Understanding Groupon Means Understanding ACSOI(aaronsw.com)
aaronsw.com
Understanding Groupon Means Understanding ACSOI
http://www.aaronsw.com/weblog/acsoi
35 comments
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.
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.
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.
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.
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.
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.
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.
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.
It's beyond plausible that Groupon would still have a thriving business without spending to acquire new subscribers.
Why do people downvote merely because they disagree? Very annoying. If you disagree, include a reply.
"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).
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).
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?
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 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.
I left a more detailed comment on this on the author's blog article page.
No, accounting is much more subtle than that. It is about trying to figure out the value of what you have now, and that is not always trivial.
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.
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.
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.
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.
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.
Including an internal metric like this in the filing was a big PR mistake.
Should this article be retitled: Understanding Groupon Means Understanding Accounting Fraud?
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?
Aside from the incredibly naive assertion that Groupon would maintain its current revenue with $0 marketing (OP, you realize that every company with appreciable revenue spends at least some of their money on marketing, right?), the primarily troubling aspect was that the figures were deliberately misleading. Even if Groupon's intentions weren't so dubious, the implication that any of their valuation or justification for an IPO can be calculated based on only some of their expenses is absurd and dangerous to a general public that may (like this author) be easily taken in by their "accounting acrobatics."
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.
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.
Aaron Swartz is probably not trolling you, to answer your totally unnecessary snarky aside.
Is that a name I'm supposed to know? Honestly, this article came across as little more than shilling for Groupon; I really don't care who wrote it.
I'm also curious as to how it's "unnecessarily snarky" to claim that a post like this might be trolling.
I'm also curious as to how it's "unnecessarily snarky" to claim that a post like this might be trolling.
Aaron is quite well known on YC but it's not surprising that many people don't know about him. http://en.wikipedia.org/wiki/Aaron_Swartz
Having known him through his writings for several years, I can vouch that he is not a troll.
Having known him through his writings for several years, I can vouch that he is not a troll.
I think that's a fair response; I took some time to look him up myself after the above post--but I appreciate the extra context that he's generally well-known within HN.
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.
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.
I also think it's fair to question whether such a lopsided opinion piece, opposed to the seemingly general prevalent thought, is indeed trolling.
Well reasoned opinions that are opposed the prevalent opinion are never trolling.
Well reasoned opinions that are opposed the prevalent opinion are never trolling.
Why is Groupon-supporting commentary considered trolling or shilling? The fact is the Gorupon's marketing spend is building an asset that has lasting value and accounting for such is not unreasonable. A 100 million opted-in email list has almost as much value next year as it does this year even if it stops growing.
Not entirely true when we start to look at repeat customer numbers, etc. Even if the list doesn't change, the number of purchases per customer will likely continue to decline over time. In that case, I think the best argument you can make is that their marketing budget is about more than typical marketing budgets: that is, they're building a valuable (if depreciating) asset. Fair enough, I think that's a legit argument.
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.
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.
the number of purchases per customer will likely continue to decline over time.
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.
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.
> the number of purchases per customer will likely continue to decline over time
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.
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.
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.
Agree with the OP: the ACSOI controversy was blown out of proportion.
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.
Yes, it deteriorates over time but you are confusing subscribers with businesses. The sales effort to acquire business customers is included in SG&A, not marketing.
I thought the list is the subscirbers to their daily emails... not the businesses they've signed up.
People unsubscribe, spam filters kick in, or people just start ignoring the email.
Ah, well in that case their list definitely deteriorates.
Understanding my perfect score means ignoring all the shots I missed.
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.
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.