Pandora Media (NYSE:P) seems to have a one-track mind: increase advertising and subscription revenue at all costs. This mindset led the company to increase sales and marketing expenses by 63% last quarter in an effort to boost revenue. To a certain degree, the strategy is successful, but the company is spending more on each new hire than it generates in marginal sales.
In contrast, another company that spends heavily on its ad sales team, Yelp (NYSE:YELP), has had much better success with the strategy. So why is Yelp succeeding where Pandora is failing?
Revenue per employee
Although operating efficiency isn't a particular concern at either Pandora or Yelp, revenue growth is. Growing revenue faster than the employee headcount is a good indication that these companies are on their way to profitability. If each new employee costs more than it generates in revenue, it's hard to turn a profit.
In 2013, Yelp improved its revenue per employee by 15.81%. In contrast, Pandora saw its revenue per employee decline 1.35%.
Focus: a gift and a curse
Pandora has become overly focused on extracting additional ad revenue from businesses and attracting new advertisers. Most recently, the company announced promoted stations. The product allows brands to create a custom station that shows up in the "Stations You Might Like" section.
Although it's unclear how much revenue Pandora will be able to generate from promoted stations, the product sounds extremely expensive for Pandora to create. The company has put together a team to help brands create these promoted stations that includes salespeople, artist partnerships staffers, and curators from the company's Music Genome Project. Comparatively, selling targeted ads is a lot less expensive.
While Promoted Stations will certainly command a premium, it's unclear if there's much demand for a more curated experience -- especially one inundated with branding and advertising. Beats Music, the streaming service that promotes itself on its curated playlists, is off to a slow start in its first four months.
How Yelp attracts business
Yelp seems to understand the value of its users. For Yelp, users are more than just people that look and click on advertisements. They contribute one of Yelp's most valuable assets: data.
These come in the form of reviews, but also check-ins, attribute questions, reservations, payments, and just about any interaction a customer has with a business. Yelp packages it all up and gives it to businesses, which are then able to extract a lot of value from it.
Speaking on the company's first-quarter conference call, CEO Jeremy Stoppleman has this to offer:
Our consumer product team is most focused on ... releasing features that take advantage of this insight that we, uniquely, are gathering at a rate that basically no one else is capable of. And so I think that is part of the moat around Yelp, is our ability to leverage all of this data that we've been gathering.
Yelp has just barely scratched the surface of using its data to extract revenue from businesses, but it's working on solutions. In this way, its sales team's job gets easier with each new use for Yelp's data.
Pandora needs to unlock the value of its data
Pandora has a ton of data coming in every day. Unfortunately, listener preferences aren't particularly interesting to most of the businesses that advertise on Pandora's platform. Pandora uses the data to make educated guesses to target advertising, but without hard data, its targeting will never be as good as a company like Yelp's.
Pandora also uses its data to constantly improve its music recommendation service, which it is very useful for, but it stops there.
Why doesn't Pandora provide its data to the companies that want it? This would drastically improve the operating efficiency of the company, as it unlocks the true value of its data instead of keeping it for itself.
There are plenty of businesses that would be interested in learning more about 76 million people's listening preferences and habits. Almost any company with ties to the music industry is a potential customer for Pandora.
What Pandora can learn from Yelp
Yelp is intent on getting its user data into the hands of businesses that can use it the most in order to extract value from it. Pandora, on the other hand, seems disinterested in helping the music labels that it's heavily reliant on.
There's a way for Pandora and record labels to play nice with one another, just as labels do with terrestrial radio. For whatever reason, Pandora has chosen to make things hard for itself and its sales team.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Pandora Media and Yelp. The Motley Fool owns shares of Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.