Groupon Deals Could Hurt the Reputation of Your Business

    September 13, 2011
    Chris Crum

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.