Groupon: Bad for Business?

BU researchers shed light on the power of daily deals

A study by John Byers (left) and Georgios Zervas questions the value that Groupon delivers to merchants. Photo by Kalman Zabarsky

October 5, 2011
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Online daily deal sites like Groupon are great for consumers, offering deep discounts on everything from restaurants to sporting events. But are they good for business?

Merchants who work with Groupon take a risk. They hope that offering a short-term discount, and giving Groupon half the revenue from the deal, will bring long-term gains: a higher profile and new customers. It’s a risk that merchants have been taking without any evidence that it pays off—until now.

John Byers, a College of Arts & Sciences associate professor of computer science, and Georgios Zervas (GRS’11), a postdoctoral fellow at Yale, worked with Michael Mitzenmacher, a professor of computer science at Harvard, to collect a massive amount of Groupon data over six months. The team found that for merchants, Groupon cuts both ways: the deals lead to a surge in Yelp reviews from new customers, but they also lead to a higher percentage of negative reviews. The findings, published recently in the online journal arXiv (pronounced “archive”), call into question the very foundation of daily deal sites.

Byers, Zervas, and Mitzenmacher began collecting data in January 2011. Between January 3 and July 3, 2011, they monitored every Groupon deal offered in 20 cities—16,692 deals altogether. At the same time, they collected data on Facebook “likes” tied to the deals and later gathered data from the daily deal site LivingSocial and the review site Yelp.

It was a huge amount of data to collect and analyze, but Byers and Zervas were well suited for the job. The two researchers also work at Adverplex, a start-up incubator in Cambridge, Mass., that helps businesses monetize their online traffic. At Adverplex, they were investigating online companies with rapid trajectories, so Groupon, which forbes.com called “the fastest growing company ever,” was on their radar.

The most surprising finding involves Yelp, where customers can post reviews of a business and rank it with one to five stars. For each Groupon deal associated with a Yelp rating, the researchers collected all of the reviews posted on Yelp through August 2011. They found a surge in reviews from new customers after a Groupon offer. “The effect is immediate and significant,” says Byers.

That’s good news for merchants, but there’s a catch: reviewers mentioning the words “Groupon” and “coupon” give “strikingly lower rating scores” than those who do not mention those terms, write the authors. Specifically, reviewers mentioning either keyword offer ratings that are 10 percent lower, on average, while the small fraction of reviewers mentioning both keywords are more that 20 percent lower, on average.

The authors aren’t sure if the lower ratings have a long-term impact on businesses. But they write that the lower-on-average scores provide “a cautionary note” for merchants. “This could indicate that a more critical audience is being reached,” they write, “or that the fit between the merchant and the new customers is more tenuous than with the existing customers.”

Ultimately, the study shines a light on one of the big issues surrounding daily deal sites: sustainability. According to Byers and Zervas, there is no data—at least none that is publicly available—on whether Groupon is a good deal for merchants in the long term.

By collecting longer-term numbers, they hope to answer new questions raised by the study. Why, for instance, were there more negative reviews on Yelp? Was this a small subset of negative reviewers, or just a broader downward trend? And what happens after the Groupon period is over? Do the reviews rebound?

“The data will speak,” says Byers. “We just have to do the analysis.”

Barbara Moran (COM’96) is a science writer in Brookline, Mass. She can be reached through her website, WrittenByBarbaraMoran.com.

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Boston University moderates comments to facilitate an informed, substantive, civil conversation. Abusive, profane, self-promotional, misleading, incoherent or off-topic comments will be rejected. Moderators are staffed during regular business hours (EST) and can only accept comments written in English. Statistics or facts must include a citation or a link to the citation.

There are 25 comments on Groupon: Bad for Business?

  1. I put one thing forward, you think that a good piece of objective research is made through monitoring review sites? How many people write a review when they have had a good meal? Not that many I would propose; they are satisfied and continue with their lives whilst telling their friends that they enjoyed it. On the converse, when someone has had a bad meal, they often comment on it as they feel it is their duty to piss and moan (sorry, create constructive criticism) about how bad a time they had. This would naturally skew research into people’s reviews in my honest opinion.

    I also like the conclusion of this research… They don’t know!

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    1. Your anecdotal theory shouldn’t change the evidence or findings here.

      The same percentage of people should be commenting in the same manner prior to Groupon, so overall those satisfied customers will not be posting positive reviews and the dissatisfied customers will be posting more. That establishes the baseline rating. Groupon comes along and injects significantly more customers, but should not change the propensity for someone to rate a positive or negative experience.

      Except it does, which were the findings, suggesting that Groupon can have a negative impact on the reviews of a business.

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    2. ^^ truth H
      also, its more common than not that a business will deal shoddy service to customers using groupon, cause they gotta say they’re using it when they show up. who’s make the extra effort when u know you’re losing money anyway?

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      1. @00ace – TOTALLY DISAGREE.

        It works to the business’ advantage to treat me BETTER because they know I am evaluating them to see if I ever want to come back again.

        A good business SHOULD make the extra effort, because it matters MORE than usual.

