November 19, 2013

Yelp and Merchandise Forensics

If you travel, you know that Yelp and those who compete with Yelp are particularly helpful.

Yelp shifts demand.

Let's say that you visit a town with 30 restaurants, all earning an average of $750,000 in sales per year, all generating $75,000 pre-tax profit (this is being done for illustrative purposes, no claims for accuracy other than a few simple Google searches). Let's say that 5% of the traffic is tourist traffic that is impacted by Yelp. In other words, $37,500 of demand per store is up for grabs, steered by Yelp and similar apps.

Let's say that your expense structure looks something like this:
  • 35% of costs are for food.
  • 35% of costs are for salaries (essentially fixed).
  • 20% of costs are for overhead (essentially fixed).
The pre-Yelp profit and loss statement looks like this:
  • Demand/Sales = $750,000.
  • Variable Costs (food/drink) = $262,500.
  • Labor = $262,500.
  • Overhead = $150,000.
  • Profit = $75,000.
In a Yelp-fueled environment (shifting 5% of total market demand to establishments favored by Yelp), the top 10 rated restaurants capture $37,500 * 30 / 10 = $112,500 per store. The bottom 20 rated restaurants all lose $37,500 each.

Yelp-fueled restaurants:
  • Demand/Sales = $862,500.
  • Variable Costs (food/drink) = $301,875.
  • Labor = $262,500 (though you could make a case you need more staff).
  • Overhead = $150,000.
  • Profit = $148,125 ... 17% of sales.
Yelp-penalized restaurants:

  • Demand/Sales = $712,500.
  • Variable Costs (food/drink) = $249,375.
  • Labor = $262,500 (though you could make a case you need fewer staff).
  • Overhead = $150,000.
  • Profit = $50,625 ... 7% of sales.
I know, this example is unfair, because the best restaurants would already have a disproportionate sales advantage ... but I'm doing this for illustrative impact. I'm trying to show how our current marketing environment causes subtle shifts, subtle shifts that result in major impact on the profit and loss statement.

In my example, 10 restaurants accelerate to winner status ... 20 restaurants fade just ever so slightly, with a big impact on profitability.

A similar thing is happening in my Merchandise Forensics projects, within companies, and across companies.
  • Google plays the role of Yelp, with a comparable impact on your profit and loss statement. To a much, much smaller degree, social media plays this role as well.
  • Your own marketing efforts (mostly email, home page, and landing page strategy) act as Yelp, steering demand to the items you focus on.
  • Amazon simply cannibalizes your business, acting as a Yelp-penalizer effect.
Combined, the examples you see above apply to your business as well.

This is why it is so critical to perform Merchandise Forensics work - within your own business, you are causing the Yelp effect that I illustrate above. You have to understand the dynamic, and measure how it impacts marketing productivity.