Reversing the Groupon Effect

When Groupon entered the marketing scene, it unintentionally brought with it the “Groupon Effect” – a negative stigma surrounding businesses using the coupon service. But new research from Maryland Smith is showing why there might be more to gain than fear for businesses using Groupon.

The theory behind the stigma held that businesses offering a Groupon deal would see a decline in their online reputation because the steep discounts often associated with the coupon service can signal a weakness in business strategy. But that’s not always the case, says Maryland Smith’s Anandasivam Gopal.

“For businesses in a marketplace with a lot of competition, if every competitor is offering a Groupon – and you choose not to offer one – you suffer since you appear to be higher-priced than your competitors,” says Gopal, the Dean's Professor of Information Systems at the University of Maryland’s Robert H. Smith School of Business. “A lot of restaurant owners might disagree with having to share revenue with Groupon, but there are some clear cases where as a restaurant owner, you can actually benefit from offering a Groupon or a similar deal.”

Gopal co-authored the research, published in the journal of the Association for Consumer Research and Information Systems Research, with Michael Trusov, marketing professor and academic director of the Master’s in Marketing Analytics program at Maryland Smith, and Jorge Mejia, PhD ’16.

The research identified potential businesses that are either not affected by the Groupon effect or that paradoxically might benefit from offering a Groupon deal.

The researchers conducted a series of experiments that consisted of creating online presences for fictional restaurants and hiring test subjects to choose which restaurants they would be willing to try. The goal, Gopal says, was to spot situations in which restaurants that offered Groupons might have more success and defy the traditional Groupon experience, while controlling for all other aspects of the restaurant.

“If people had a Groupon for a brand new restaurant, they were more willing to try that restaurant despite having a Groupon, since this seems like a good way to attract an initial set of customers,” says Gopal. “Similarly, for the most part people were willing to believe that restaurants in higher price segments offered a Groupon not because they were in financial trouble but because these restaurants are trying to acquire new customers.”

While Groupon may still have work to do if it wants to eliminate its stigma, Gopal says, based on his research, there’s no denying that the coupon company’s potential is underestimated by some when it comes to competition among businesses.

“The benefits of Groupon as a strategic decision – especially when a restaurant is new – hasn't received enough attention,” says Gopal.

“Coupons are a big part of the marketing mix now, and being able to offer discounts to these large mailing lists can yield distinct benefits.”

Read the full research, “Deal or No Deal? The Effect Online Deals on Consumer Quality Perceptions and Competition,” in the journal of the Association for Consumer Research and Information Systems Research.