There are few sectors where innovation moves at breakneck speed, and social media is one of them.
Social networking websites need to be fluid enough to appeal to vast swaths of audiences yet concrete enough to attract investors, businesses, and advertisers, who are the lifeblood of their operations. Without innovation, a popular website one moment can turn into yesterday's news the next. Ahem, Myspace!
Why customer engagement and loyalty matter
One of the most important aspects of running a social networking site is how it interacts with the public. While no site can please everyone, offering a positive first-time interaction and creating the allure to return over and over are how social networkers survive and thrive. Specifically, a website's mutlifunctional connectivity is a big driver as to whether a member sticks around or not.
As you might imagine, some social networking sites are really good at drawing in large groups of people and retaining them. Others, though, don't quite pass muster according to the latest customer engagement and loyalty survey conducted by research firm Brand Keys. Social networking sites that lack engagement and loyalty run the risk of eventually becoming a dinosaur as advertisers will take their business to where the consumers and growth are.
Let's take a closer look at a few of the highlights of Brand Keys' study, noting some of the top social networking companies as it relates to customer engagement and loyalty and eventually leading to the surprising worst social networking site of them all.
But before we begin dissecting these social networking sites (and believe me, there are so many that we certainly aren't going to touch on them all), think about which one you believe might be dead last in customer engagement in loyalty.
Got your selection?
Now, let's dig into a few of the winners.
The cream of the crop in social networking
If you thought Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) were among the best social networking sites for driving customer interaction and return users, then you'd be correct, with the two companies tying for the top spot on Brand Keys' study, which included 15 total social networking sites.
Both Facebook and Twitter have turned their focus toward mobile and have worked tirelessly on ensuring the seamless functionality of their mobile apps for users as well as collecting data from users to allow businesses to optimally target consumers. The end result has was a 49% year-over-year increase in Facebook's daily active users (DAUs) to 556 million in the fourth quarter and a 37% increase in monthly active users for Twitter to 184 million. Furthermore, 73% of all DAU's on Facebook accessed its mobile app while 76% of all Twitter users accessed the app via their phone on a monthly basis. In other words, these two social sites are driving seamless convenience and it's showing with their rapid top-line growth and impressive ad pricing power with businesses.
A surprise in the middle of the pack
The middle of the pack delivered some very familiar and potentially unfamiliar websites with well-known Tumblr and Instagram, as well as the lesser-known DeviantArt and Orkut.
The other big surprise in the middle of the pack was a tie between Pinterest and Myspace. Yes, Myspace! Brand Keys' study found that users on Myspace are about as loyal and engaging to the brand as users on Pinterest, which just might have Pinterest believers shaking in their boots now. I'm still cloudy on how Pinterest plans to fully monetize its idea, so I can't say I disagree too much with its middling ranking.
However, neither Myspace nor Pinterest took home the worst social networking engagement and loyalty ranking. It also didn't go to hi5 or Tagged, if that's what you were thinking.
The surprising social networking site ranked dead last in customer loyalty
Scratching your head? Confused as to who it could be? If you guessed Yelp (NYSE:YELP) before we hopped into this discussion, then you deserve a pat on the back.
On the surface, Yelp is a great idea. It allows consumers to read peer reviews of restaurants and other establishments, potentially even booking a reservation in one seamless transaction. But that's just on the surface. Yelp also has a number of shortcomings as well, which led to its dead-last ranking in brand engagement and loyalty for social networking sites.
To begin with, Yelp's business model is brutally exposed to competition from the likes of Google. For example, if a user enters a business name into Google search, she's going to get the businesses website or perhaps a Google Plus profile on the business long before a Yelp link shows up. This makes it very easy for consumers to simply bypass Yelp and use what Google's search engine has to offer. Not to mention that Google Maps can now work with Google Plus to offer a seamless shift from entering a business address or name to going straight to reviews and potentially booking.
That leads to my second point: Yelp doesn't have the capital to compete against Google. Compared to Yelp, Google is a bottomless pit of cash flow. Yelp has around $390 million in cash on hand and $21 million in operating cash flow over the trailing-12-month period to put to work in terms of collaborative deals as well as research and development. Google Is sitting on $51 billion in cash and roughly $19.4 billion in trailing-12-month operating cash flow. Literally, anything Yelp can do, Google can do 100 times better.
We're also beginning to see the reality that Yelp's business model lacks the ability to drive new traffic and retain customers. In the fourth quarter, its mobile app usage increased 15% to 10.6 million users from the previous year, but this was down dramatically from the growth witnessed in previous quarters and marked its first sequential quarterly decline. As SunTrust analyst Robert Peck noted in an interview with Forbes in February, Yelp's clicks to call businesses directly from its mobile app also dropped, signifying a reduction in consumer engagement with the brand.
Also, from an investing perspective, and to add icing on the cake, Yelp is expensive. It's expected to be unprofitable this year and currently trades at close to 190 times forward earnings and roughly 20 times trailing-12-month sales. That's pricey for a company with rapidly decelerating mobile app growth.
You might brush off these brand loyalty reports as nothing more than words on paper, but they can be quite useful when helping to pick out good and poor investments. Based on this study and Yelp's latest quarterly report, I'd suggest keeping your distance until Yelp's top and bottom lines suggest otherwise.