Groupon Deals Could Hurt the Reputation of Your Business

Academic research looks at ill-effects of offering deals

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The type of headline we ran here probably isn’t exactly the kind of thing Groupon wants to see circulating throughout the Blogosphere these days, considering all the negative press the company has been getting lately, but it is a conclusion drawn from some new academic research.

That research, from computer scientists John W. Byers and Georgios Zervas of Boston University and Michael Mitzenmacher of Harvard, finds that ratings scores on Yelp for businesses running daily deals are 10% lower on average.

Is it worth it to your business to run a Groupon? Let us know.

It’s certainly worth noting that the researchers studied both Groupon and Living Social, which are the two biggest players in the deals space, with Groupon still in the lead (though the gap seems to be narrowing).

“A key selling point of a daily deals site is the promise of beneficial long-term effects for merchants participating in a deal offering,” the report says. “Since discounted deals typically result in a net short-term loss to the merchant as customers redeem the coupons, a merchant is pitched on the expectation that some new customers, initially attracted by the deal, will become repeat customers, providing a long-term gain. Participating merchants should determine that these gains outweigh the costs, which include providing discounts to their existing customer base.”

“We find that the average percentage increase in reviews across all merchants who had received at least one review in the 3 months prior to the Groupon offer is 44%,” it says. “Meanwhile, the average month-over-month growth in number of reviews for deals prior to their Groupon offers is about 5%. Similarly, the average percentage increase in reviews the month after the Groupon offer is 84%. Roughly 20% of merchants in our dataset (461 out of 2,332) had received zero reviews in the 3 months prior to the Groupon offer. Of these, 270 received at least one review within two months after the Groupon offer.”

Yelp Ratings
The researchers also conclude that “Yelp star ratings decline after a Groupon deal.”

“The average drop in ratings is 0.12. This could affect any sorted order produced according to Yelp rankings significantly,” the report says. “Also, Yelp scores are reported and displayed according to discretized half-star increments. Thus, an average drop of 0.12 suggests a significant number of merchants may lose a half-star due to rounding. This could have a potentially important effect on a business; a recent study reports that for independent restaurants a one-star increase in Yelp ratings leads to a 9% increase in revenue. However, the transitory nature of Groupon-driven reviews, in addition to complexities of modeling hidden factors like weighted moving averages, cloud our ability to pinpoint the repetitional ramifications precisely.”

That study by Michael Luca says that its findings suggest that “online consumer reviews substitute for more traditional forms of reputation,” that “consumers do not use all available information and are more responsive to quality changes that are more visible and consumers respond more strongly when a rating contains more information.”

The new study also looked at text, and found that reviews mentioning either “Groupon” or “Coupon” are associated with star ratings that are 10% lower on average than reviews that don’t use these words. The few reviews that used both words were actually 20% lower on average, according to the report.

One of the other findings from the study was that Groupon and deals sites in general are greatly helped by word of mouth (like Facebook “likes”). Kind of a no-brainer, but they have data to back it up. There is much more data to back all of these findings up. Detailed methodology can be found throughout the report, which you can read in its entirety here.

While the findings may turn some businesses off of the Groupon strategy, the news isn’t all bad for Groupon these days. Another report released by Yipit finds that Groupon’s revenue increased by 13% in August, while it gained 2% market share.

Groupon Revenue on the rise

Key findings from Yipit’s report include:

  • Groupon’s revenue increased 13% from July to $121 million, a $1.5 billion annual run rate.
  • LivingSocial’s revenue declined 3% to $45 million, a $540 million annual run rate. August was the second consecutive month that LivingSocial experienced declining revenue in North America.
  • The North American Daily Deal industry resumed growth in August. Industry revenue and number of deals offered increased 9% from July.
  • Groupon gained market share at the expense of LivingSocial for the second consecutive month. Prior to July, LivingSocial had been gaining market share on Groupon for several months.
  • In its first full month, Groupon Getaways outperformed LivingSocial Escapes in the travel deals segment. Groupon Getaways generated 42% more revenue than LivingSocial Escapes and averaged 78% higher revenue per deal.

