Does a Daily Deal Promotion Signal a Distressed Business? An Empirical Investigation of Small Business Survival

TL;DR

This study investigates whether offering daily deals signals business distress by analyzing the correlation between unobserved factors influencing daily deal offerings and business survival in Chicago's small businesses.

Contribution

It introduces an empirical framework using seemingly unrelated regression to link daily deal decisions with business survival, revealing significant correlations.

Findings

Significant correlation between unobserved factors affecting daily deal offerings and business survival.

The correlation is particularly strong in categories like restaurants.

Offering daily deals may indicate underlying business distress.

Abstract

In the last four years, daily deals have emerged from nowhere to become a multi-billion dollar industry world-wide. Daily deal sites such as Groupon and Livingsocial offer products and services at deep discounts to consumers via email and social networks. As the industry matures, there are many questions regarding the impact of daily deals on the marketplace. Important questions in this regard concern the reasons why businesses decide to offer daily deals and their longer-term impact on businesses. In the present paper, we investigate whether the unobserved factors that make marketers run daily deals are correlated with the unobserved factors that influence the business, In particular, we employ the framework of seemingly unrelated regression to model the correlation between the errors in predicting whether a business uses a daily deal and the errors in predicting the business' survival. Our analysis consists of the survival of 985 small businesses that offered daily deals between January and July 2011 in the city of Chicago. Our results indicate that there is a statistically significant correlation between the unobserved factors that influence the business' decision to offer a daily deal and the unobserved factors that impact its survival. Furthermore, our results indicate that the correlation coefficient is significant in certain business categories (e.g. restaurants).