Does Groupon Negatively Affect How People View Your Small Business?

Daily deals, with Groupon and LivingSocial as the two main players, are a topic of much debate among those associated with the model.  Since their popularity exploded over the last year or so, some have questioned whether or not using the service actually benefits the business.

Of course, the daily deals model allows businesses to offer their services or merchandise for a discounted price.  The theory is that businesses will reap the long-term benefits from participating in the deal, because in the short-term they almost always lose money. 

Basically, you use a daily deal to get customers in the door, and the hope is that they will keep coming back.  That way, you can make more in the long run. 

Of course, that doesn’t work in every case. 

Now, new research indicates that business reputations might be hurt from participation in daily deals from Groupon.  Research from Boston University finds that ratings for businesses on review site Yelp decrease after the use of Groupon. 

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.

The yelp reviews that mentioned the words "Groupon" or "Coupon" had an 10% lower star rating on average than reviews that didn’t mention the daily deal.  If a review on Yelp used both of those key words, star ratings fell by an average of 20%.

Although Groupon is having some legal troubles right now, it doesn’t appear that they are suffering from the negative press.  A recent Yipit report found that Groupon’s revenue increased 13% from July to August.  They also gained market share from LivingSocial.

What do you think about daily deals like Groupon?  Are they a good move for businesses?  Or does the model fail to provide enough benefits to outweigh the harm it can do?  Let us know in the comments.