in the sizing.

Overall, I think entering the ads business could be a great opportunity. Next, I want to think about Yelp’s position in this market if we are to enter.

Assessing Yelp's Chances of Success

I think Yelp has several unique advantages in an ads business model:

Our consumer engagement: people are already coming onto Yelp on a weekly / daily basis to find restaurants, shops, and other local businesses. Because of that consumer engagement, we also have many businesses onboarded as well, so the marketplace is already there.

Data about consumers and their preferences: People search for businesses, mark favorites, provide reviews, etc., so we know a lot about our users. That data can help us optimize what ads to surface, and is a unique asset.

Business credibility: Because users submit reviews on businesses, businesses with good reviews have a ton of credibility on Yelp. That also means successful businesses will probably see better conversion results from ads on our platform than on other platforms where they don’t have the reviews-based "stamp of approval."

Overall, I think Yelp internally has many advantages when it comes to building an ads business model.

Considering the Competition

From a competitive point of view though, Google also has a similar data set on Maps. I know users can find businesses on Google Maps and see reviews posted by other people. There’s also the ability to search nearby businesses using keywords. That use case overlaps more with the high-intent search use case on Yelp and less with the lower-intent search use case / discovery use case, so as a follow-up I want to think more deeply about how the existence of that direct competitor affects our product design and go-to-market.

More broadly, there are several indirect competitors and substitutes. Indirect competitors could be advertising on Facebook, Twitter, Google Search, or even restaurant magazines or local newspapers. I think compared to these, Yelp has incredible advantages in terms of targeting and conversion, so I’m less worried about those.

Based on all of this, at a high-level, I’m cautiously optimistic about Yelp’s ability to win in this type of advertising model.

Lay Out the Risks & Opportunity Costs

Finally, I want to assess how pursuing something like this brings trade-offs to the rest of the business.

First, in terms of risks, I want to make sure we’re not overwhelming the organic experience with promoted content like ads. It would significantly compromise the user experience to see searches yield a bunch of promoted businesses that are not great answers to the searches.

Second, in terms of opportunity cost, I would want to understand how else Yelp can use our internal resources to drive growth. Given this opportunity is more longer-term high-potential, the company has to be comfortable with that return timeline versus more conservative quick wins.

Summarize

Always summarize your findings / recommendation with an answer first approach. Share the evidence for that recommendation next, and wrap up with any risks and next steps to keep in mind.

To summarize, I think Yelp is very well positioned to pursue the very attractive advertising business with its unique assets and competitive position. This is because 1) the immediately addressable total market opportunity is $2.3B, which is huge, and 2) there are few competitors so well equipped as Yelp to convert consumers. As next steps, I want to better investigate Google Maps as a strong direct competitor and get more clarity around the risk profile of this investment in the context of the rest of the business.

Interviewer: All great points, thank you. No more questions from me.