Escaping the Groupon Curse for Restaurants

SMITH BRAIN TRUST -- Restaurants often come across as desperate when they offer Groupon-style deals, but a new study from the University of Maryland's Robert H. Smith School of Business suggests that certain types of venues can escape the damage to their reputations. That's because the negative effect tends to be concentrated on restaurants at lower price points. In the case of upscale restaurants, offering a deal either does not hurt the reputation or actually boosts it — probably because customers view those restaurants as more confident, offering the deal from a position of strength.

The study offers important new detail about the dynamics of an omnipresent form of promotion in the digital economy. Groupon-style deals are on track to bring in $5.5 billion annually by 2016. Nonetheless, says Anand Gopal, a Smith professor and study co-author, "this is one of those areas where there's a lot of opinion but not a lot of rigorous research."

The study includes both an analysis of real-world data and online experiments. The real-world analysis focused on some 2,000 restaurants in and around Washington, D.C., looking at the connections between deal offerings and Yelp ratings from December 2011 to December 2012. Besides Groupon, the study included deals from Living Social (based in Washington with a strong presence there), Amazon Local, Yelp and other vendors. Overall, the researchers examined 2,425 deals.

In addition to price point, the age of a restaurant was also an important determinant of how a coupon was viewed. Consumers seemed to assume that new restaurants would want to attract patrons any way they could, and viewed the deal leniently. They perceived deals from older restaurants with more skepticism.

The study also looked at the effect of restaurants' decisions to offer online deals on its peer restaurants. Surprisingly, restaurants that failed to offer a deal but which existed in a neighborhood in which its competitors did offer coupons suffered a reputational hit. "You cannot isolate yourself from these effects," Gopal says.

The online experiments helped to nail down an important issue: They showed that the reputational declines stemmed directly from the existence of online deals, and not from a genuine decline in service that might occur because a restaurant can't handle the increase in business that a coupon might produce. In those experiments, test subjects looked at a mock Yelp profile of an Italian restaurant, either high-priced or low-priced, either offering a deal or not. They then indicated on a seven-point scale how likely they'd be to go, and how good the restaurant was likely to be. There was no actual restaurant visit, yet people rated restaurants offering coupons lower.

Other researchers have documented the existence of a negative "Groupon effect" on restaurant reputation. This paper, however, offers a more nuanced look at how and when that effect plays out. "This is the first time that anybody, to our knowledge, has shown that Groupons can have a positive effect," says Jorge Mejia, a Smith PhD candidate and another study author.  (The third co-author is the Smith School's Michael Trusov.) A new, high-priced restaurant in an area where other restaurants offer Groupons is likely to be making a reasonable marketing move if it offers a deal, for example.

"Deal or No Deal? The Quality Implications of Online Daily Deals and Competition," by Mejia, Gopal and Trusov, is a working paper.

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