Monday's New York Times featured a terrific column by Andrew Ross Sorkin on Groupon's finances, as well as some reasons behind its delayed initial public offering (IPO).
Sorkin's column is must reading for investors. Consumers have their sources of commentary on the daily deal site as well. But the company's oft-revised IPO registration has a few tidbits for marketers, too. (The most recent amendment of its IPO registration was its fourth – and anyone who can get short odds on there being a fifth might consider floating a few bucks on the proposition.)
Groupon is coy about its dealings with participating merchants, and much of what follows is speculation, along with a few questions the company might consider answering should it issue a fifth registration proposal.
To start, some math (it's easy math): The company makes a distinction between gross billings, which are what it collects from people buying Groupon deals, and revenue, which is what it nets after it pays participating merchants.
During the first six months of 2011, the company pulled in $1.597 billion in billings (what it generated from consumers), and reported $688.1 million in revenue (what it kept). This means it paid out $909.3 million to merchants. Using these numbers the remittance to merchants would be right around 56.9%.
The first caveat is that the IPO isn't clear about whether the lag between when it collects payment from consumers and when it pays participating merchants crosses from one quarter to the next. According to the papers, "In North America, we typically pay our merchants in installments within sixty days after the Groupon is sold. In our International segment, merchants are not paid until the customer redeems the Groupon."
For what it's worth, the company's accrued merchant payable balance, which stood at $4.3 million on Dec. 31, 2009, was $391.9 million on June 30 of this year.
The second caveat is that, according to the IPO registration, Groupon is offering advantageous terms to some international merchants. According to the company's papers, it is giving merchants in the Asia-Pacific region deals with lower remittances for Groupon in return for entry into the markets.
Groupon notes that the lower deal margins it has in the Asia-Pacific region are offset by higher deal margins in other international markets (the company has pursued an aggressive acquisition strategy, which has given it entry to a variety of global markets), and that it offers fewer national deals in its non-North America markets than it does in North America. "As a result, we experienced higher margins in our International segments than our North America segment," Groupon claims in its IPO filing.
Is it possible that the advantageous terms given to the Asia-Pacific market are skewing remittance guesstimates? During the first six months of 2011, 57.3% of Groupon's revenue came from its International segment. But during the first six months of 2010, the International segment made up only 5.1% of its revenue.
Back then, the company's gross billings were $135.8 million, and its revenue was $58.9 million. That means participating merchants, who were largely drawn from North America, were paid just under $76.9 million – a remittance rate of 56.6% of the company's billings, which is only a tick below the 56.9% seen in first-half 2011.
First question for participating merchants: Is your remittance rate significantly below 57%? If so, why?
Moving on: Groupon reports a subscriber base (subscribers to its e-mails) of 115.7 million, as of June 30, 2011. The company admits that the number of individuals might be less, due to a single consumer having registered under multiple accounts. Separately, the company notes that it sold nearly 23.1 million deals between Jan. 1, 2009 and June 30, 2011.
A side note: It may be an apples-to-oranges comparison, but the Federal Trade Commission's rules for telemarketers say that, for the purposes of telemarketing, a company has a relationship with a consumer for only 18 months after a transaction, and three months after an inquiry. It's not a perfect guideline for what makes up an active customer, but it is a place to start.
Second question for participating merchants: Shouldn't Groupon establish what an active account is – based on e-mail open rates, or click-throughs, perhaps – and publish that number either alongside, or instead of, its cumulative figure of 115.7 million? Is a "cumulative customer" figure that includes 30-month-old data useful?
It's not that the company isn't trying to acquire more subscribers. It spent $345.1 million on subscriber acquisition during the first half of 2011. Between Dec. 31, 2010 and June 30, 2011, its subscriber base jumped from just under 50.6 million to 115.7 million. That's 65.1 million new subscribers at a cost of $5.30 per subscriber. But remember, all subscribers do is receive newsletters. They haven't necessarily made a purchase.
What has Groupon spent per purchaser? Again, because consumers may have multiple accounts, the numbers are fuzzy, but here goes: As of Dec. 31, Groupon had just over 9 million cumulative customers, compared with just under 23.1 million as of June 30. That's an increase of a little more than 14 million customers – meaning that with acquisition costs of $345.1 million, it cost the company $24.65 to acquire each customer.
In an internal e-mail (since widely leaked to the press), Groupon CEO Andrew D. Mason did write that he expects subscriber acquisition costs will decline in the future. The letter was ultimately included in the prospectus, albeit with a note requesting that investors not rely on it and make investment decisions based on reading the entire prospectus.
According to the IPO prospectus, Groupon's average per-deal revenue during the first half of 2011 was $11.40, up from $10.10 during the first half of 2010. But the average revenue per subscriber dipped from $9.60 to $8.30 during the same period. And it's likely that many of these deals were repeat purchases from pre-existing customers, which would dilute the value of newly acquired customers.
Final question for participating merchants: Given Groupon's stated average deal value of $11.40, aren't you glad it isn't your $24.65 per customer being spent on acquisition?
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