This comes after a recent report from Experian Hitwise indicating that Groupon’s traffic was down 50% over the summer while LivingSocial’s was up 27%.

Groupon is now testing e-commerce deals in the UK. This could provide a whole new set of opportunities for business. For brick and mortars, it could lead to more online sales. For strictly online businesses, it could simply let them into the club. Getting repeat business from a consumer might be easier to achieve online. If you’re a click away, as opposed to a drive away, a customer might be more inclined to come back, given the right customer experience. ”

It remains to be seen if the e-commerce deals will become a mainstream feature across Groupon’s markets, but it’s definitely something to watch for.

Do you think the benefits outweigh the negatives for businesses offering deals through Groupon or similar services? Tell us what you think.

Groupon Deals Could Hurt the Reputation of Your Business
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  • http://silicoxvalley.com person287

    All of Groupon just stinks of rubbish to me. All those pop-unders just put me off, I mean what other reputable company uses those?

    • http://yelpsucks.com Sarrah

      true but if you can save $100, stop crying.

  • Roland

    If the deals that are purchased are below the fixed costs and too many are purchased this may actually hurt the retailer. Keep in mind that not only are these deals 50% off, the merchant will pay 50% to groupon. This is really a 75% deduction by the merchant. It is a big gamble to be taking

  • http://www.brickmarketing.com Nick Stamoulis

    The customer experience might be negatively affected if a business sells too many Groupons. Suddenly they are inundated with new business they may not have been ready to handle. Some of the customers are bound to have a poor experience because the merchant can’t be 100% perfect every time someone uses their Groupon. It might just be a case of more customers means more times to mess up.

  • http://top10cdrates.wordpress.com/ Top CD Rates

    Part of the problem may also be the establishment not treating the person with the groupon as well as a “normal” customer. I’ve used Groupon twice. Once for reduced movie tickets through Fandango. Redeemed online so no personal interaction. We did go see an extra movie so both Fandango and the theater came out ahead.

    The second one was for a restaurant. We got $15 off our bill for $7. I would have never gone to this restaurant without it. Our total bill (after Groupon) was $32 plus a $10 Tip. We really weren’t treated that well and the food was just okay. I can’t say we would go back. The hostess who I believe was one of the owners (small, family owned) said it was not a good experience for them. If they treated others like they treated us, I doubt they would come back either.

    I didn’t go leave a review, but if I had, of course it would have been lower because we weren’t treated very well. So customer treatment is probably key to whether or not someone comes back.

    So at least in this case the deal itself didn’t hurt their reputation. How they treated us could have.

  • http://www.connecticutplastics.com Michele

    Personally my employer is not involved, but I have friends who own businesses in the service industry. Hair salon, Day Spa, coffee shop, they did not like their experience with using Groupon. Saw some new faces, lost money on the deal, but no repeat business. They said they would never do it again. It is exciting to see foot traffic increase, even for a short period of time, after all, your doors are open to the public, and it is better than having employees sitting around, but at the end of the day, week or month, is sales are not up, then it is a marketing tool that must be discarded. On to the next great idea.

  • http://www.centauria.com/ Centauria Vancouver

    Hopefully businesses trying Groupon thought through if these deals help them long-term: do they want bargain hunters as their customer base? will they get repeat business from them at regular price? are they prepared to provide great customer experience at 50% off? Friend just complained that none of her Groupon deals in Vancouver felt like deals — she felt that she was duped and actually overpaid at the end. From the customer experience point, the businesses that dressed their offering to look like “deals,” lost their opportunity. Everyone should be adequately paid for what they do, but if you offer a “deal,” do it genuinely, think long-term.

    • http://yelpsucks.com Sarrah

      it has nothing to do with that.

      online offers only have to reflect perceived value (whether it’s there or not is not relevant.)

  • Rita

    I am a consumer & love Groupon – I’ve used the companies they advertise, which I otherwise would not have known about, and had wonderful experience & used them several times thereafter, as well as told my friends about them. Wonderful advertising!

