Groupon has more than 100 million subscribers (mostly in America). If we assume that the total available market is another 50 million or so signups in the US, then these loss leader marketing expenses will drop dramatically (no need to offer $10 for a friend that buys a $5 deal).
The attempt of this metric is to explain what their business looks like in another year or so when they've reached some level market saturation. Groupon has treated the deals space as a race (I don't personally agree that it will necessarily pan out this way).
But it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.
it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.
Look, projections based on assumptions are part of the investing game. And while I appreciate your enthusiasm, the likelihood that you are correct is not the point.
The point is, there is already an existing method of disclosing assumptions and projections for the future, it's called a pro-forma financial statement. Groupon can simply state their assumptions for when their customer acquisition expenses will go away and give us their projection for what they think their financials will look like at that point in time. In the time-honored format that has served many companies before them.
Giving us a new number for what their business looks like now is ridiculous, because there already is a standard way to share their hopes and dreams of what their company will look like in the future. And that has nothing to do with what you or I might think of their assumptions about what might happen in the future.
"Look, projections based on assumptions are part of the investing game... Giving us a new number for what their business looks like now is ridiculous"
A thousand times, yes!
Investors need baseline, objective, bottom-line numbers to work with. These numbers help potential investors evaluate where the business is at today, and (perhaps more importantly) help current investors evaluate whether the past projections met with reality.
There are plenty of places that companies are able to spin the numbers to tell their story of fabulous fortunes and world conquest. But there are certain places where you have to let the tried-and-true numbers speak for themselves without someone standing in front waving their arms.
It's like going to vegas. It's easy to say: "Hey, I about broke even. Even if I did lose a little money on the tables, I got some free drinks and I had fun this weekend." Sometimes that story is true, and sometimes they are some pretty-darned expensive free drinks. Your bank account will tell the story, and you wouldn't let a casino owner jump in front to "help you interpret" the numbers.
I'm actually not defending this particular accounting method since I expect they've filed proper paperwork that explains all their income, expenditures, profit, taxes, etc.
What I'm defending Groupon against (not that they need me) is the ridiculous pot shots at their business model as of late and that somehow they're trying to scam people (You'll probably see a few show up in the comments today).
They've grown a phenomenal amount of revenue faster than anyone ever has before and they've apparently spent quite a bit of money to acquire e-mail subscribers. Groupon is a stupendous outlier when it comes to all businesses before it and the biggest question people have is whether or not the business is sustainable. When these significant marketing costs go away, this should be a very solid business.
I get that you are defending their business model, thanks. The whole point of starting a business is to lose money today building an asset that will make money tomorrow, so what's wrong with that?
In days of yore, companies would not go public until they were actually making money, but tail fins fell out of favor, and conservative investing went with it.
All I am saying is that they should use standard financial tools when promoting their business to investors. I am sure that plenty of people, possibly yourself included, will be just as bullish on their prospects.
Most groupon subscribers I know (including myself), are super active for the first couple of month after signing up, and then forget all about it. If this is any sort of indication of a more general trend then they'll probably have to keep that marketing expense high for the foreseeable future. Not only to capture new users, but once they reach saturation, they'll have to refocus their marketing towards reminding their older subscribers to come back and keep using them.
Another possible scenario is that their new customers account for a significant portion of revenue. Once they hit the edge of the addressable market, their CPA rises significantly and their revenue goes off a cliff as it becomes harder to acquire new, profitable customers.
Anyone with a brain will look at the marketing expense numbers and make a bet as to their relevance and size going forward.
Dropping them completely and saying "look - we're profitable if you assume our customer acquisition cost is zero" seems pretty dumb. How, exactly, are we to assume their marketing numbers will drop at all? It is a sales-driven organization, no?
I'm not sure I'd call it slimy, as the article implies. But I would call it irrelevant. It's not like they're extracting some subtlety from the numbers that is not already well described by GAAP.
I'm not so sure... Their model is one that throws all deals on to one big pile for a geographic region and they're trying to get newsletter subscribers. Eventually that's not going to interest consumers anymore (there will always be some bargain hunters, but that market is relatively small). They're going to have to add some sort of element to distinguish what you could be interested in to be interesting and competitive. I should be able to say: "I like Chinese, and don't want to spend more than $40 on a nice meal" and get ads that match. They'll need marketing muscle to make that interesting too.
I don't subscribe to Groupon because it's all junk I don't wanna buy. Or maybe I just don't have enough expendable income?
What's crazy is that they think it's some sort of race when they have no barriers to entry (either natural or fabricated)... so they rush in an stake all this land... what's to keep LivingSocial (backed by Amazon) from just taking it from Groupon (ie, by higher marketing spend or lower margins)?
Groupon as it exists is completely running on vapors and wishful thinking.
The attempt of this metric is to explain what their business looks like in another year or so when they've reached some level market saturation. Groupon has treated the deals space as a race (I don't personally agree that it will necessarily pan out this way).
But it's insane not to see that marketing expenses will drop and that they can be comfortably profitable.