Will Yelp’s Marginal Sales And Marketing Expense Decline In The Near Future?

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Yelp (NYSE:YELP) has been expanding its operations outside the US for the past few years. The single most important factor that drives Yelp’s value after its revenue growth is the growth in its sales and marketing (S&M) expense. Yelp has had to incur high S&M expense to fuel its rapid expansion, as it needs to rope in new local businesses to attract visitors. Yelp’s S&M expenses were almost $52.93 million, 63.56% its overall revenues, in 2011. While S&M declined over the subsequent years as a percentage of revenues, it increased in absolute terms to $121.84 million and $280.06 million in 2013 and 2015 respectively.

However, as the company expanded to regions outside, its marginal S&M expense per claimed business grew from $77.08 in 2013 to $137.82 in 2015. Most of the claimed businesses are in regions where Yelp has been operational for more than five years. Considering that mature markets witness higher growth rates in claimed businesses, we expect that marginal  S&M cost for company will decline in the future, even as S&M expense in absolute term increases. We estimate that the S&M cost per claimed business will increase as  the company tries to retain the existing claimed businesses and add new ones to its fold of services. However, marginal cost will decline over the next couple of years, and this trend will continue over our forecast period. The table below summarizes the marginal S&M cost for Yelp in 2017 based on the historical trends in underlying drivers:

Yelp marginal Cost2

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Yelp