Online customer reviews affect restaurant business

Thai Basil in Asian Ghetto is one of many restaurants in Berkeley that is highly rated on Yelp.
Kayla Shapiro/Staff
Thai Basil in Asian Ghetto is one of many restaurants in Berkeley that is highly rated on Yelp.

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We’ve all used the site, whether it be to look for the cheapest midnight burrito after a night of debauchery or the tastiest brunch spot the morning after. Yelp, the ubiquitous restaurant ratings site, has become the go-to reference for both starving undergrads looking for a cheap meal and visiting parents hunting for more upscale fare. It is clear how the site influences our own culinary choices, but how does it affect the businesses we rate?

Two UC Berkeley economists set out to find just how much a restaurant’s average star rating on Yelp affects its chances of selling out on a Friday or Saturday evening and found that gaining half a star makes all the difference.

“What we found is that when you move up half a star, your probability of being sold out goes up by roughly 20 percent,” said Michael Anderson, a co-author of the study and an assistant professor of agricultural and resource economics at UC Berkeley.

He noted that moving up from a 3 to a 3.5 star rating gives restaurants between a 20 and 40 percent chance of being sold out at peak hours, while moving up from a 3.5 to 4-star rating gives restaurants a 40 to 60 percent chance of being sold out.

“I was surprised our effect size was as large as it was,” said Jeremy Magruder, co-author of the study and an assistant professor of agricultural and resource economics on campus. “The effect that we found is pretty massive in terms of revenue. I expect it to matter, but I didn’t expect (it) to matter as much as it did.”

For many local restaurants, these findings come as no surprise.

“Yelp is the key to making or breaking your restaurant,” said Andrika Layton, a supervising manager at FIVE Restaurant in downtown Berkeley. “People use Yelp to see if they’re going to come (in) or not.”

She added that their executive chef checks reviews on Yelp at least twice a day.

The researchers had similar theories even before the study, but wanted to find out exactly how big of an impact Yelp made. In the course of their research, they learned that Yelp’s cutoff point between 3.5 and 4 stars is an average rating of 3.75.

In other words, if a restaurant receives an average rating of 3.76, Yelp will display a 4-star rating, while another restaurant that receives a 3.75 average rating will only earn a 3.5-star rating on the website. Two restaurants could be nearly identical, but their average Yelp ratings would vary by a half star.

Both authors noted that most of a restaurant’s costs are fixed, and therefore, getting those few extra customers can make the difference between reporting a loss or a profit.

Restaurants, Anderson said, have fixed costs — like rent, wages and utilities — that are equal to around 70 percent of their total costs. The actual food is only 20 to 30 percent of their total costs, which means that drawing in additional customers can greatly affect restaurants’ profit margins.

“If you’re charging diners $15, it only costs you $5 (to produce the meal),” Anderson said. “The (revenue from the) first 100 customers might go towards your fixed cost, but the (revenue from the) last 20 goes towards profits. It can make or break your business.”

Sara Grossman is the lead research and ideas reporter. Contact her at [email protected].

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