Stamps.com 2014 Annual Report Download - page 37

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Cost of Revenue
The following table shows cost of revenues and cost of revenues as a percentage of its associated revenue for the periods indicated (in thousands
except percentage):
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. Cost of PhotoStamps revenue principally consists of the face value of postage,
customer service, image review costs, and printing and fulfillment costs.
Cost of service revenue increased 28% to $19.7 million in 2014 from $15.4 million in 2013. The increase in cost of service revenue is primarily
attributable to higher customer service cost to support our growing customer base, higher promotional expense and higher variable costs
associated with our growth in revenue. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in
the period in which a customer qualifies for the promotion while the revenue associated with the acquired customer is earned over the customer's
lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period.
Promotional expense increased 28% to $3.1 million in 2014 from $2.4 million in 2013. The increase in promotion expense in 2014 is primarily
due to higher customer acquisition in and an adjustment to our redemption assumption in 2013.
Cost of product revenue decreased 3% to $5.5 million in 2014 from $5.7 million in 2013. Cost of product revenue as a percentage of product
revenue decreased from 34% in 2013 to 33% in 2014. The decrease in cost of product revenue was primarily attributable to decreased
fulfillment costs.
Cost of insurance revenue increased 20% to $3.2 million in 2014 from $2.7 million in 2013. The percentage increase in cost of insurance
revenue was consistent with the percentage increase in insurance revenue. Cost of insurance revenue as a percentage of insurance revenue
decreased from 36% in 2013 to 35% in 2014. The increase in cost of insurance revenue was consistent with the increase in insurance revenue.
Cost of PhotoStamps revenue increased 21% to $4.5 million in 2014 from $3.7 million in 2013. Cost of PhotoStamps revenue as a percentage of
PhotoStamps revenue increased from 79% in 2013 to 82% in 2014. The increase was primarily attributable to the increase in PhotoStamps
revenue from high volume business orders. The decrease in PhotoStamps revenue as a percentage of PhotoStamps revenue is primarily due to
higher high volume business orders compared to PhotoStamps orders through our website in 2014. High volume business orders have a lower
average revenue per PhotoStamps sheet than website orders but have the same associated costs.
32
Table of Contents
2014
2013
Cost of Revenues
Service
19,687
$
15,422
Product
5,516
5,694
Insurance
3,210
2,685
PhotoStamps
4,493
3,699
Total cost of revenues
32,906
$
27,500
Cost as percentage of associated revenue
Service
17
%
16
%
Product
33
%
34
%
Insurance
35
%
36
%
PhotoStamps
82
%
79
%
Total cost as a percentage of total revenues
22
%
22
%