Groupon's Hidden Influence on Reputation

One of the biggest internet phenomena in recent years has been the rise of daily deal sites such as Groupon or Living Social. These sites offer discounts, generally of between 40 and 60 per cent, for products and services available in specific cities around the world.

These deals are expensive for merchants: Groupon takes about half the revenue that the vouchers generate. But although merchants may make a short term loss during the deal, the potential benefit is of long term growth due to the repeat business from new customers.

Many merchants have been persuaded--the sales for daily deal sites is expected to reach $1 billion this year. So an important question is how well this business model works.

Today, John Byers and Georgia Zervas from Boston University and Michael Mitzenmacher from Harvard University provide a fascinating insight into the mechanics of daily deals.

These guys have studied over 16,000 Groupon deals in 20 US cities between January and July this year. They monitored each deal every ten minutes or so to determine how sales varied over time and also counted the number of Facebook likes that each deal generated.

At the same time, they collected Yelp reviews--some 56,000 of them for 2,332 merchants who ran 2,496 deals--examining how merchant reputations changed before and after a Groupon deal.

These guys use their data to make gain a remarkable insight into the business of daily deals (they also collected data on Living Social). For example, they make a surprisingly accurate estimate of Groupon's weekly revenue per city, which they were able to check against the company's S-1 filing.

They also examined how the popularity of a deal spread via Facebook likes and created a cascade model to show what was going on. Their model suggests that word of mouth effects on Facebook play a significant role in boosting sales.

But their most controversial finding is that a Groupon deal seems to have an adverse impact on reputation as measured by Yelp ratings. Their analysis shows that while the number of reviews increases signifificantly due to daily deals, average rating scores from reviewers who mention daily deals are about 10% lower than scores of their peers.

They examine this effect in more detail by pinpointing reviews that specifically mention the words "Groupon" and "coupon". "Reviews mentioning either keyword are associated with star ratings that are 10% lower on average than reviews that do not, while the very small fraction of reviews mentioning both keywords are more than 20% lower on average," they say.

That will be worrying for Groupon and its merchants. On the one hand, the data provides clear evidence of increased interest in a merchant after a deal because of the higher number of reviews. But the lower ratings will raise a note of caution. "This could indicate that a more critical audience is being reached, or that the fifit between the merchant and these new customers is more tenuous than with existing customers," say Byers, Zervas and Mitzenmacher.

The real test, of course, is the long term revenue that the deals generate for merchants and this study provides no data on that. So ultimately, only the merchants themselves can know how successful these deals really are.

What's clear though is the power of analyses that fuse sales data with social media effects. If Byers, Zervas and Mitzenmacher can build an analytics engine that gathers and crunches this kind of data automatically, they may start an internet phenomenon of their own.

Ref: arxiv.org/abs/1109.1530: Daily Deals: Prediction, Social Diffusion, and Reputational Ramiﬁcations

Gryphonisle

More Discerning, or Cheap?

This is welcome and fascinating news, but if I read it right, are you suggesting that Yelpers are more discerning? Could it be that a coupon would take some Yelpers into a more rarified environment than they would normally venture, and as a result, cost them more money, and the negatives have to do with the higher cost and a perception of lower value (a lot of great restaurants are light on portions)? Coupon clippers in general tend to be a thrifty lot, to the point of travelling extra miles to save a few dollars, which they then spend in gas and time getting there.

Is this data really an indication that Groupon is hurting reputations among serious diners, or merely that it brings people up from lower altitudes who aren't adjusted to the climate, and go home feeling a bit queasy from the experience?

4 months agoshare flag

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RaviMatcha

Mis-communicated marketing

Groupon is a marketing tool helping businesses market themselves without any upfront cost and is rightly pointed out by the article. When I bought a recent Groupon deal for an exotic food restaurant offering a 50% discount, I did intact not recommend the restaurant solely because of the service provided in the restaurant.

The Groupon sales pitch for lack of a better word said that they offer exotic meats and mentioned close to 9 different ones but failed to mention that only one of them would be available each day. An obvious fact that was revealed to me after visiting the place. I could have lived with this, but when I arrived at the restaurant, I was told that they ran out of the exotic meat by 7 in the evening. If the restaurant couldn't offer their USP to me as a customer, I don't think me or for that matter any customer would recommend them.

Business owners are overwhelmed by the surge of customers. However if they are not prepared to handle this sudden surge they would be doing more harm and permanently damage their ratings on yelp or zagat or wherever.

I have always argued that Groupon should work with the business owner to check capacity, forecast operational issues, better the fine print for each deal and also maintain yelp kind of rating/ feedback for each deal and share this feedback with the business owner. What they also have to do is create incentives for the customer to provide good WoM instead of just sharing which deals they've bought. I think this key element of post deal redemption is missing from the business model.

5 months agoshare flag

TheLaserGenie

Groupon BAD FOR BUSINESS, Terrible Result after Groupon

Thank you for this!!! This validates the sad results we too have seen for other companies similar to ours (we have a list of 200 companies that have terrible reviews from Groupon purchasers).

It's terrible because the bad reviews are seemingly ALL the same, from one company to the other; the same annoyed client that is complaining about issues that happened with the company ONLY due to Groupon. It is a sad situation because nowadays consumers are highly reliant on reviews and a company with a lot of bad reviews will not only 1) not be at the top list of a search for their offered product/service, and 2) an unlikely choice for consumers since the average star count will be low and consumers will just choose the company with a stellar star count.

This highlights more the recession we have faced, and the reason why Groupon came into existence in the first place. It saddens us that small companies are on the verge of close due to this. Something must be done especially because there are still thousands of companies looking to do a daily deal!!!

