Stamps.com 2014 Annual Report Download - page 68

STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On a limited basis, we allow third parties to offer products and promotions to our customer base. These arrangements generally provide payment
in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers accessing third party products and services.
Total revenue from such advertising arrangements was not significant during 2014, 2013 and 2012.
We provide our customers with the opportunity to purchase parcel insurance directly through our solutions. Insurance revenue represents the
gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to our insurance brokers. We
recognize revenue on insurance purchases upon the ship date of the insured package.
PhotoStamps Retail Boxes
We sell PhotoStamps retail boxes that are redeemable for PhotoStamps on our website. The PhotoStamps retail boxes are sold through various
third party retail partners. Our PhotoStamps retail boxes are not subject to administrative fees on unredeemed boxes and have no expiration
date. PhotoStamps retail box sales are recorded as deferred revenue. We concluded that sufficient company-specific historical evidence existed
to determine the period of time after which the likelihood of the PhotoStamps retail boxes being redeemed was remote. Based on our analysis of
the redemption data, we estimate that period of time to be 60 months after the sale of our PhotoStamps retail boxes.
We recognize breakage revenue related to our PhotoStamps retail boxes utilizing the redemption recognition method. Under the redemption
recognition method, we recognize breakage revenue from unredeemed retail boxes in proportion to the revenue recognized from the retail boxes
that have been redeemed. Revenue from our PhotoStamps retail boxes is included in PhotoStamps revenue. During 2014, 2013 and 2012
PhotoStamps retail box breakage revenue was approximately $63,000, $115,000 and $260,000, respectively.
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. Cost of PhotoStamps revenue principally consists of the face value of postage,
image review costs and printing and fulfillment 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
reasonably 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. We periodically review our historical redemption rates and adjust, if necessary, our
estimated redemption rates for future periods. 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. During 2014, 2013 and 2012 promotional expense was $3.1 million, $2.4 million and $3.5 million, respectively.
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