Defining the Local Coefficient: A Conversation with Yelp

yelp-logoThere’s a longstanding debate in local about the sustainability of brick & mortar businesses amid the rise of e-commerce. But people always seem to forget that despite all attention paid to e-commerce, it still only only accounts for about five percent of U.S. retail. The rest is still offline.

The online buying experience can’t be ignored, though — a growing chunk of physical purchases are now influenced by online marketing. And the path to purchase increasingly weaves between different screens. For conversions, it’s still all about offline — but the question is how long this will remain to be the case.

Out of sheer curiosity, Yelp business development VP Mike Ghaffary ventured to quantify this. He has devised what I think will be an influential model for the sustainability of local offline commerce. Known as the “Local Coefficient,” it defines local verticals’ susceptibility to online disruption.

“Yelp is in the business of sending customers to local businesses, while others out there are predicated on putting them out of business,” says Ghaffary. “But I don’t think [brick & mortar] is going away, and as a CS major, I wanted some math to back it up.”

Each local category in his analysis is measured against variables like the need to see a product, or meet a service provider. Availability of online alternatives is also a key input. Autos and home services have high local coefficients, while books and music are low (more here).

Applying the coefficient to dollar amounts of each vertical deduces how sustainable the offline market is. Ghaffary shows that even with liberal assumptions of online disruption, you’d be hard pressed to show that offline won’t maintain a three-fold lead for the next decade.

But we’re seeing disruption even among local staples, Ghaffary admits. Education is changing quickly with Khan Academy and others. There’s LegalZoom in law, and startups taking friction out of diagnosing illness, appraising a move, or quoting a price for auto repair.

The common element is digitizing only the interactions that can be brought online for greater efficiencies, cost containment, and lowered barriers. Those succeeding aren’t killing small businesses but are actually optimizing and increasing offline transactions.

“You start going to more restaurants,” says Ghaffary, “or trusting home contractors and mechanics again, or getting medical checkups more often.” Classroom learning also happens at optimized pacing. Commoditized legal tasks like patent filing are streamlined. And doctors aren’t overrun by low-urgency diagnoses. The result is educated customers and economic benefits to troubled systems like healthcare.

The lesson: Opportunity lies in discovering and elegantly digitizing the parts for which high-touch isn’t inherent. Offline commerce is made better in the process, as lowered barriers increase consumer accessibility and thus transaction volume for local merchants.

“The most forward-thinking among us would be best to think: ‘How do I create experiences that make lives better?’ And not just in the online space,” says Ghaffary. “None of us want to live in The Matrix.”

This is all good stuff, but it’s not just altruism for Ghaffary. He doesn’t hesitate when asked about the implications for Yelp in the findings that physical offline transactions are here to stay.

“Forrester has said online-influenced local commerce is a $1 Trillion market,” he says. “With [Yelp’s] $138 million in revenue last year, we’re at about 1/1000th of that. As the leader in this space, I have to believe that leaves a huge amount of headroom.”

Mike Boland is senior analyst at BIA/Kelsey, where he heads up the firm’s mobile local coverage. Previously, he was a tech journalist for Forbes, Red Herring, Business 2.0, and other outlets.