Thursday, April 22, 2010

The Pitfalls and Promise of the Consumer Revolution

Two big stories in the brave new world of consumer-powered retail in recent days, and both help us understand how it is taking shape.

First, there's Yelp, the smash-hit consumer review website that faces legal action that goes to the heart of the site's integrity. The lawsuit filed against Yelp by ten US businesses claims that the site removes and relegates negative reviews in return for advertising. The implied threat is that your business will get stuck with negative reviews if you don't pay – and this matters when the site gets 30 million visitors each month.

Two insights have made Yelp a great pioneer of the Consumer Revolution: first, they understood the power of the Internet to amplify 'word-of-mouth' (they carry 10 million reviews); second, they grasped the largely untapped potential of linking content to location via GPS. While they are not alone in either respect – think Amazon or Google Maps – few businesses have woven these features into their business model as successfully as Yelp. That is why, perhaps, the company rejected the recent $550 million courtship of Google!

But, like any business, Yelp is ultimately hostage to its reputation. That's why they have responded to the latest allegations by announcing high profile changes to reinforce the integrity of their processes.

The CEO has rightly pointed out that "user trust is the foundation on which Yelp is built". He went on to announce that they would eliminate the favorite review feature and make the filtering process transparent. Yelp is right to act decisively. In the Participation Economy, authenticity and trust are linchpins and half measures won't do.

Groupon is another consumer-powered super-site that is worth watching. Starting just eighteen months ago, Groupon is a social buying site that offers members daily coupons for a seemingly limitless range of goods and services, from baked good to teeth whitening, from house-cleaning to NASCAR speedway driving lessons.

Groupon has just been valued at a staggering $1.4 billion and last week managed to attract over $100 million in new capital. It now offers discount deals in more than forty US cities. Next stop, who knows?

Groupon succeeds from the most old-fashioned premise. It drives consumers to products and services and takes a small fee in return – a classic win-win-win. But it does something else: the daily Groupon has become a talking point, something worthy of anticipation. It is irresistible and enticing – and intuitively viral. Who wouldn't want to pass on to their friends the latest deals for a half-price massage or a $3 sushi lunch?

Groupon and Yelp are the vanguard of the Participation Economy, harnessing consumer power in new and innovative ways. Recent events are timely reminders that some things – the importance of trust and authenticity, the power of mystery – never go out of style.