This looks good. But looks are somewhat misleading. In reality it is a mixed picture.
Because customer acquisition in Q2 2010 was during a period where competition was almost non-existent, the costs of acquisition were lower.
First, based upon our analysis, the latest cohort costs at least 25% more than back in Q2 2010. Hence, on a go-forward basis, each cohort within the same time scale will provide, at best, a 91% ROI with a fast degrading percentage over time.
We say ‘at best’ because, these new customers are worth less and less going forward as
- gross margins is degrading across the industry. Groupon’s average margin is down from 42% in Q1 2011 to 37% Q3 and
- each new customer is lower in quality as the early adopters are also the heaviest users of this channel which will result in
- lower continued spend per customer
That said, as long as there is positive ROI, it will be worth acquiring a new customer. It helps that the average price of a Groupon is currently on an uptrend with the significant contribution to revenue from travel deals. Looking beyond marketing costs, we can expect SG&A costs to start coming down as merchant acquisition will cost less over time with more and more revisiting merchants. Whether that would result in significant sustainable profitability remains to be seen but for now, there is a significant potential margin within the model.
