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In this essay, we examine the impact of Groupon promotions on its change in online ratings. We begin by exploring main impact of promotions on the change in online ratings through propensity score matching process. We then analyze the mediation effects of food and service quality factor and moderation effect of pre-promotion rating on the main effect. We utilize the text and sentiment extraction techniques and obtain food and service quality features and their associated sentiment through the period of promotion. We tested a range of causal relationship models using the data compiled from Groupon, Yelp, and the US Census. We find that mediation effects of food quality and service quality are both significant. Particularly, Groupon promotions decreased perceived food quality and perceived service quality, which cause the decrease in Yelp ratings. The moderation effect of pre-promotion ratings is found to be significant. Groupon promotions had a negative effect on Yelp ratings for relatively higher rated restaurants, while for lower rated restaurants Groupon promotions had a positive effect on Yelp ratings.

4.7.1 Summary of Theoretical Contributions

Our study makes two major theoretical contributions to the literature on the influence of retailer promotion strategies on e-WOM. First, we empirically examine the impact of retailers’

promotions on the valance of e-WOM. Previous studies have shown that promotions can trigger

the generation of e-WOM and hence have a positive impact on the volume of e-WOM (Berger and Schwartz 2011; Godinho de Matos et al. 2015). Our analysis showed that Groupon promotions had a negative impact on online ratings on average, i.e. the online ratings after Groupon promotions declined more than that of without promotions. We operationalized valence with the average numeric ratings of retailers’ online reviews. To identify the influence of Groupon promotions on online ratings from the natural trend of ratings over time, we applied a modified propensity score matching (PSM) method to Groupon Restaurants (the treatment group) and Non-Groupon Restaurants (the control group).

Second, we investigated consumer perceived quality as a mediator and pre-promotion ratings as a moderator of the main effect. Through text mining techniques, we extracted food quality comments and service quality comments from the textual contents of reviews and determined the corresponding sentiment (positive, negative or neutral). Interestingly, we found that food quality and service quality both mediated the main effect of Groupon promotions on online ratings. Specifically, Groupon promotions decreased consumers’ perception of food quality and service quality, which further decreased online ratings. Another interesting finding is that Groupon promotions had a negative influence on online ratings for higher rated restaurants on average but a positive influence on online ratings for lower rated restaurants on average.

4.7.2 Discussion of Managerial Implications

Our results have important managerial implications for retailers. First, our results provide guidance for restaurant managers who are considering whether or not to run a daily deal promotion. Particularly for higher rating restaurants, the managers should take the potential damage to online ratings into account, because the changed online reputation may impact the future demand (Anderson and Magruder 2012). However, for lower rating restaurants, Groupon

promotions will likely not hurt their online reputation, and may be an effective marketing tool to reach more consumers who are likely to find them (Sun 2012).

Second, our findings suggest that restaurant managers who decide to run a Groupon promotion should pay special attention to the food quality and service quality during the promotion period. Managers may take appropriate actions, such as, for example, increasing training for wait staff before engaging in Groupon promotions, to avoid any decline in online ratings after promotions.

4.7.3 Limitations and Future Work

Our study, like all studies, has certain limitations. First, our main mediation and moderation effect analysis is based on matched Groupon Restaurants and Non-Groupon

Restaurants with similar observable characteristics, that was the result of a modified propensity score matching process. However, it is possible that unobservable factors might influence the generation of matched pairs, which might impact our results. Although we employed a

sensitivity analysis, there is still a caveat to, as in all analyses, relate to the potential for omitted factors.

Second, we conducted our analysis using online review data from one retail category, restaurants. Therefore the two mediators (food quality and service quality) obtained in this study likely restrict the generalizability of our results to other retail categories. However, our method is applicable for any type of retailer, if review data are available. Our future work will focus of the analysis to other retail categories and the possible generalization of our initial results.

Third, to obtain the mediators (average sentiment of perceived quality), we implicitly assumed that the three types of sentiment (positive, negative, and neutral) have equal weights.

However, in reality, reviewers (and review readers) may have different weights for different

types of sentiment. For example, negative sentiment may have more impacts on final ratings than positive sentiment. Some advanced measures, such as a 5-score scale, might be useful in a future study.

4.7.4 Conclusions

We apply a propensity score matching (PSM) analysis to provide a causal analysis of the main effect of Groupon promotions on the change in online ratings. Consistent with previous empirical evidence, Groupon promotions have a negative effect on online ratings on average.

Regarding the mediation effect, we find that food quality and service quality are two mediators of the main effect, i.e. Groupon promotions decrease consumers’ perceived food quality and service quality, which further causes the decline of online ratings. Regarding the pre-promotion ratings as the moderator of the main effect, we find that Groupon promotions have negative effect on online ratings for higher rated restaurants, versus a positive impact for lower rated restaurants. These results provide important insights into the impact of promotions on retailers’

online reputation.