Stamps.com 2011 Annual Report Download - page 60

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STAMPS.COM INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We will continue to recognize retail box breakage revenue from PhotoStamps retail boxes in future periods using the redemption recognition
method. Due to the cumulative catch-
up and to a lesser extent variability of timing of sales and redemptions, retail box breakage revenue in the
future will differ significantly from retail box breakage revenue recorded in the second quarter of 2011.
Cost of Service Revenue
Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card
processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of
the cost of products sold through our Mailing & Shipping Supplies Store and the related costs of shipping and handling. The cost of insurance
revenue principally consists of parcel insurance offering costs.
Promotional Expense
New PC Postage customers are typically offered promotional items that are redeemed using coupons that are qualified for redemption after a
customer is successfully billed beyond an initial trial period. We account for our promotional expense in accordance with Accounting Standard
Codification (“ASC”) 605-50-25, “Recognition – Vendor’s Accounting for Consideration Given to a Customer”,
by recognizing a liability for
promotional expense based on estimated amounts that will be claimed by customers unless the liability for promotional expense cannot be
reasonable and reliably estimated. This includes free postage and a free digital scale and is expensed in the period in which a customer qualifies
using estimated redemption rates based on historical data. Promotional expense, which is included in cost of service, is incurred as customers
qualify and thereby may not correlate directly with changes in revenue, as the revenue associated with the acquired customer is earned over the
customer’
s lifetime. Promotional expense was $3.6 million, $2.7 million and $1.7 million for the years ended December 31, 2011, 2010 and
2009, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. These costs principally consist of compensation for personnel involved in the
development of our services, depreciation of equipment and software and expenditures for consulting services and third party software.
Sales and Marketing
Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel
engaged in sales, marketing, and business development activities. Ongoing marketing programs include the following: traditional advertising,
partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct sales, direct mail, and online advertising.
Advertising Costs
We expense the costs of producing advertisements as incurred, and expense the costs of communicating and placing the advertising in the period
in which the advertising space or airtime is used. For the years ended December 31, 2011, 2010 and 2009, advertising and tradeshow costs were
$7.0 million, $5.5 million and $4.7 million, respectively.
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