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  2. H, you’re right that review sites are generally skewed, although I don’t think it’s just to the negative. It’s usually people at the extremes, who either had a bad experience or a great experience. Either way the point of that part of the study was that you would expect reviews from users of deal sites to be the same as other users but they weren’t; they were more negative on average.

    I can’t speak for the average, but I’ve been happy with every deal I bought from one of those sites and five of them were for businesses I had never been to. Of those five I recently bought two more deals to the same places and I would buy deals for the others if they came up again.

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  3. I think there is a lesson to be learned by those offering Groupons and other options to bring in a new audience for their restaurant or product, which is to be prepared for the onslaught of additional customers and to put your best foot forward. Too often there is a reason that customers are not flocking to the establishment and unless that is not corrected, whether it be poor service, mediocre food or overly inflated prices, the feedback to review sites will not be positive. Taking advantage of discounts often means trying someplace that you would not go otherwise simply because it is outside your usual haunts or more expensive than you would normally indulge in. I recently tried a fish restaurant in Back Bay that I heard was very expensive and the food was not worth the money simply because an offer came in my e-mail and I thought that it might be worth trying just to have an alternative to Legal Seafood. The establishment turned out to be quite worthwhile, serving great food, having excellent service and having a really nice atmosphere, while not really being any more expensive than the restaurant that we normally frequent. Since I made the reservation on Open Table I left a very positive review on Open Table when a request came to my e-mail. I did not mention that I had a discounted certificate in the review. On the other hand my son and I tried another restaurant that we would not have tried ordinarily and it turned out to be unclean and my son got food poisoning. In that case I plan on writing a review that will let others know to avoid the place and will mention the incentive as the reason we tried the place. The issue of the value to merchants of incentive sites is somewhat complex. If someone uses an incentive to go someplace more expensive than they are used to they will likely be more demanding in terms of value for money and that might invite harsher reviews and fewer return visits if the perceived value wasn’t there. If your establishment is not offering good quality and value then the added exposure places you at great risk. If you offer a good product and value then you will pick up additional long term customers due to the added exposure. The logic seems obvious.

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  4. Very interesting study regarding the user base’s ratings of the services. I wonder if the correlation between negative ratings and coupon/Groupon deals is because the customers that purchase the deal are not in the target market of the company, but are being brought in on price point alone.

    It would be good to see quantitative analysis of the financial impacts of the ratings and whether or not the users repeated purchases at the company.

    I would be skeptical to use Groupon as a business owner other than for the purposes of generating advance payments on an expensive ticket item to help cash flow. For example, sell whale watch tickets on Groupon during the winter. Other than that, the core business may be impacted long term as repeat customers wait for the next Groupon deal.

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    1. @Joe – The study has the same question

      “However, the lower-on-average rating scores in those reviews
      mentioning Groupon provides a cautionary note: this could
      indicate that a more critical audience is being reached, or
      that the fit between the merchant and these new customers
      is more tenuous than with existing customers.”

      for the full study results, follow the links in the article. http://arxiv.org/PS_cache/arxiv/pdf/1109/1109.1530v1.pdf

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  5. H is right, comments go up after the offer.
    The more positive reviews discuss the business without stating groupon. The more negative reviews mention Groupon or coupon.

    I think that says more about the way people phrase negative reviews than it does about the coupon experience.

    – – –

    Do coupon companies work for business?

    I did about 8 coupons last year, with mostly positive experiences, and I am a repeat customer for 3 of this years coupon business’. 37% of the business’ have made money off me – the other 63%, not so much. A coupon gets customers through the door – The customer experience is what makes repeat customers.

    Groupon is a referral business – and I don’t use them much, because the business they refer have not pleased me as much as two other services.

    BiyWithMe.com seems to vet the quality of their deals better than Groupon – and I get 5-7 days to decide on the deal, so overall I am more satisfied with BuyWithMe.com for the businesses they refer.

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  7. I was very pleased with my groupon. We went to Concord Colonial Inn, in Concord Ma and loved it. Had in not been on groupon I would have not know about it. I love using coupons.

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  8. Great article, very interesting to see analysis done on the impact of Groupon sales. Many people seem to have interpreted Groupon’s success as a company as an indication that it is good for merchants. That may be true in some cases, but it will be interesting to see what the data on long-term merchant impact shows.

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  9. I’m sending this article to a friend of mine who owns a massage center. Her ratings on Yelp, which is another story in itself, dropped after 2 or 3 disgruntled Groupon customers wrote nasty reviews about her business.

    They never set foot in her establishment and her rating dropped from 4 starts to about 1.5. They gave bad reviews because it took her 2-3 days to call them back. She was overwhelmed with the response and had never ran a DOD. She’s old school and isn’t too savvy with social media.

    One griper changed her review after her service and Yelp changed my friends rating to a 2-star review. All positive reviews were filtered and then Yelp began calling her to sell advertising.

    She’s been a SMB for 20 years and she was very upset by these incidents, all because of Groupon customers. She’s staring to see the light after friends told her the horror stories that are floating around. She’s cutting back on the deals and thinking of using them only during a slump.