  • http://www.wow-its-clean.co.uk Louisa Goldstone-Smith

    We signed up to Groupon 3 weeks ago and made sure we had a cap on the amount sold because we knew we could only service 1 a day for 3 months. They put us on as a side-deal. It sold out quick and was very happy until we have had to refund 10% because the customer did not read the terms and conditions about where we travel too.
    But so far, out of all the customers we have served, 3/4 are repeat customers and we had other new customers who missed out on the deal! So this has been amazing for us and costly because of staffing costs but much cheaper than any other form of advertising or marketing in such a short space of time. We have doubled our sales and customers!
    I think the reason its been successful so far is that we are a domestic service and the customer has been wowed by the results and our caring nature. So the key is to aim for low numbers from 60 deals bought.
    Lets hope the groupon’s to come, still provide us with the increase in business!

    • http://divadishkitchenscatering.com Gianna Ianos

      Try Google Coupon Offers, they are Launching there offers here in Minnesota, and they will do it big…
      Contact #1-855-877-0077 x65911
      Tell them Divadish/Gianna Ianos sent you….

  • http://www.direkizlesek.com direkizlesek


  • http://www.laymanwebdesign.com Obdurate

    Look, the reviews that you find on sites like Urbanspoon and Yelp are left by relatively few individuals. What I suspect is these same individuals are no different than anyone else who visits a chat room. They get their 15 minutes of fame by posing as a food connoissuer with no real reason for being one other than they probably don’t know how to cook.

    I also find that these foodies usually cluster around a neighborhood or two and if your restaurant isn’t in the “hip” section of town, then it generally doesn’t get a very good review anyhow.

    So, technically, some of these restaurants probably deserve to drop a half star or more.

    I think if you’re going to write an article on the benefits of giving coupons to recruit new customers, they should conduct the research by a marketing organization that looks at the revenues of the establishments, rather than computer scientists who studied the Yelp star ratings and the revnues of Groupon/Living Social, etc.

    • http://yelpsucks.com Sarrah

      No doubt, who takes those rating folks seriously anyway. They strong arm business owners into purchasing their services and if they don’t they HIDE positive feed-backs from store owners.

      • http://divadishkitchenscatering.com Gianna Ianos

        I agree with Sarah, I have gotten no help from Yelp and lots of No-Nothing, if I don’t advertise with them, who could afford $1500,-2500 a month!????

  • http://www.bontemedical.com Anthony Zelinko

    “Public is duped again.”
    Any business owner knows margins have to be made up somewhere by volume or repeat business pushing higher priced items and making up for the discounted ones. Any smart business owner needs to proceed with caution when using coupon sites like Groupon. Your reputation can get slammed in a heart beat and frankly many consumers who use coupons want to “squeeze blood out of a turnip”. They want the best customer service, products and experience even though the owners budget doesn’t allow for it since he had to offer his products or services at a discounted rate.
    It’s my contention this whole coupon craze or fad is going to quickly run its course like a multi-level marketing opportunity or it’s similar too a ponzi scheme but not as bad at least you may get a body in the door. Whether or not they will continue to buy remains to be seen.

  • http://yelpsucks.com Sarrah

    Are you SERIOUSLY evaluating a companies ranking using YELP? OMG! Talk about the weakest link to an credited opinion. If anything – YELP is the one you should blow the whistle on.

    • http://divadishkitchenscatering.com Gianna Ianos

      I agree, Yelp is a total waste of time, if you do not own a brick and mortar business or advertise with them you do not get much at all. So why not put some pressure on Yelp instead of discounting discounting!

  • http://www.CaptainCyberzone.com CaptainCyberzone

    This story would carry more weight if Google were completely devoid of any involvement but knowing that Google lusted after Groupon with a tantalizing buy-out offer (only to be rejected) makes me suspect of any and all information (presented as facts) in the story.

  • http://www.restaurantsalesbuilder.net Alistair Gray

    Great post…very helpful. Time and time again here in Sydney I watch restaurants commit “financial suicide” with mass un targeted couponing deals when the real focus should be on getting your existing to return and buy more often. The “hidden gold” in most restaurants.

