Restaurants whose Yelp ratings increase by one star can expect to see their revenue increase by more than five percent, according to a study conducted by Harvard Business School Assistant Professor Michael Luca.
By combining restaurant ratings from the user review website with data from the Washington State Department of Revenue, Luca discovered that a one-star rating increase on Yelp leads to a five to nine percent increase in revenue, regardless of the actual quality of the restaurant itself.
“Very small amounts of information can have an impact in the restaurant industry because there isn’t a lot of information out there,” Luca said.
Luca controlled for restaurant quality by taking advantage of how Yelp rounds ratings. For example, an actual rating of 3.25 will be rounded to three and a half stars on Yelp, while a rating of 3.24 will be given three stars. By exploiting how similarly-rated restaurants appear unequal due to how stars are displayed, Luca was able to test the effects of how Yelp users perceive restaurant quality.
Luca also found that changes in a restaurant’s score had a relatively larger effect on independent restaurants, whereas a rating change had only a minimal effect on the profits of chain restaurants with established reputations.
In fact, online rating systems may hurt chains. Without them, diners would have had to rely on the chains’ established reputations, but with services like Yelp, they can access reviews of independent restaurants that previously would not have had exposure, Luca said.
Luther Lowe, the director of public policy at Yelp, praised the results of the study.
“It’s heartening to see what we do is helping small business owners,” Lowe said. “Yelp’s mission is to connect people with great local businesses.”
Luca said the restaurant industry in particular is ripe for crowdsourced reviews because of the high number of restaurants and the limited resources about them.
It was another source of restaurant information—hygiene scores—that, in part, spurred Luca to investigate the impact of Yelp. He said he was unsure whether crowdsourced information would be seen as less reliable than ratings given by government agencies or experts.
But people generally trust ratings on Yelp, particularly when there are more reviews for any given restaurant, according to Luca.
Lowe said Luca’s findings support the use of crowdsourced reviews for more than just restaurants.
“Dr. Luca’s paper has exciting implications for other industries,” Lowe said. “They are exciting findings because it demonstrates Yelp ratings are an important parameter on consumer choice.”