We have recently published our story on our blog and have recently been interviewed by MSNBC and the story will air on the show "Your Business" on Sep 18, 2011.

Please read our blog here: http://www.thelasergenie.com/blog/?p=169

ccdb19

The real problem with groupon and Living Social is it attracts the worst kinds of customers. They have no interest in paying full price for anything ever. They are trolls that want everything for free and trah your online reputation. These coupons are like anti-marketing. This whole concept is soomed for failure.

Redeem

Managing a deal and redemption data

It is great to read an article of this calibre in respect of the quality and understanding these authors bring to the field of daily deals for business.

In looking at post sale redemption data through our platform it has been the case that an interesting difference has been shown from sales to actual redemption's.

Due to our platform managing a deal for a merchant and helping to turn one time customers into repeat customers that follow on from daily deal to new customer conversion has been exciting to see with our merchants to date.

Well done on a fantastic article.

www.redeemandget.com

@redeemandget

Daily Deals Made Easy

mdsmith88

real data

where's the data? Graphs are nice and everything but i'd like to see the real data.

oceanla

Groupon and Living Social 'deal' is really a scam

All I can say is Duh, and I told you so... Groupon & Living Social have both pursued my restaurant and I've turned them down. Here's why:

A restaurant's typical cost of product is 33%, and cost of labor is 33%, add in fixed expenses (rent, utilities, etc) and the profit margin is driven down to the single digits, 5-8%. That's right, 5-8 cents on the dollar.

Groupon/Living Social sells $20 gift certificates for $10 and gives the restaurant $5. This means the restaurant is receiving just 25% of the menu price, which falls far below even covering the cost of the product. Then the restaurant has to increase staffing to cover the surge in sales that the 'deal' creates, further increasing the cost.

Ironically, in an email to me, Groupon claimed it would bring in 'high end' customers. This couldn't be further from the truth.

Herein lies the worst part of the whole scam: The 'customers' attracted to Groupon/Living Social will not be returning, even if they have a good experience. Customers attracted to extreme discounts tend to be poorer, and/or do not value or want to pay full price for restaurant services. They do not become repeat customers, unless you offer another 2-for-1 deal. We stopped participating in the Entertainment book years ago for this reason. At least with Entertainment's standard "Two-fer" we were paid 50%, better covering our cost.

Reality: Groupon/Living Social prey on weak businesses, who in desperation think this ridiculous 75%/25% deal will somehow help improve sales. But in terms of reputation damage, the cost is far beyond merely giving away your product.

With this Yelp study, I do not think it an exaggeration to posit that Groupon/Living Social have helped bankrupt more businesses than they have helped stay afloat.

naasking

A single short-term groupon deal will generate a loss, no question, but you can write off this temporary loss effectively as advertising, and your restaurant is now more well known due to word of mouth.

...except that 'word of mouth' is 'don't go there, the service sucked'.

You also missed the point about "Two-fer" seekers - they do not become repeat customers. So these deals ultimately do not generate ongoing sales.

so it's Groupon's fault that a restaurant's service is crappy? Not really sure of your argument. Groupon gets customers to your business then it's your job to make them happy.

goyalankur

You are not understanding the point of oceanla. It is not about the kind of service the restaurant provides, the ambience or the food, rather it is about the quality of customers that walk in with a Groupon deal.

The quality of customers that purchase these deals tend to be very very price sensitive, and no matter what you do to please them, they will never come back to the restaurant because they just can't afford it.

If Groupon attracted the customers which would have eaten at that restaurant in any case, but are happy they a got a good deal, then this would not have been an issue. Instead the kind of customer demographics Groupon attracts are the those that would have never eaten at that restaurant unless its 50% off, and that is the problem for Groupon.

Re: price sensitivity, that's neither here nor there. So the people who took advantage of the deal are not repeats, but the people they tell just may be. You could use this exact line of reasoning to argue against advertising and marketing of *any* sort, and yet we know that marketing is essential.

Re: two-fer seekers, I think you're missing the point. These people may not return, but the people they tell just may. That's the whole point of advertising. Some customers are repeats, some are not. That's life.

jamesatlga

I don't see how you can blame Groupon. Groupon is a marketing effort and if the business can't afford it i.e. if they can't supply the resources during the promotion period then service will slip. Further, employees take their cues from their boss. If the owner looks down on customers using coupons and considers them to "be poorer", that attitude will roll down to her employees. That translates into a negative experience for the customer. It's not Groupon's fault when a customer shares their negative experience online.

bora231

I don't think the treatment by staff can be based on the coupon as the coupon is given at the end of service when it is time to pay the bill. No one calls to make a reservation and states- "I have a coupon".

I do agree that a coupon user is a coupon user. You are not going to get them to return without another coupon and with so many available on these sites they can just keep going from one deal to the next.There is no loyalty except to the deal.

I had the same experience with Entertainment book years ago. They didn't want their card punched so they could come back for another visit????

As to the word of mouth idea, They are not going to say they had a great meal. You should try them out we did. Their going to say Hey, they have this deal where you can go to----and eat for half price check out this deal site.

bmn

Weak businesses? That explains it. The few times I've tried Groupon, the restaurants went out of business before I could cash it in. I guess it was just a way to get some quick cash before the closed.

reputationrhino

Online Reputation Management

Great post. It underscores the importance for companies who use daily deal sites for social marketing to have a comprehensive online reputation management strategy. I advise my clients to monitor online mentions and engage actively with new customers to encourage positive feedback.