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  10. Very interesting results, but not necessarily a true cause and effect situation.

    Even though the Groupon users may seem to be more critical there may be a good reason for their discontent.

    Many businesses offer too many coupons to be redeemed which results in a huge increase in customer volume. A business cannot maintain quality service under those circumstances.

    The other day I read an article about a restaurant that sold 3,500 coupons and then complained that the buyers actually showed up to redeem them the next week.

    A better approach to discount coupons is to sell them in smaller quantities spread out monthly.

    Peter

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  11. This topic stirs up an emotive response in businesses and consumers alike. I’m glad to see serious researchers and empiricists looking at these questions. Indeed, the data does and will continue to speak for itself.

    Right now, I find Groupon programs can be a solid marketing option for an unknown business that wants to put themselves on the map quickly, advance their unknown brand, and gather new customers fast. For established businesses, the data is pointing out what I have suspected all along: Groupon offers do not necessarily attract your ideal customer. In fact, you may be shooting yourself in the foot by herding followers that cost you.

    I’m on the editorial board of hotelexecutive.com and wrote an article on this topic called, Hotel Flash Sales: Engagement at Any Cost? Those interested in my findings highlighting online coupon use for the hospitality industry are invited to contact me directly for a copy.

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  12. As a Groupon user, I hope that companies will keep using Groupon and similar services. I found my current hairdresser and a number of businesses I use regularly through trying them with a coupon. I do though make it a rule never to buy anything I need right away, only things I can use in a few weeks or a month or whatever, because right after the Groupon it seems ANY business is flooded with calls. And that I think is the source of the more negative reviews–not necessarily the match between the customer and business. Peter Fuller’s idea is a smart one–I’d like to see someone try offering very limited quantities over a longer time period.

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  13. According to a news report, Groupon is highly profitable. It is the proven data. If Groupon is bad for business then why more and more Groupon clone software and competitors develop?

    Daily deal makes out high profit. It has lot of stuffs to consider. If we talk about features, there are many. Only the advertisement platform is lagging behind. E-mail alone doesn’t help for better growth.

    In developing countries like India, Groupon model works superbly. Consider SoSasta for example. It deals with variety of daily deals and discounts for middle class or average income people in India. At present, there are no other major options available other than Groupon.

    So let us take positive things from daily deal business. More information: http://www.agriya.com/groupon-clone

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  14. Groupon is great for the consumer who purchases a groupon as most are very advantageous offers. As a business owner I found out the hard way that Groupon really took toll on my profit margin just to keep my head above water. I own a restaurant and we were literally giving food away..patrons drink water with lemon and tip the waitstaff horribly..these are the hard cold facts. When all is said and done business owner participating with Groupon makes 25 per cent of what Groupon makes..is Groupon profitable?? well its not rocket science to figure out the answer.

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  16. This entire article assumes that a business’ success is measured by user reviews on a website that caters to people that think they are important. I have found plenty of restaurants that I love with mediocre ratings on yelp and have found quite a few of the higher rated locations to be either overpriced, undersized, or just not for me.

    A business’ success is based on providing goods or services to its customers and making a profit while doing it. Just because some cheapskate who only will buy something if they have a coupon doesn’t like the fact that they can’t get anything but a hamburger at a hamburger joint because they are a vegetarian give a bad review doesn’t mean that’s a good measure.

    Now a business that would give another company half its gross $$$ just to get some customers in the door…that might be a good indicator of how a business is going.

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  17. So here’s my thing and would love responses to this. After what I’ve read, I wouldn’t suggest using Groupon as a vendor except in this scenario. Tell me what you think. I was recently in a really great (imho-ha!) play that was poorly attended. I was ready to suggest to the theater owners that we should do 2-4-1 tickets, etc, just to get butts in seats. On Groupon and similar sites, there is much better publicity. So for that little theater that needed a lot more theater patrons, I think a Groupon deal would work. The seats are sitting (pun!) empty anyhow. What do ya’ll think? email me if you like: cjhuskies@gmail.com

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  18. I worked for a mom and pop restaurant for 12 years…they had been in business for over 30 years. I have never served more water in my life! Your customers want to eat for free and could really care less about our product. At the end of last month our restaurant closed…because they made sure they never spent more than $1.80 over their discount. ANY respectable house keeps the cheapos out

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  19. I used groupon for business , And it is the worst thing I could of ever done.. Because groupon ran my ad for almost a year , when it only suppose to ran for 2 days. Come to find out that somewhere in their long contract that they will cont running the ad., I called to cancel after a few months of wondering how are these people still calling.. And on the other hand.. I told them 30 miles from the area I’m in.(zip code) they made a mistake and put 30 mile outside of a major interstate that goes around Georgia.. Now I’m having to tell clients that we can’t do their 2 hr job for 49$ (which groupon takes 25$ of that, ) to come 1-2 hrs away just to lose 100 after labor and gas in a big dodge truck.. So now I have bad reviews on my biz because they don’t want to refund them are because I can’t do their work.. Smh !! Never again.. I hate groupon !!

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