  • http://www.eatdrinkpaint.com Keli Oelerich

    It is not worth it for me to run a groupon. If I had a class full of groupon students I would lose on average $45 a class not counting my time and energies. Groupon is for desperate businesses to raise cash.

  • http://www.okehypnotherapy.co.uk Gary

    I toyed with the idea of using Groupon for a couple of years before I finally bit the bullet and gave it a shot. It sold more than expected (based on reasonable assumptions from similar offers in other areas) but I had planned for it. I’ve normally very against discounting but took the Groupon gamble for the coverage. My offer was emailed to 400,000 members in my area, as well as the viral effect from other sites and social networking. My website received a phenomenal number of hits and my business name became one of Google’s most popular search terms when starting to type my most valuable keyword term.

    The clients themselves were a mixed bag, some were a total waste of time who would probably buy anything on Groupon if they thought it was a good deal. However, there was a surprisingly high number of decent, repeat clients and full-price referrals as well as a handful of full-paying clients who missed the offer deadline. Once I had cleared all the Groupon coupons, it took another three months to clear the backlog of referrals!

    I am now considering running the offer again with Groupon, but have found a way of increasing the revenue and/or reducing the overheads on the Groupon clients as it is a bit soul-destroying doing so much work for so little money, despite the long term benefits.

  • http://www.mexico-myspaceclassifieds.com George Puckett

    Very interesting but there’s a new player in the game. The name is Qzanza, the marketing arm of AdzZoo (Google them). The have several innovations which may appeal to more business and those who complain about Groupon & Living Social.

    Qzanza uses a MLM model but they have a product that’s in demand so recruiting & growth should be assured.

  • http://darrylmanco.com Darryl Manco

    I wrote about Groupon’s repercussion for my industry a couple months back. Here is the link to my FB notes: https://www.facebook.com/note.php?note_id=1628374524214

    The note is titled “The Real Repercussions Of Discounting”.

    I believe discount sites are still in their infancy, and as they continue to evolve they will come to realize which businesses should be targeted for their target audience’s needs.

  • http://divadishkitchenscatering.com Gianna Ianos

    I will be using Google offers this year for my business. yes they do take a lot of your profit to advertise with any of these special offers, but I look at it as a opportunity to meet clients I would never had anyway. So things cost money, everyone gets their cut, it is up to me to make more connections and opportunities for my company.

  • http://deals.mydosti.com Sloan

    Check this site out for some cool deals.


    Easy to use and the service offering benefits both the businesses and the consumers.

  • http://www.marketing4smallbusinessowners.info Jerry

    I don’t have enough details from the study to make a conclusion, but here are some of my guesses. Some owners foolishly do not put a cap on the amount of vouchers sold, leading to a complete disaster in customer service. This will lead to poor reviews.

    I would guess that most small business owners do not give the necessary time to plan a Groupon. It is not something that only takes a few minutes to be successful. I have purchased over 25 Groupons and Daily deals and zero small businesses have tried to get my contact info or follow up with me. That should be the minimum for any small business running a Groupon. There should also be plans involving employees and regular customers.

    Groupon is not a permanent marketing strategy, but smart business owners are to make a lot of money in the long-term. Besides, smart business owners would push for their best customers to post reviews after a Groupon to offset any negative reviews and bury them off the main page.

  • http://www.celebrityjam.net Anu


    I think by offering a lot of discounts the company could be reducing its profits. I think only Groupon gets the attention from the people and not the companies listed in the discounted offers.

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  • http://xn--e-hs8cp4s.com 英会話マンツーマン

    Groupon is the biggest rip off for a business. They sell the merchants on future business by compromising current profits. If merchants keep giving these deep discounts, there won’t be a future for their business.
    Brand image will also be reduced. The only winners are Groupon and the bargain hunters. And with the availability of social sites who needs Groupon?

    Groupon is not for all merchants.

  • http://xn--e-hs8cp4s.com 英会話マンツーマン

    Groupon is the biggest rip off for a business. They sell the merchants on future business by compromising current profits. If merchants keep giving these deep discounts, there won’t be a future for their business.
    Brand image will also be reduced. The only winners are Groupon and the bargain hunters. And with the availability of social sites who needs Groupon?

