More Evidence Groupon Is Bad for Business

A study of Yelp ratings shows Groupon customers are not happier customers

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Groupon bills itself as a win-win-win for merchants, customers and, obviously, itself. Businesses get exposure, coupon purchasers save dollars and Groupon acts as the money-making middle man. But like anything that sounds too good to be true, this situation doesn't exactly play out in favor of all the parties involved. Especially for participating retailers, whose online reputations are at risk post-Groupon. A group of computer scientists at Boston University and Harvard looked at how businesses that did Groupon deals fared on Yelp. According to Technology Review, "Their analysis shows that while the number of reviews increases significantly due to daily deals, average rating scores from reviewers who mention daily deals are about 10 percent lower than scores of their peers."

Part of the Groupon allure is that it provides marketing for small businesses. But looking at the stats, these flash deals do just the opposite, hurting a merchant's ratings that future potential customers might see. While the numbers of reviews increase post-deal, the ratings decrease, as you can see from this chart.

It's not as bad as it looks. "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," explains Technology Review. And, as Business Insider's Pascal Emmanuel-Gobry points out, online reviewers tend to skew evil. "A well known phenomenon with online reviews is that people who post reviews tend to have either a very positive or very negative view of what they're posting." But that doesn't change the nature of publicity. It's bad: A Yelp peruser that cares about ratings over popularity will pass the business over. And like we said, this is about marketing, after-all.

This isn't the first negative effect businesses have seen from using daily-deal sites. Not only are companies missing out on the marketing perks, but the monetary benefits are murky. The company takes a big cut of the deals it offers to users, in exchange for so called publicity explains Technology Review. This may mean a short-term loss, but the idea is that in the long-term the businesses are better off. But sometimes that long term growth never comes, as we've noted before a Forbes report found that one-third of businesses have lost money on the Groupon experience. Not all companies can handle the surge of customers--which could also explain the lowered Yelp reviews--and many Groupon purchasers only go for the deal, never returning for repeat purchasing. Bad marketing, no revenue increase: What exactly do businesses get?

Yet, Groupon continues to grow. The company saw a "banner month revenue-wise," reports TechCrunch's Alexia Tsotsis.

But behind these numbers we learn something interesting: businesses are losing interest in working with the daily deals site, Tsotsis continues. "This growth broken down symbolizes a 10% increase in the number of Groupons sold per deal and a 5% increase in the average Groupon price, both increases compensating for a decline in the number of deals ran by Groupon." The company also benefited off of growth in a new sector: Travel.

Groupon's canceled its investor roadshow and pushed off its IPO. If the company keeps failing to deliver on its promises, businesses will flock to other marketing pastures.

This article is from the archive of our partner The Wire.