Prominent investor Paul Graham advises innovators to "live in the future." He suggests immersing oneself in a new trend, to live and breathe it. By doing so, an innovator can develop real insights into what the future holds when the trend becomes mainstream.
One way ClearMechanic team members live in the future is through our headquarters in Silicon Valley, a pocket of tech-savvy consumers who force businesses to innovate far more than in other regions. Recently, Graham's maxim resonated with me as I observed a sea change in the Silicon Valley auto repair industry, only to receive blank stares when I mentioned the same trend at a national conference.
I am referring to the dramatic rise of Yelp (www.yelp.com, NYSE: YELP) in Silicon Valley. Four years ago, Yelp was a hot start-up that dealers and shop owners hated. Today, their hatred has changed into grudging respect, as Yelp is a fact of life - like Google or Facebook - and is a key driver of service and repair business. ClearMechanic has analyzed this Silicon Valley trend closely and we have a surprising prediction about the future of Yelp.
Silicon Valley Consumers and Shop Owners Acknowledge the Dominant Impact of Yelp
Last week, a car owner in Silicon Valley sent the following e-mail to a neighborhood e-mail list, asking for a mechanic recommendation.
Note that the consumer has already searched Yelp and narrowed her search for a trustworthy repair shop (excluding dealers based on negative reviews), and is now seeking word-of-mouth recommendations. In ClearMechanic focus groups of Silicon Valley consumers, this is a common refrain. "Step #1: Check Yelp reviews. Step #2: Ask friends and family for recommendations." Such consumer behavior is not lost on local repair shops, who closely monitor their Yelp ratings and often pay third-party vendors to respond to negative reviews.
The best study on Yelp's impact is by Michael Luca at The Harvard Business School, who researched the impact of Yelp ratings on restaurants. He concluded that a 1-star increase in a restaurant's Yelp rating corresponds to a 5% to 9% increase in revenue. It is no wonder repair shops are laser-focused on their Yelp rating.
Yelp's Unique Influence in Silicon Valley
Interestingly, the topic of Yelp reviews does not come up as frequently with our national shop clients. There is awareness of online review sites and their importance, but not with the urgency or concern we hear from dealerships in San Jose or independent shops in Palo Alto. This is because consumer adoption of Yelp has already satured Silicon Valley, forcing auto repair providers to adjust.
In ClearMechanic's study of Yelp reviews of San Francisco auto repair shops (more on this study below), we document this quantitatively. The average San Francisco shop has 56 Yelp reviews! Although there is no city-by-city Yelp data available for the auto repair industry, a quick scan through Yelp reviews in other cities underscores the significance of this figure. Even the best shops in major U.S. cities like Charlotte and Dallas won't reach 56 reviews. In contrast, there are plenty of San Francisco shops with over 250 Yelp reviews.
One San Francisco shop owner told me, "If we hear a customer found us through Yelp, we have to bend over backwards to make them happy. The risk of a negative review is something we can't afford." Another Bay Area shop owner told me his entire business is predicated on strong Yelp reviews.
Likewise, Yelp is still not a top discussion topic at national automotive aftermarket trade shows. Smartphones, Facebook, mobile ads, SEO - these continue to dominate the conference circuit. But, very soon, this will change. Just as Yelp has conquered Silicon Valley in a few years, it is penetrating the rest of the United States as the leading website for online small business reviews. Yelp just announced that 100 million monthly unique visitors visited its site in January 2013. To put this in perspective, this is about 10 times the monthly traffic of AutoTrader.com
Yelp Reviews in Silicon Valley: A Surprising Twist
At ClearMechanic, it is clear that we are "living in the future" when it comes to consumer behavior in auto repairs. Yelp dominates in Silicon Valley and gives us a terrific laboratory for analysis and prediction for the broader market. Accordingly, ClearMechanic conducted an analysis of all Yelp reviews in the city of San Francisco. Our sample includes 298 automotive repair shops, all of whom have at least five Yelp reviews. The sample includes every dealership, independent repair shop and chain repair shop in the city. A number of things surprised us as we dug into the data, but in this post, we will emphasize just one: in San Francisco, Yelp ratings indicate that most shops are...perfect.
You are not misreading this. The average Yelp rating for a San Francisco auto repair shop is 4.3 stars out of 5 stars. In fact, 102 of the 298 independent shops have a perfect 5-star rating.
When you break down the data further, the "Lake Wobegon" issue - every shop is above average - worsens. Dealers fare poorly on Yelp, with an average Yelp rating of 3.7 stars. (Side note: dealer reviews are worse because the sales and service reviews are mixed together by Yelp and because dealers are more aggressive about recommending additional repairs to consumers.) So, in fact, when you refine the data to only show independent repair shops, the average Yelp rating is a remarkable 4.5 stars.
How Silicon Valley Shops are Doing the Impossible
Maintaining a 4.5-star average Yelp rating is not easy, particularly with Yelp's aggressive spam filters. So, how are shops accomplishing the impossible?
First, Silicon Valley repair shops are taking advantage of every available legal tool to boost their Yelp ratings. Many shops hire third-party vendors to monitor their Yelp profiles for negative reviews and request removal when possible. This is part of the nascent "social media management" industry.
Second, Silicon Valley shops proactively encourage their loyal customers to submit positive Yelp reviews. This explains why so many Yelp reviews start with, "I've been bringing my car to Frank for 5 years..." or similar comments reflecting a longstanding relationship between shop owner and consumer. Take this example of a 3-year customer who proclaims one shop owner to be "the most honest mechanic you will ever meet":
Because all shops have loyal customers who know the owner personally, it makes sense for the shop to lean on these fierce loyalists to write positive Yelp reviews. If an average shop has 56 reviews, then a single review represents about 2% of total reviews - not bad!
Third, shops are clever about finding out if a customer is a Yelp user. A simple "how'd you hear about us?" can elicit this information. If the customer says he / she is a Yelp user, the shop can put in extra effort during the repair visit to ensure a strong review.
There is a final, deeper explanation of Silicon Valley shops' ability to maintain near-perfect Yelp reviews. This relates to an area of academic research on "credence goods," which argues that lay customers cannot evaluate expert service providers like mechanics and dentists. The research states that laypersons instead judge the quality of experts by making simple observations which they falsely believe are correlated to trustworthiness. This subject is complex and important enough that it deserves a separate article.
The Future: Yelp is a Long-Term Cost of Doing Business, Not a Differentiator
For the broader auto repair industry, there are several lessons from Silicon Valley's Yelp experience:
1) Yelp will soon be the first website your customers look to before deciding which repair shop to visit.
2) Shops must use all available legal means to boost their Yelp reviews.
3) 4.0-star reviews aren't enough! Your competitors will work with vendors and use other aggressive tactics to boost their Yelp reviews, which will force you to do the same. As we have seen in San Francisco, this is an arms race. Shops who ignore Yelp and maintain a seemingly respectable 3.5- or 4.0-star rating will lose business.
4) Before Yelp has saturated your market, there will be a short period where you can gain a decisive competitive advantage by "artificially" boosting your Yelp reviews.
5) After the market stabilizes and most shops have 4.5 or 5.0 star ratings, Yelp will no longer be a differentiating factor and will instead be a cost of doing business. When every shop has 5.0 star ratings and 50 reviews, then the market resets and other, more enduring differentiating factors become critical.