    Groupon is not for all merchants. Waste of time and money for them.

  • http://www.genp.com.au Peter Evans

    Timely article as I am considering coupons from one of these companies for my software product.
    However, if it would damage my business I would have to think again.

  • Kirsten

    I think if a company uses any ‘deals’ company for the sale of its products or services it needs to be careful about the impact. I have used Groupon and others to sell services that we can provide during a time in the day when our staff have to be there and are being paid anyway but have little to do. The costs associated with these deals for us, is negligable, it just makes our day more profitable. If however, we started to use these (as we tried) for other services that would require bringing in staff at a cost, then the sums need to be looked at very closely. For me, I sold a huge number of deals, making very little on each but in the current economic climate which has hit our business hard, it helped our profitability immensely by utilising staff hours and hitting a market we would not otherwise have reached.

  • http://www.ewindowwashing.com Commercial Window Cleaning Company

    I was going to run with an ad with both companies when it was slow for us after July 4th weekend. After speaking with both Groupon and Living Social, there was no way that I would be able to suffer a loss like what they were offering.

    The carrot was supposedly the up sell, residual, brand recognition and the demograph of their audience.

    The demographic was a concern for me, but more important to me was the psychograph of their audience. They say they have “an upper class demographic” and when I asked her to be more specific, she told me the data…household income OVER 100,000 and 70 something percent were homeowners.

    Now how is THAT upper class? Okay, even IF the data is accurate and it was NOT being spun to make it seem like only the affluent were their demographic, the phsycographic profile of those people are not what a business who sells high end products or luxury services are trying to attract.

    Do you see Gucci or Prada going with Groupon? Have you ever seen either of those companies in the Penny Saver? Doubt it.

    So why in the world would someone who is looking for a screamin’ deal of a lifetime EVER pay full price for what your company offers when all they are doing is looking for great deals on anything.

    That person’s loyalty rarely strays from the bargain basement. As soon as that person can find a better deal, there is a good chance they will change brands.

    Groupon and living social will not let you craft your own ad, which drew some red flags. They asked questions about pricing, and they felt that our prices were too high to begin with, so right away the woman lowered my price to something that ALREADY would have a profit margin of only a few dollars after taxes and insurance!

    Then they want to slash that in half, AND take another percentage out of my end? I don’t think so. I told her “you must’ve bumped your head lady, I don’t run a charity here. I have a kid to feed just like you. How do I do that if I work for free? Would YOU work for free?”

    The companies that go with Groupon are small businesses, and those that are hurting and desperate for coin. This is my opinion, that may very well be wrong. Running the numbers though, and coming up in the red makes you study what the factors are that are going to get me repeat business. I simply don’t see why someone would be paying double on a regular basis for a luxury service.

  • http://www.antellus.com Theresa M. Moore

    I never use coupon programs to promote or sell my products. I simply lower my prices when I think the product is lagging in sales. Then I raise them again at the end of the promo period. This way I have more control over pricing and how much is costs me to promote them at the lower price. As for Groupons minimums, I would never allow myself to get locked in like that. Forget Groupon. You want to sell more products? Lower your price for a limited time and then promote that. I guarantee you will gain more repeat customers.

  • http://www.MassiveResultsMarketing.net Jay Estis

    I found your article to be both topical and interesting. I have read a great deal on this subject, and have spoken to business owners.

    The number one mistake I see business owners making with Groupon and similar sites is not being proactive with the new customers that come to their business from their coupon offer.

    I made a video in which I showed a couple of examples of offers being made, and why some offers are good and others are bad for business owners. You can see that video here on YouTube:


    Business owners need to take a hard look at their ROI and they absolutely must have a plan for capturing those new customers.

    The idea that you use a service like Groupon, or that you sell your products for the sole purpose of making a sale is where most business owners go wrong. And it’s not their fault.

    It’s a mindset that needs to change. You make a sale to gain a customer, not to make money. If business owners make this mindset shift, they will start to see that it is the customer that makes a business money, not the sale.

    And by building your marketing strategies around this mindset, you will have a much better chance of having services like Groupon work for your business.

