More on the Local Coefficient: A Conversation with Yelp
A couple weeks ago, we wrote about Yelp VP of Business Development Mike Ghaffary, and his new model for defining the sustainability of local offline commerce; the Local Coefficient. As promised, I caught up with Ghaffary to get some more color.
I wrote up the findings in my monthly Street Fight column which published today. A sneak peek is below and you can read the rest here. Stay tuned for lots more on this subject, including next week’s Leading in Local Conference. Hope to see you there.
There’s a longstanding debate in local about the sustainability of brick & mortar businesses amid the rise of e-commerce. But people always seem to forget that despite all attention paid to e-commerce, it still only only accounts for about five percent of U.S. retail. The rest is still offline.
The online buying experience can’t be ignored, though — a growing chunk of physical purchases are now influenced by online marketing. And the path to purchase increasingly weaves between different screens. For conversions, it’s still all about offline — but the question is how long this will remain to be the case.
Out of sheer curiosity, Yelp business development VP Mike Ghaffary ventured to quantify this. He has devised what I think will be an influential model for the sustainability of local offline commerce. Known as the “Local Coefficient,” it defines local verticals’ susceptibility to online disruption.
“Yelp is in the business of sending customers to local businesses, while others out there are predicated on putting them out of business,” says Ghaffary. “But I don’t think [brick & mortar] is going away, and as a CS major, I wanted some math to back it up.”
Each local category in his analysis is measured against variables like the need to see a product, or meet a service provider. Availability of online alternatives is also a key input. Autos and home services have high local coefficients, while books and music are low (more here).
Applying the coefficient to dollar amounts of each vertical deduces how sustainable the offline market is. Ghaffary shows that even with liberal assumptions of online disruption, you’d be hard pressed to show that offline won’t maintain a three-fold lead for the next decade.