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Can Yelp Help Independent Restaurants Drive Chains Out of Business?

Online reviews are driving business to independent restaurants and away from chains.

More often than not, if you want to find a good restaurant, you’re going to Yelp it. While the individual reviewers may not be the most charming, in aggregate, they’re changing the restaurant market, creating new business for well-reviewed companies and cutting into the market share of chains.

Researcher Michael Luca at Harvard Business School analyzed data [PDF] from Yelp and the Washington State Department of Revenue to see how the online database affected Seattle restaurants. He found that Yelp had rated 70 percent of all operational restaurants in 2009, while the city’s largest newspaper had only reviewed 5 percent of them.

Luca discovered that Yelp had tangible influence on business in Seattle’s restaurants:

"A one-star increase in Yelp rating leads to a 5-9 percent increase in revenue." That’s a big deal right there. When consumers have information that they trust (especially from multiple users or particularly detailed reviews) it influences decisions.

"This effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation." This makes sense: The major advantage of a chain restaurant is the information conveyed by its branding: All McDonalds have Big Macs, and they’re all pretty much the same. But if Yelp makes information about independent restaurants more easily available, it levels the playing field. Interestingly, people don’t appear to be paying much attention to variations between chain restaurants.

"Chain restaurants have declined in market share as Yelp penetration has increased." The internet saving small business? Maybe. It’s certainly equalizing the information advantage enjoyed by famous brands.

So if you like a particular local restaurant, rating it appropriately on Yelp is a good way to keep it in business. But don’t waste your time on chain restaurants, since no one seems to be weighing the differences between the Burger King here and the one six blocks away.

Taking this data and looking into the future, though, gives us reason to expect a change in the way brands and reputation affect our decisions.

Plentiful online information combined with increasing ease of access—think Google Goggles and other “augmented reality” devices—could mean a reduction in brands and marketing, which would become a “a far less worthwhile investment for the producer,” Julian Sanchez writes: “Products, of course, would still need to be distinguished in some way, but a seller with a superior product would be far better able to compete without investing in a costly national marketing campaign.”

Which is a good outcome, since we’d rather have better stuff than better marketing.

Photo via (cc) R2 Productions

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