Understanding Groupon Means Understanding ACSOI
aaronsw.com
aaronsw.com
This is incredibly naive. To pretend that marketing isn't a core part of Groupon's model is like pretending that Ford doesn't need car dealerships.
Let's apply the same logic to GroupOn's business customers: once they acquire a customer through a GroupOn, that customer will remain loyal and they don't need to market to them again. In other words, that business doesn't have to offer sharp discounts for quite a long time, and therefore ceases to become a GroupOn customer. So, GroupOn needs to spend more on marketing to get new businesses to offer deals.
Sure, it's plausible that if they stop marketing, they still have a business. That's certainly the story they are trying to tell. But accounting is not about plausible-sounding stories. It's about cold, hard numbers in black and white.
It's beyond plausible that Groupon would still have a thriving business without spending to acquire new subscribers.
How do you know this figure is independent of your marketing efforts? If I start out paying $1 per customer, or people are just walking in off the street for free or whatever, and find those customers are worth $50, is it okay to just assume that the customers who cost me $20 to get through the door are also going to be worth $50?
I'd think the more it cost to get someone to do business at all, the lower the expectations for repeat business should be (interestingly, I'd think the same thing if I were a merchant considering doing a Groupon).
Accounting is all about adding up the figures of the past, not prospects for the future.
In keeping with the analogy, who's to say that any of my cereal box customers will not leave me the next day? Are they tied in any way to me? Am I providing them with a service that is absolutely impossible to clone?
I left a more detailed comment on this on the author's blog article page.
For example, how many people will demand returns for sales you've recently made? 0%? 15%? you don't know, but you can't "account" for the complete value of past transactions without this estimation of future actions.
In fact, we've calculated that it takes $5 to bring in a new customer, and we have a $5M marketing budget, so let's book those million customers now, too. That's $38M in profits the first year! Not bad.
But hey, why don't you give us $5 billion? Then, we could get a billion customers, and bank $38B in profits the first year. Minus a few billion to cash out the early investors, of course -- but hey, we can still give you a 30X return on your money.
[END SARCASM]
Yes, we understand the story. We're not stupid. It's not that complicated of a story. But we want to see how often the story intersects with reality, and how much is fiction. Accounting is the tool that allows us to measure the story against reality. If we start weaving stories into the accounting, then it's no longer a-counting, it's a-wishing.
None of that means Groupon is a bad business, it just means that they are trying to insert marketing material into their accounting statements.
Including an internal metric like this in the filing was a big PR mistake.
If their managers and finance team want to use this figure internally to justify jobs that they may or may not deserve, that's fine--but to use these ridiculous measures publicly is irresponsible at best, and actively deceitful at the other end.
[Edit]: I almost didn't bite on the OP at all--I'm still not 100% sure it's not pure troll.
I'm also curious as to how it's "unnecessarily snarky" to claim that a post like this might be trolling.
Having known him through his writings for several years, I can vouch that he is not a troll.
I also think it's fair to question whether such a lopsided opinion piece, opposed to the seemingly general prevalent thought, is indeed trolling. Perhaps his reputation says otherwise; but, that doesn't make it any less reasonable to question.
Well reasoned opinions that are opposed the prevalent opinion are never trolling.
But they don't stop there; they actually claim that because their marketing expenses are geared towards asset building that they shouldn't count. That's a pretty big leap; at best, from the conclusion drawn above, their marketing budget could considered as a typical company might consider manufacturing or development cost. That is, if Groupon's value is truly derived (at least in part) from the size of their network, then the costs associated with building that network are analogous to building product in more traditional companies.
I agree that their marketing spend has different impact to their business than other businesses; but I don't believe that means they can just pretend they aren't spending that money.
That's not correct. While the list is growing the number of purchases per customer will probably decrease, and when it is shrinking I would imagine it would increase (because the people who get no value from it will remove themselves, while those who get value will stay on the list)
If GroupOn can continue to provide value to customers they will keep using it. Much of their business is currently in the "door buster" special type offers, but it is easy to see them offering smaller, 10%-off-type offers from retailers they have a relationship with in addition to the "door buster" offers. Places like supermarkets would pay for that, and consumers would get benefit too.
the costs associated with building that network are analogous to building product in more traditional companies.
Yes, exactly. It's not abnormal for companies that have huge up-front investments to report their operational financial situation differently to the operational expenses. Think of sports stadium operating companies, or companies that build toll-roads, railways of other infrastructure: they have huge upfront costs, but report that cost by amortising it over the operating life of the infrastructure. At the same time, they also report their finances without taking this cost into account, because that cost is more relevant to their business. I guess GroupOn could have tried to amortise the customer acquisition costs, but that would be hugely speculative. In this case the raw operating numbers were more useful.
GroupOn may or may not have problems with their business model. That is orthogonal to the fact that reporting that ACSOI number made sense and was useful for any investor to know.
Actually, as Groupon dials down on acquisition and dials up on activity, the reverse is more likely.
> the costs associated with building that network are analogous to building product in more traditional companies
Right. Which is why product development costs are frequently split out form operating expenses into line items such as R&D.
Agree with the OP: the ACSOI controversy was blown out of proportion.
If he's right and everyone else is wrong I'd use the analogy to decide what to do: Borrow every cent the OP can get his hands on, put some more leverage on it and buy up as much of the IPO as he can. After all he has to get in now before everyone else realizes what a great deal the stock is.
However, if you look at the prospectus you'll see that most of the latest round went to cash out early shareholders, and not on marketing.