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Daily deal downer: Groupon lowers business's Yelp ratings, study says

by Shaina Humphries
Oct 20, 2011

When Phoebe Walters opened her shop, Phoebe’s Cupcakes, in Lakeview more than two years ago, the grand opening caused hundreds of cupcake-hungry customers to line up along Broadway Avenue.

The popularity of her confections continued, but in March, Walters wanted to boost customer traffic even more. Like many local businesses, she was able to attract waves of customers by teaming up with Chicago-based Groupon to offer a “daily deal.”

The deal offered customers $10 worth of cupcakes for $5. Within three days, 3,500 people purchased the Groupon. Walters was excited about the huge increase in customers, but she later vowed she would never do it again.

“We had a five-star rating on Yelp that all of a sudden went down to a three-star rating. I went through and looked at the reviews and they were all Groupon,” Walters said. “I feel it’s a waste of money… You’re basically paying for bad reviews.”

A recent study by Harvard and Boston University showed that Walters’ experience is not uncommon.

According to the study, the Groupon effect is two-fold.  “First, on average, the number of user-contributed reviews increases significantly after a Groupon offer… Second… [the overall] Yelp star ratings decline after a Groupon deal.”

The reason for the decline in Yelp star ratings is not clear. Many of the Groupon users who have voiced their frustrations through Yelp have mentioned unsatisfactory customer service. One common cause of the less-than-perfect service is businesses that are unprepared for the sudden influx of customers.

Groupon, which did not respond to emails or phone calls for comment, has tried to assist business owners with preparation materials before their deals begin. But Walters said the materials are not enough to evade the problems. While the 3,500 people that bought the cupcake Groupon had only three days to purchase it, they had five months to use it before it expired. There were surges of customers at the beginning and end of the five-month period, but in between, it was very difficult to predict when the next wave of Groupon users would arrive.

“In a small store, you’re trying to make and bake enough product for that day,” Walters said. “When all of a sudden 500 extra people come in, getting a dozen cupcakes each, it throws your numbers off and you weren’t prepared. If you try to make them the day before, then they say, ‘Oh it wasn’t fresh’.”

Ill-prepared businesses aren’t the only gripe among the Groupon crowd. Many daily deal users believe some of the poor service they receive is actually intentional—because they aren’t paying full price.

Maria Cabuang, a San Diego healthcare management specialist, is a member of the Yelp Elite Squad—meaning she has consistently submitted many reviews—in her case, more than 1,100—on Yelp. She said she has a way to avoid intentional bad service.

“I typically do not notify the business of my deal until my bill arrives or I remit payment. That way, I experience the same treatment as any one else that arrives as a non-Groupon customer and my reviews are not biased.”

This lack of good service often occurs when a Groupon deal affects the tips or commissions of employees—smaller bills and particularly price-conscious customers usually lead to smaller take-home pay for them. But, there may be something about the typical Groupon user that causes even more frustration for the business, and in turn, the customer.

“Inherently, it’s going to be people who are technology-comfortable and they are very sensitive to deals,” said Tim Calkins, professor of marketing at Northwestern University Kellogg School of Management.

That’s putting it lightly, according to the owner of Jury’s restaurant in Chicago, John Rogozinski. He described his Groupon experience in January as a nightmare.

“People are very demanding. They come in with the deals and want to spend [the bare minimum], so they order just enough for the Groupon and some cups of water,” Rogozinski said. “It’s just a completely different vibe from regular customers.”

He added that the majority of Groupon users never return to the establishment, defeating the purpose of the deal altogether.

Even though many Groupon users don’t become repeat customers (unless the business offers another Groupon deal), many of them quickly judge the business overall based on whatever they deem important. Then they log on to

Rob Wick, an avid Yelp reviewer from Arlington Heights, said many of his fellow Yelpers are habitual one-star reviewers, often for unfair reasons. If customers are not frequent diners like him, he said, their expectations are not always realistic.

“Sometimes my jaw just drops… They are getting Groupons and they have no clue as to what is an ordinary process in a restaurant,” Wick said. “They walk away and say ‘We didn’t get this or that,’ which is fine if you want to pay an ordinary price. But [with a Groupon] you’re usually not going into a fine-dining establishment where you can expect that level of service.

Walters agrees.

“It has taken away the people that have gone to school for journalism, that are educated on the products and that are making an educated review based on what they know,” said Walters. “So people give you bad reviews about things that don’t even make sense.

One Yelp review that contributed to the overall decline of Phoebe’s Cupcake’s star rating gave the shop one star because it closed at the posted closing time. Another reviewer gave the shop one star because he said some of Walters’ employees “looked like lesbians.” The review was flagged and eventually removed by Yelp, Walters said, but the reviewer simply posted another similar review.

Walters said her loyal customers are not as likely to post an online review. A 2011 Colloquy study confirmed that phenomenon, saying negative word-of-mouth spreads faster than positive chatter.

While most people know Yelp is completely user-generated and not based on professional opinion, Walters said the decrease in her shop’s Yelp star rating has had a real impact on the number of customers coming through the door.

In fact, a recent study by Harvard Business School professor Michael Luca supports that. The study showed a change in an independent business’s star rating has a measurable impact on its revenue. The same effect did not apply to chain restaurants or franchise businesses.

“Based on the data, a one star increase on Yelp leads to somewhere between a 5 and 9 percent increase in revenue,” said Luca.

The opposite also may be true. Walters said this applies especially to businesses like hers, where food is involved.

“It’s a rumor mill. It’s like a nasty person in high school saying something bad about you,” she said. “All you have to do is say one bad thing about a place that serves food, and then people won’t want to go there.”