How does Yelp make money?

Yelp is all about consumer reviews, but the bulk of its revenue comes from local advertising

It’s been said that if you’re not paying for it, you are the product. What does that mean exactly? Something about advertising, user data, probably a few cookies or whatever…(spoken like a person who isn’t at all worried that the NSA sees how many things-riding-roombas videos she watches each week). So to help make things a little clearer, we’ve decided to start taking a closer look at how some of our favorite companies make money.

This week, we’re starting with Yelp. The local commerce review site lets users rate businesses they love and hate, and while free to use for consumers and businesses alike, businesses can pay to upgrade to an Enhanced Profile.

While consumer review competitor Angie’s List makes money by charging users to subscribe, Yelp keeps its service free to users by relying on advertising. In 2012, Yelp generated a total of $138 million in revenue. Of that, 79% was all local advertising revenue. Another 15% was from brand advertising (ads and promotions from a specific brand), and just 6% was from “other services.”

To be clear, that’s from 2012, and we’re now less than two months away from 2014, so those numbers are liable to change. But the general structure of Yelp’s business model will stay the same: the bulk of its earnings comes from local advertising. In its Q3 2013 earnings report, Yelp noted that local advertising revenue was up 80% over Q3 2012. The company expects total full-year revenue to come in at $228-$229 million.

A big chunk of local revenue comes from Enhanced Profiles, to which a business can upgrade to get a host of special tools and features, including unlimited photos, removal of competitors’ ads from your page, and a “Call to Action” button that allows customers to make reservations or print coupons on the spot.

Yelp sports some 47 million global listings, one million of which have been claimed. Of that one million, 57,200 local businesses have upgraded to Enhanced Profiles, each of which generates about $3,340 a year in revenue for Yelp.

A recent study by Nielsen found that when customers find a local business on Yelp, 89% make a purchase within a week.

“Other services” refers to Yelp’s partnerships with OpenTable and Orbitz.

Over the summer, Yelp launched Yelp Platform, which allows businesses and consumers to make transactions directly on the business’s Yelp listing. Yelp takes a small cut of the revenue businesses pay to the services that provide online ordering and offline distribution technology, but Yelp doesn’t share those numbers.

Net revenue grew 68% in Q3 to $61.2 million for a net loss of $0.04 a share.

Yelp shares were up 2.51% at the close Friday to $63.38. The stock is up 157.85% since the company went public in March 2012.