Researchers Michael Luca and Weijia Dai wanted to know if paid search ads pay off for small businesses such as restaurants. The answer: Yes, but not for long.
by Dina Gerdeman
For business executives trying to decide where exactly in the digital realm to invest their advertising dollars, new research indicates that paid search ads on review sites such as Yelp can be a good way to go—at least for small, lesser-known companies.
Harvard Business School Assistant Professor Michael Luca and Weijia (Daisy) Dai, an assistant professor of economics at Lehigh University, recently studied effectiveness of paid search ads for small businesses by designing a large-scale field experiment that involved nearly 20,000 restaurants and 24 million advertising exposures on Yelp.com.
The results, written up in new working paper Effectiveness of Paid Search Advertising: Experimental Evidence, showed these restaurants enjoyed a significant spike in exposure, in actions such as map requests and calls to restaurants, and most likely a boost in business as well from the ads.
Luca says these paid search ads, which appear on top of a Yelp user’s online search results for, say, “Chinese Food” or “Cheap Dinner,” spotlight restaurants that might otherwise blend inconspicuously into a list of many competitors.
“There are thousands of restaurants in cities like San Francisco and New York, which is great for customers … but also means that even some businesses with solid reputations on Yelp can be hard for people to discover,” Luca says.
Dai adds: “Going into the project, we weren’t sure exactly what to expect, but our results suggest that these ads are effective. If the effect were just on clicks and not on calls and direction requests, I’d be less inclined to think that Yelp ads work for these businesses.”
Ad effectiveness best for small businesses
In recent years, internet advertising has become the fastest-growing marketing channel, accounting for a whopping $60 billion in spending in the United States in 2015, up from $26 billion in 2010 (pdf). Advertisers are steering the biggest share of their digital ad dollars—about half of all online ad expenditures—toward paid search.
"SMALLER BUSINESSES HAVE LESS OF AN ESTABLISHED BRAND AND ARE MORE LIKELY TO BENEFIT FROM ADS"
Yet even with all that money flowing to ads, executives are doing quite a bit of hand-wringing over whether they actually produce sales. Luca and Dai thought they could help answer that question.
Besides, previous research measuring impact of search ads for bigger name brands had executives questioning whether they are a sound investment. An influential study involving eBay showed that search engine ads—especially on brand keywords—were ineffective for the website. After the eBay study came out, the market saw a dip in large-businesses advertising, Luca says.
“I am a fan of eBay’s decision to produce rigorous, managerially relevant research, and I’d like to see more out there,” he says. “In the case of advertising effectiveness, I thought: What if you take small businesses and give them advertisements for a three-month span, would it be like eBay or would it be different? My hunch was that it would be different.”
An experimental field study was born.
Yelp agrees to run free ads
The genesis of the advertising project came while Luca was having coffee with Geoff Donaker, then COO of Yelp. Yelp, which hosts consumer reviews of all types of businesses, has become a popular online destination for people searching for services, boasting about 163 million unique visitors monthly on its site in 2015.
Luca admits to being a bit of a data nerd, a trait he says he and Donaker share. Luca said to Donaker, “Look, we don’t know whether Yelp ads work or not. Maybe they have a big effect and maybe they don’t. Why don’t we collaborate on an experiment testing their impact?”
That was music to Donaker’s ears. Yelp had run experiments to optimize advertisements and had consultants try to figure out the impact of ads. But in the end, these analyses didn’t answer exactly what they (or potential advertisers) wanted to know, which is: What would happen to their business if restaurants bought an advertising package?
Luca proposed a large-scale experiment in which Yelp would give away several months of advertising spots for free to randomly selected businesses. “Geoff sort of cringed,” Luca recalls, at the thought that he would effectively be giving away the equivalent of millions of dollars worth advertising exposures.
By the end of the conversation, they were excited enough that the idea expanded to a broader vision of doing economic research with a high degree of flexibility in accessing Yelp data and running experiments, with the goal of producing managerially relevant academic research with the freedom to publish it.
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