What Is Groupon Business Model? Plus Key Metrics For The Business

3 Jun, 2011

What is the Groupon business model? The model is clearly stated in the IPO prospectus. We reproduce it here:

The Business Model "Groupon is a local e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements and promotions. By bringing the brick and mortar world of local commerce onto the internet, Groupon is creating a new way for local merchants to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.

Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Consumers access our deals directly through our websites and mobile applications. Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.

The Other Key Metrics

Gross profit: Our gross profit is the amount that we retain after paying our merchants an agreed upon percentage of the purchase price to the featured merchant. We believe gross profit is an important indicator for our business because it is a reflection of the value of our service to our merchants. Gross profit is influenced by the mix of deals we offer. For example, gross profit can vary depending on the category of product or service offered in a particular deal. Likewise, gross profit can be adversely impacted by offers that we make for the principal purpose of acquiring new subscribers or establishing our brand and building scale in a new market.

Free cash flow: Free cash flow is cash flow from operations less amounts paid for purchases of property and equipment, including internal-use software and website development. We believe free cash flow is an important indicator for our business because it measures the amount of cash we generate after spending on marketing, wages and benefits, capital expenditures and other items. Free cash flow also reflects changes in working capital. We use free cash flow to conduct and evaluate our business because we believe free cash flow captures the cash flow of our ongoing operations. See "Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures" for further information.

Operating Metrics

Subscribers: We define subscribers as the total number of individuals that have completed registration through a specific date, less individuals who have unsubscribed. To sign up for our service and become a subscriber, an individual provides an email address. We can measure our overall growth in the market as well as our potential revenue opportunity as a function of our total subscriber base. The subscriber base does not take into consideration the activity level of the subscriber with our service, nor does it adjust for multiple or unused accounts. Despite these drawbacks, we believe this metric provides valuable insight about the trajectory and scale of our business. Although the vast majority of our revenue comes from subscribers, we also sell Groupons to customers that purchase as guests and, as such, are not included in our total subscriber number.

Cumulative customers: We define cumulative customers as the total number of unique customers that have purchased Groupons from January 1, 2009 (the first date we began tracking unique customers) through a specific date. We consider this metric to be an important indicator of our business performance as it helps us to understand the purchase rate of our subscribers.

Featured merchants: This metric represents the total number of merchants featured in a given time period. For deals offered on a nationwide basis, we count the national merchant once. For deals offered by national merchants on a local or regional basis, we count the national merchant as a separate merchant in each market in which the deal is offered. We consider this metric to be a good indicator of growth as well as an important measure of the effectiveness of our sales and marketing infrastructure.

Groupons sold: This metric represents the total number of Groupons sold in a given time period. This metric is presented net of Groupons refunded during the same time period. We use this metric to measure our growth and activity level in the aggregate as well as in our individual markets.