While SMBs Focus on Social, Online Reviews May Have More Impact

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How much is a higher Yelp rating worth to a company? A whole lot. Two UC Berkeley economists published a research paper in the September issue of Economic Journal that demonstrated how a mere half-a-star boost in a restaurants 5-star rating can increase likelihood of selling out tables by as much as 50%.

The researchers wrote in their paper “…although social media sites and forums may not generate the financial returns for which investors yearn — they play an increasingly important role in how consumers judge the quality of goods and services.” To arrive at their conclusions, the economists correlated daily Yelp ratings and reservation availability across 328 eateries in San Francisco (this Atlantic article covers it quite nicely). By measuring the number of available tables left on offer at the end of a day and then asking the restaurants about other factors which may have impacted the number of diners, the researchers concluded that the Yelp Factor provided the primary impetus to selling out the joint.

The paper actually underscores a point I made in my last column. Today, many small businesses are being told that unless they focus on social media marketing, then they will lose out. This is only half the story. If they have a choice between social media marketing and better customer service or a better product — both of which are dependent on resource allocation, which is always a problem in small businesses — the small businesses may in fact be better off focusing on the product rather than the marketing push. You can have the best Twitter patter and the finest Facebook page, but a half-star rating change on Yelp because you failed to flip that burger in time or didn’t make eye contact with a customer might have a bigger impact.

In a nutshell, this paper continues the ongoing process of taking some of the sheen off the social media mirage that has engulfed the marketing world for far too long now. Social media is an awesome tool. It can magnify brand power both positively and negatively, pronto. Twitter and Facebook makes it easy for a mom-and-pop to have the same sized mouth as a giant multi-national. But social media is not a substitute for service delivery and customer satisfaction. While I don’t always agree with Yelp ratings – I find Yelpers are usually too soft on businesses and too easy with their four-and-five-star rankings – Yelp has become a de facto trusted source that is completely beyond the control of the business owners, for better or for worse. (Which may explain why its shares have risen sharply in recent weeks as the collective market intelligence digest that Yelp is the real deal).

So the bottom line here is actually quite simple. Businesses that spend more time focused on social media and less time focused on putting out a great product risk incurring the wrath of powerful social media platforms that can do far more damage. What I’d like to see next out of these researchers is the following — how are Yelp ratings correlated to social media activity by restaurants? Perhaps I am totally wrong and social media engagement actually drives higher Yelp ratings (due to better focus on product and better customer feedback, I would wager or hope).  Regardless, if you have to pick between social media and superior food, its clear which is more important if the food speaks to Yelpers more than the tweets.

Alex Salkever is an executive at a cloud computing company and a former technology editor of BusinessWeek.com. The views expressed in his column are his own and not those of his employer. His Personal Fight column appears every Wednesday on Street Fight.