The backlash against daily deals

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Booking an appointment was a headache, staff seemed annoyed and the service she received wasn't anything to write home about.

Samantha Li, a 35-year-old stay-at-home mom, had never been to Toronto's Buff Nail Lounge, but a Groupon offer – $28 for $60 worth of services – prompted her to give the salon a go. She won't be a repeat customer, she says.

Groupon and its ever-growing list of competitors have co-ordinated deals with thousands of businesses in Canada with a promising sales pitch: Offer a deep discount on a product or service, attract new customers, make regulars of those new customers and see your profits soar.

But a new study from Boston University and Harvard University suggests offering daily deals can backfire.

Researchers found offering a Groupon correlated with a bump in business for most companies and also an increase in Yelp reviews. But they also found a company's star rating declined after it offered a Groupon. In general, those companies with reviews that mentioned the words "Groupon" or "coupon" had star ratings 10 per cent lower, on average, than those that did not.

High volume and staff thinking they won't make as much cash can translate into substandard service for discount-seekers. And when a customer is unhappy, she can post about her experience online, leaving a stain on the company's reputation.

After her lacklustre pedicure and eyebrow waxing, Ms. Li complained to Groupon and got credit for the two remaining coupons she'd bought for Buff. She wrote an unfavourable account of her experience on Yelp, a popular hub for customer reviews. She gave the business one star out of five, contributing to the company's overall score of 2.5 stars out of five (close to half the reviews reference cashing in a Groupon and only one of those is positive).

A growing body of research suggests bad customer service experiences are more likely to stick with you than good ones – and, as Ms. Li says, "You're more inclined to spread the word if it's bad."

But why are so many reviews that cite Groupon, in particular, negative?

Katherine White, an associate professor of marketing at the University of British Columbia's Sauder School of Business, says it's because many companies are not prepared for the surge in business that comes with participation in a daily deal.

Julie Mossler, a spokeswoman for Chicago-based Groupon, says the company learned from its early days to steer businesses away from offering more coupons than they could handle. It also encourages them to hire temporary staff to keep up with added demand if their deal sells well.

But ability to fulfill demand isn't the only issue. While managers sign up for daily deals with dollar signs flashing in their eyes, it's their front-line staff who have to carry out the service (sometimes for less pay than usual).

Cathy Ma, the co-owner of Buff Nail Lounge, is well aware of the daily-deal effect on her company's Yelp rating. Since she and her business partner took over Buff last September, they've been working to resuscitate its online reputation.

She says staff preferred serving regular clients over the ones who came in with Groupons since they'd make more on the service.

"I told all of my employees, 'No matter if they pay [full price]or don't pay [full price]you have to provide the best customer service to make them come back,' " Ms. Ma says.

She's giving daily deals another try next year in hopes that better service for the discount-seekers will improve the company's online reputation.

Some restaurants that have participated in Summerlicious or Winterlicious – two Toronto dining events in which many high-end restos offer discounted prix-fixe menus – have suffered the similar struggles with their online reputation.

The combination of increased demand but less revenue per customer can translate into poor service and dashed customer expectations (which are posted on the foodie forums Chowhound and Urbanspoon as well as Yelp and food blogs).

Stella Yu, a 29-year-old Toronto tax consultant and food blogger, has had many disappointing experiences with the 'Licious events and has blogged about all of them (her posts are often listed on the restaurants' Urbanspoon pages). In many cases, she blamed slow and unfriendly service or unappetizing dishes on "the 'Licious effect."

Negative reviews can help a frustrated customer blow off steam, but they can also be a serious revenue concern for the companies that receive them.

Michael Luca, an assistant professor of business administration at Harvard Business School, suggests a strong Yelp rating can prompt demand. In an analysis of Seattle restaurants in the pre- and post-Yelp periods, he found that a one-star increase in a restaurant's Yelp rating translated to a 5 to 9 per cent increase in revenue.

"There's a lot of evidence that suggests people do read reviews and they are swayed by what other people say," Dr. White says. "Even one incredibly negative review can sway people."

John Byers, an associate professor of computer science at Boston University and lead researcher of the study that linked Groupon with negative Yelp reviews, says sorting reviews could be the future of Yelp.

"I think understanding more deeply the reasons why certain reviews are more positive could be a really interesting piece of future work," he says.