Do Deals Damage SMB Reputations?

Groupon has taken a lot of knocks and shots in the past several months; here’s another. A blog post on MIT’s Technology Review site repeats findings from Boston U. and Harvard researchers who claim that running a deal has clear positive social media effects, but equally seems to degrade merchant reputation.

The researchers looked at 16,000 Groupon deals in 20 cities between January and July 2011. The objective of the research was to “study the interplay between social networks and daily deal sites.” One of the things they examined was how reputations changed before and after running a deal through Groupon.

The researchers counted the number of Facebook Likes generated from these deals, as well as new reviews for the involved merchants on Yelp. The looked at more than 50,000 reviews for more than 2,300 merchants running 2,496 deals.

These were the high-level findings:

  • Daily deal sites benefit from significant word-of-mouth effects during sales events
  • The number of reviews increases significantly due to daily deals
  • Average scores from reviewers who mention daily deals were 10% lower than scores of their peers on average

We’ve known for a long time that Yelp is often where people go to check merchant reviews before deciding to buy a deal. The Facebook “word of mouth” effect could have been predicted too: people “discussing” and sharing deals via Facebook. However the negative effect on reviews is surprising.

How might it be explained?

I’m not a statistician but there may be a straightforward explanation that argues as the number of reviews increases their distribution changes and overall scores decline. In other words as more people review a business (following greater exposure through Groupon) we start to see a broader mix of reviews that depress the merchant’s score somewhat.

However perhaps there’s a more disturbing pattern: people are valuing these businesses less because merchants are discounting and they receive weaker reviews accordingly. This would play into merchant fears about the impact of discounting and deals generally.

Another potential explanation exists. Unprepared deal merchants may also be delivering weaker service that gets reflected in Yelp reviews. However I would be surprised if “unprepared” applies to all 2,300-plus merchants in the sample.

How might you explain this correlation between deals and declining reputation scores? Is it simply a function of a greater volume of reviews or is there something else, along the lines of what I’ve speculated above?

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13 Responses to “Do Deals Damage SMB Reputations?”

  1. Benfletch says at

    I think that sometimes staff treat people with vouchers less well than ‘normal’ customers. With restaurants the business may resent the new customers that are costing them money and provide cheaper ingredients or a restricted choice of food – which would also depress the ratings

  2. Greg says at

    I suspect you’re correct. And if so it’s turning out to have a negative impact on the business’ reputation — if these data are accurate.

  3. Tim Cohn says at

    The reviews confirm both sides got what they paid for.

  4. Malcolm Lewis says at

    Per the chart, looks like the businesses’ reputations were declining 1-2 months ahead of the Groupon deal..?

  5. Greg says at

    Potentially correct, however, it’s not exactly clear when the Groupon offer begins. It spans several columns. 

  6. Joe says at

    Agree with all the possiblities you noted. Some additional possibilities:

    – deal-chasers may be pickier in general.

    – deal-chasers have cognitive dissonance (‘guilt’) over getting a great deal, so punish the SMB with extra negativity. (Seemingly illogical, but a very human behavior.)

    – deal-chasers may have broader experience with other vendors in the vertical, and thus higher standards than local ‘regulars’. Especially since Groupon is probably drawing customers from farther away than the SMB may usually get. [ie, if someone from “downtown” shlepps to the boonies for a deal, do they bring their downtown standards with them (and downrank accordingly)?]

    – pre-deal, reviewers may be skewed toward “regulars” of the SMB, as infrequent customers of a business might not bother to overcome the ‘friction’ of the review process. But during the deal, reviews may be skewed toward regulars of Groupon, who are eager to appear to be discriminating, tough shoppers?

    A lot of psychology comes up, much of it stacked against the discounting SMB.

  7. Joe says at

    Yes, I also agree with what Malcolm noted. It may be that businesses in decline are more likely to resort to Groupon, and that Groupon may also in some cases deepen the spiral.

  8. Greg says at

    Joe:

    Some good additional ideas. Thanks. Of the ones you presented I would tend to favor the deal chasers are pickier thesis. 

  9. Greg says at

    Business in decline is a plausible theory. However from what I’ve observed personally and empirically that doesn’t define most of these businesses. They’re trying to attract new customers (potentially nervous about the economy also). 

  10. Joe says at

    Here’s yet another take:

    Is the Groupon deal actually IMPROVING reputations? According to the chart, the decline in rep actually appears to slow markedly during the deal.

    Second, what’s the explanation for the sudden crash in reputation after six months? I bet I know: If you follow the buyer postings on the individual deals on Groupon.com, you invariably see VICIOUS reviews coming in right around the time the deal expires. And these reviews are over-the-top — they suddenly describe food or service of such bad quality as to be unlikely to have ever occurred. (Suddenly, meals supposedly have insects in them, etc.)

    My theory for these take-downs is that some Grouponers are lazy, wait until shortly AFTER the deal expires, then bring in their Groupons insisting they be honored. The SMB can’t, because then they get NOTHING on the deal. The holder of the expired Groupon then goes to Groupon.com (and, presumably, Yelp) and attempts to punish the SMB for the coupon-holder’s laziness.

    I know that I’ve seen this at least a couple of times on Groupon.com, but I bet it’s happening on Yelp: a flurry of attack reviews by holders of expired Groupons is what’s causing the 6-month post-deal dogleg-down in the chart.

    If so, SMBs might need to be warned that part of the deals hidden cost is that they must honor expired Groupons just to keep from getting crucified on the review sites.

    Expecting people to honor “a deal is a deal” doesn’t work when there’s both anonymity and such asymmetry of power between customers and the hapless SMB!

  11. person287 says at

    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?

  12. Steve Young says at

    I agree with Benfletch. I get worse customer service when staffers know I have a Groupon. SMBs need to step up and treat Groupon folks like potential long-term customers. I’ve found many difference businesses that I frequent after being exposed through Groupon. 

  13. gmonte says at

    Great article, Greg! This is a great lesson to learn–Groupon isn’t a continuous medium to market like phone books or search engines. I think it’s more ideal for driving foot-traffic to specially planned events, where employees are prepared to give great service. 

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