

Understanding Groupon Means Understanding ACSOI - edw519
http://www.aaronsw.com/weblog/acsoi

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jerf
To repeat an earlier comment of mine, the problem wasn't the metric itself;
the problem was where it was put. That filing is not the place for companies
to put free-form propaganda. If we permit that, we'll never see an honest
filing ever again. If Groupon wants to push that metric, let them do it in a
more appropriate forum.

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dbfclark
I'm afraid that doesn't fly. If a company wants to use any kind of non-GAAP
financial measures in their marketing to investors they have to be disclosed
and explained in the prospectus by law. That's how the prospectus works: it
has to include everything you use in the marketing materials. If you think
it's invalid it doesn't matter, but if the metric itself is fine it _must_ go
in the prospectus.

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hvs
_After all, if you stopped marketing tomorrow you’d have a nice, profitable
$10 million a year business._

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.

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pbreit
Not really. Groupon's marketing spend goes to list-building. It could reduce
it's marketing costs dramatically and still run its business for the most
part.

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jeffdavis
Even if you assume that current customers require little marketing effort
(which is a huge assumption), what about the businesses?

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.

~~~
pbreit
ACSOI has to do with acquiring subscribers, not businesses (that's covered in
SG&A).

It's beyond plausible that Groupon would still have a thriving business
without spending to acquire new subscribers.

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ajscherer
"You learn that the average new customer brings in $50 in profit over their
lifetime"

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).

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yuvadam
Nice post, but it makes no sense whatsoever.

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?

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payne92
I agree, this post doesn't make senese, because Groupon needs to market to
acquire current business, in addition to "expansion" business. ASCOI excluded
important current business marketing spend.

I left a more detailed comment on this on the author's blog article page.

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jeffdavis
That's great reasoning, and it gives me an idea: let's book the $45 profits as
soon as the customer signs up! (of course, we can calculate the PDV, to make
sure everything's honest, so it's really only $38).

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.

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adamtmca
This concept is called customer lifetime value. No one misunderstood it;
everyone is questioning what the actual lifetime value of those customers is.

Including an internal metric like this in the filing was a big PR mistake.

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abrenzel
Should this article be retitled: Understanding Groupon Means Understanding
Accounting Fraud?

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jellicle
Groupon doesn't have a $10 million business without marketing. Groupon minus
marketing is a $0 business. Groupon's measurement of their profitability "if
we don't count all these expenses over here" is like a restaurant measuring
profitability if you exclude staff salaries and food costs and rent. Wait,
what?

~~~
pbreit
Groupon's primary marketing costs are associated with list building and its
lists don't lose much value over time. In fact, it could bring its marketing
spend to $0 and continue to maintain healthy sales.

Agree with the OP: the ACSOI controversy was blown out of proportion.

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burgerbrain
It is my impression that Groupon's list does in fact deteriorate over time
because many (most?) businesses that work with them don't wish to continue the
engagement after the initial period.

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sobriquet
I thought the list is the subscirbers to their daily emails... not the
businesses they've signed up.

~~~
gersh
People unsubscribe, spam filters kick in, or people just start ignoring the
email.

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snorkel
Understanding my perfect score means ignoring all the shots I missed.

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fleitz
This is the great thing about the IPO, maybe he's right and ACSOI is a great
metric from GroupOn, maybe everyone else is right and it's an unprofitable
business in the future.

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.

