The integrity of online reviews has continuously been called into question. An expose by the NY Times demonstrated the extent to which online retailers would push customers to give positive testimonials – one Amazon seller gave free products for 5-star reviews.
Companies like Consumer Reports and Angie’s List (ANGI) hope to battle paid-for positive reviews. Having recently IPO’d, Angie’s List offers investors the opportunity to get in on a new business model where customers pay for membership to ensure quality reviews.
Angie’s List’s Competitive Edge
Angie’s List offers consumers a way to access honest reviews, but only if they’re willing to pay to ensure honesty. In particular, I see only two demographics that derive substantial value from Angie’s List’s services:
- Frequent Movers – Those who move from locale to locale would benefit greatly from a high quality review service. If you frequently uproot your life to move from place to place, finding new contractors, car mechanics, and babysitters that you can trust is worth the membership price.
- Super Consumers – If you’re in the market for something pricey – think a new roof, or maybe a maid – the small investment in an Angie’s List subscription may be well worth paying for. Those who spend the most on services obviously derive more value from a company like Angie’s List than do other consumers.
Angie’s List also has a tremendous advantage over anyone crazy enough to compete with the company for paid reviews: Angie’s List benefits from the so-called network effect. A massive catch-22, no one wants to join a review service without existing members populating the site with reviews. So the company undoubtedly benefits from the fact it would be difficult to compete with it.
Where Paid Reviews Fall Apart
Angie’s List’s business model falls flat where it counts: people have to be sold on the idea of paying for reviews. For one, free review sites like Yelp provide competition that doesn’t come with a monthly subscription cost. Secondly, YellowPages and other directory services put every business phone number and address in shopper’s hands.
Angie’s List spends a literal fortune to acquire new members. In the latest quarter, the company spent a whopping $91 to acquire each new customer. The marketing cost per new member makes the company less profitable as it sells more services. Companies should benefit from scale – more sales should bring more marginal profits. Angie’s List loses more money as it increases sales.
Here’s a chart of Angie’s List’s operating margin over time:
In short, Angie’s List is in a cycle of spending $1.20-2 for every $1 of services that the company sells. There seems to be no end in sight, either, as the company reports its retention rate of 78%. In other words, 22% of customers leave the company each year. Those who dig deeper into the numbers and quarterly reports will discover that the true retention rate is much lower than reported, possibly as low as 68% when analysts include all subscription cancellations.
(Angie’s only reports customers who cancel a subscription, not those who purchase only one-month memberships, or those who leave the company before the subscription period has ended.)
Residual Billing with No Residual Benefit
In general, I like companies that can sell a product time and time again. Coca-Cola and Starbucks do this quite well – their sales are extremely consistent because each sale provides value to the customer. Angie’s List customers have no reason to keep paying for the service once their objective is met. If you need a roofer once, you have no need to continue your Angie’s subscription. Likewise, once you find a reliable babysitter, Angie’s provides no value because you have no reason to continue shopping around.
It’s an interesting business that is excellent for consumers. But there is a very big difference between businesses that help consumers, and those that can help consumers and themselves. Angie’s List only hurts itself every time it makes a sale.
Would you ever pay for a membership to a review site?