How Does Yelp Make Money and Where Is It Going Next?

Following Foursquare’s slick website revamp and Facebook’s Yelp-like mobile SMB profile pages, we’ve heard the standard chorus of Yelp “killer” claims from generalist tech media. This was followed closely by Yelp’s positive Q1 earnings.

Facebook’s scale is scary and Graph Search has clear local applications. But the hard part for Facebook will be convincing the world that it’s a search utility like Yelp, in addition to a place to look at drunk pictures of friends. Can its fun persona coexist with being the go-to place to find an electrician?

Yelp meanwhile has a reviews volume that erects a sizable barrier to competition. More importantly, it has something that the Facebooks and Foursquares of the world wish they had: direct local sales. That’s the unsexy part of the discussion, but the key to monetizing the products we do talk about incessantly.

I always say that Yelp combines the nimble and engineering-driven product focus of a Foursquare or Facebook, with the direct SMB sales of a YP. It’s a powerful combo that few companies have, and few people talk about in blogospheric proclamations of category killers.

Another thing seldom discussed is how exactly Yelp makes money. I thought I’d take this opportunity to spell out the model, because I’m constantly asked. It also reveals of some of the moats that Yelp has built and where its product development and growth opportunities may lie.

In terms of revenue sources, of Yelp’s $138 million 2012 revenue, about 80% was local advertising. 15% came from brand advertising (think restaurant and hotel chains), and the remaining 5% was affiliate revenue for things like OpenTable or Orbitz bookings.

The local ads segment consists of Enhanced Profiles for SMBs and national chains with individual locations. Of Yelp’s 47 million global listings and 1 million claimed listings, 40,000 have upgraded to one of these Enhanced Profiles at an average spend of $4,200 annually.

Anyone can claim a profile which involves mail or telephone authentication. At this free level, there’s a growing list of features such as responding to reviews and profile analytics. The latter teases out the ROI that can be gained from upgrading to the paid level.

Enhanced Profiles conversely push your profile links to Yelp search (desktop and mobile) and competitor’s profiles, while also clearing ads from your own profile, and you can choose multimedia such as slideshows.

Multimedia is a key point, because it represents where I think the biggest opportunity lies for Yelp and its competitors. Smartphone saturation and wireless broadband have created a fertile environment for video production and sharing via applications like Vine.

People already love taking pictures of food: 61% of Yelp’s photo uploads are from mobile not surprisingly. Low-barrier video is the next step, and the question is how local businesses will capture and redistribute this activity? Or how can Twitter/Vine help them get there?

That’s where Yelp and Foursquare come in. Given that multimedia is additive to profile or feed-based local discovery, it’s something could join Foursquare’s Explore tab. That would be fitting to Foursquare’s current charge to prove itself as a serious local discovery utility.

Look for Yelp to likewise do something soon to better equip users to capture sights and sounds, thereby creating a library of 1). points of user engagement, 2). monetizable moments. SMBs can redistribute video through social channels, or spotlight it within their Yelp profiles.

There are lots of ways this could play out, and kinks to be ironed. But I’m making the call now: Yelp within the next year will partner, build or acquire a Vine-like product that brings low-barrier viral video production and distribution into the product mix.

This hints at Yelp’s mobile monetization, or at least part of it. Like Facebook, Yelp’s ARPU could go down as users migrate to the undermonetized touch point that is mobile. And like Facebook, Yelp’s mobile monetization will be more about native content discovery. Foursquare has already gone down that road, and Yelp won’t be far behind.

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.

Yelp business development VP Mike Ghaffary will be giving a keynote address at Street Fight Summit West in San Francisco on June 4th. Don’t miss the chance to meet him, as well as hundreds of other top hyperlocal industry executives. Buy your ticket now and save!