Groupon 2011 Annual Report Download - page 44

Factors Affecting Our Performance
Customer acquisition costs.
We must continue to acquire and retain customers who purchase Groupons in order to increase revenue and achieve
profitability. If consumers do not perceive our Groupon offerings to be of high value and quality, or if we fail to introduce new or more relevant deals, we may
not be able to acquire or retain customers. In our limited operating history, we have not incurred significant marketing or other expense on initiatives designed to
re-
activate customers or increase the level of purchases by our existing customers. If such expenditures or initiatives become necessary to maintain a desired
level of activity in our marketplace, our business and profitability could be adversely affected.
Deal sourcing and quality.
We consider our merchant partner relationships to be a vital part of our business model. We depend on our ability to attract
and retain merchants that are prepared to offer products or services on compelling terms. We do not have long-
term arrangements to guarantee availability of
deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. In light of our objective to promote variety in our daily deals,
our general practice to date has been to limit repeat merchants. If new merchants do not find our marketing and promotional services effective, or if our existing
merchants do not believe that utilizing our services provides them with a long-
term increase in customers, revenue or profit, they may stop making offers through
our marketplace.
Competitive pressure.
Our growth and geographical expansion have drawn a significant amount of attention to our business model. As a result, a
substantial number of group buying sites that attempt to replicate our business model have emerged around the world. While there has been a lot of documented
consolidation of competition in recent months globally, we still expect new competitors to emerge. In addition to such competitors, we expect to increasingly
compete against other large Internet and technology1
based businesses which have launched initiatives which are directly competitive to our business. We also
expect to compete against other internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such
communities or interests.
Investment in growth. We are a high-
growth company and have aggressively invested, and intend to continue to invest, to support this growth. As a
result, we have incurred net losses in the majority of quarters since our inception. We anticipate that our operating expenses will increase substantially in the
foreseeable future as we continue to increase the number and variety of deals we offer each day, broaden our customer base, expand our marketing channels,
expand our operations, hire additional employees and develop our technology.
Pace and effectiveness of expansion.
We have grown our business rapidly since inception, adding new customers and markets both domestically and
internationally. Our international operations have become critical to our revenue growth and our ability to achieve profitability. For the years ended
December 31, 2010 and 2011, 36.0% and 60.6%
, respectively, of our revenue was generated from our international operations. Expansion into international
markets requires management attention and resources and requires us to localize our services to conform to a wide variety of local cultures, business practices,
laws and policies. International acquisitions also expose us to a variety of execution risks. The different commercial and Internet infrastructure in other countries
may make it more difficult for us to replicate our traditional business model.
Basis of Presentation
Revenue
Revenue primarily consists of the net amount we retain from the sale of Groupons after paying an agreed upon percentage of the purchase price to the
featured merchant, excluding any applicable taxes and net of estimated refunds.
Cost of Revenue
Cost of revenue is composed of direct and indirect costs incurred to generate revenue, including costs related to credit card processing fees, refunds
which are not recoverable from the merchant, certain technology costs, editorial costs and other processing fees. Credit card and other processing fees are
expensed as incurred. At the time of sale, we record a liability for estimated costs to provide refunds which are not recoverable from the merchant based upon
historical experience. Technology costs in cost of revenue consist of payroll and stock1
based compensation expense related to our technology personnel. Such
technology costs also include website hosting and email distribution costs. Editorial costs consist of the payroll and stock1
based compensation expense related to
our editorial personnel, as such staff is primarily dedicated to drafting and promoting merchant deals.
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(4)
Reflects the total revenue generated in the trailing twelve months per average active customer in the applicable period.