    And of course knowing your numbers, what your ROI is on your marketing campaigns, knowing your lifetime value of a customer, and making sure you have a plan to turn a first-time customer into a lifetime customer will all help to make your Groupon and other marketing campaigns more effective.

  • http://www.TheOkayNetwork.com Steven

    To be honest, I only browse Groupon when looking for a specific purchase I was going to make, not to be enticed by some discount on something I wouldn’t buy. So what if I can save 60% off skydiving if I’m not going to skydive in my life? 60% off a massage? While I’m sure it would feel great, in this economy it’s about food, water, shelter and clothing over the purchase of any luxuries. I think Groupon can have a sustainable business model if either more businesses use it, or the economy starts to recover. They should have sold to Google when they had the chance.

  • http://www.advancedreading.com Bob James

    Advanced Reading Concepts is a small training company conducting reading improvement programs for corporations, the military and the general public. One of our marketing programs for the general public market segment is to attract people to “introductory lessons”. We use a variety of ways to develop leads for these “free” lessons (an opportuity to sell oour programs). We charge $25 for these lessons unless we met the person at a networking event or expo and then it is free unless they don’t show up for the lesson. Groupon gets our name infront of thousands of people who pay $5 for the $25 lesson. We get $2.50 and have another opportunity to sell ouor programs. We consider Groupon “free advertising” and lead generation.

  • http://twiceblessed.thecustomeradvantage.com Ufuk Sepin-Curtis

    Not every business model will benefit from Groupon or Living Social deals simply because they don’t have enough margin to subsidize the marketing cost associated with the deep discounts and for some the promise of return customers are replaced by short lived coupon hunters that hop from one place to another following the next daily deal.

    The good news is the market hasn’t reached its real match yet. There is a new company in the making called The Customer Advantage (TCA).

    Chris Crum, it would be a nice addition to this article if you would please research and review this new Groupon alternative company as well.

    As far as the general concept goes, TCA is very similar to the largest and most successful group coupons companies. However, that is where the similarities end. With TCA, instead of half the profits going into the pockets of the company, over 50% of those revenues are shared with the people who help them share the concept… the free subscriber. They reward everyone who tells their friends about TCA with 5% referral payments on each and every purchase of TCA promotional offers made by everyone they introduced to TCA. No matter where they live or what they buy. And the referral payments are made on 5 levels deep.

    The referral compensation plan applies for business owners as well.
    In fact when compared to Groupon and Living Social, the biggest benefit merchants will receive working with TCA, is the ongoing residual income generated by all their referrals, whenever they shop at another TCA merchant anywhere in the country. Businesses benefit from other businesses when shoppers save.

    What could this mean for your business? Basically it allows the business owner to expand their profit reach into areas that have nothing to do with their main business, just by signing people to the Customer Advantage. Once they are signed up and tagged to their business as the referrer, the business owner will earn from their referrals for life as well as anyone else they introduce (up to 5 levels of referrals). It costs them nothing to join and there is never any obligation to buy anything.

    Can you see what this could do for the businesses bottom line?

    Anyone who is interested in finding out more can go to the main company site. It is designed to be by invitation only. You can use invitation code: twiceblessed

    The company website is:

    And I look forward to seeing a more detailed analysis and review by Chris, hopefully soon! :)

  • http://www.linkedin.com/pub/joe-mckean/8/272/821 joe mckean

    Groupon deals can definitely work against your branding if you want your brand to be perceived as special or high-end – since words such as discount and cheap do not reinforce this. However, if you’re simply selling based on the lowest price, then Groupon’s a great marketing tool.

  • http://www.rudraayurveda.com/ Roy

    Thats absolutely right. With deals you might will get more clients but that hit your reputation as well.
    Thanks Chris for this post because it was in my mind from sometime to do this mistake.

  • http://jeffdownerbailbonds.com Jeff Indianapolis

    What’s the cause and effect relationship? Is it being suggested somehow that Groupon is causing review ratings to decline? That is not intuitive to me. I find it more likely that businesses knowing they are facing quality control issues are reaching out to Groupon to the fill demand gap caused by their internal issues.

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