Groupon's Andrew Mason: "I've Never Been More Confident and Excited about the Future of our Business"

In an internal memo sent to thousands of employees, Groupon CEO and co-founder Andrew Mason breaks his silence. Kara Swisher of AllThingsD has scored an exclusive look at the memo, which addresses the silly (if not absurd) controversy surrounding Groupon's accounting practices. Known as ACSOI (which stands for “adjusted consolidated segment operating income”), Mason said that this metric was included in the company's S-1 “to help people understand how we think about marketing expenses.” “The reason everyone in the world seems to hate ACSOI is that it makes us look magically profitable by subtracting a bunch of our customer acquisition marketing costs from our expenses,” Mason wrote. “The reason we didn't realize everyone in the world would hate ACSOI (no, it's not the same reason we didn't realize everyone in the world would hate our Superbowl ad), is that we think it actually does a pretty good job at describing our marketing expenses in a steady state – we just didn't realize there would be so many skeptics.” Mason then warned his employees to “brace” themselves for a deeper explanation. “Our internal forecast shows two different types of marketing: what I'll call ‘normal marketing' — which is NOT excluded from ACSOI — and ‘customer acquisition marketing,' which is.” “The way Groupon spends on marketing is unique in three ways,” Mason added. Those ways include: (1) Groupon is spending more “than just about any company ever” on marketing, (2) its strategy is designed to add people to its own long-term marketing channel (its daily e-mail list), and (3) the company plans to greatly reduce its marketing costs but is spending more now “because we're acquiring as many subscribers as we can as quickly as we can.” “In Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%,” Mason wrote. “Why do we spend so much? The simple answer is ‘because it works.' But thats [sic] only part of what makes our situation special.” “Once we have a customer's email, we can continually market to them at no additional cost,” Mason explained. “Compare this to Johnson and Johnson JNJ, McDonald's MCD, or most other companies. If I'm a Johnson, and I'm trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you've bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition — that's unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.” Mason admits that this marketing strategy (coupled with ACSOI) is not something you might immediately comprehend. “It's not lost on me that if you actually understood this, you probably had to read it three times,” he wrote. “It's not easy stuff. It's much easier to assume that we're goons. So people can be forgiven for being suspicious. “In fact, feel a little bad about how downhearted the critics will be when we don't turn out to be a Ponzi scheme — those are good impulses for journalists to have, and I hope our non-evil ways don't destroy their spirits.” Internationally, Mason said that Groupon is doing extremely well. “Even in young markets like Korea, where we're still making massive investments, we're seeing unprecedented growth,” he insists. “We started building our Korean team this January, despite the presence of two competitors that were larger than any we'd previously battled from behind. Thanks to the brilliant execution of the Korean team, we are set to be the market leader within months. We've never had a country grow as fast as Korea!” In China, Mason said that Groupon inches closer to profitability every month. “As has been our strategy in launching other countries — Germany, France, and the UK, included — our China growth strategy was to hire quickly and manage out the bottom performers,” Mason wrote. “So far, that strategy has improved our competitive position in China from #3,000 to #8.” Mason then posed a question, asking whether Groupon would one day reach the dominant status in China that it enjoys in most other countries. “It's too soon to tell, but there's no question in my mind that we're building a business that will be around for the long haul,” he answered. Fending Off the Competition If you think Groupon is going to have a tough time competing, Mason would like you to take a look at a few facts: “Google GOOG Offers is small and not growing,” he wrote. “In the three markets where we compete, we are 450% of their size. “Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size. “Living Social's U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it's generally a bad idea, and not a profitable form of customer acquisition. Facebook sales are harder to track, but are even less significant at present.” Mason said that his point is not that his competitors will fail (“some may actually develop sustainable businesses, or even grow,” he wrote), it's that Groupon's business is a lot harder to build than people realize. “Our scale creates competitive advantages that even the largest technology companies are having trouble penetrating. And with the launch of NOW, I suspect our competition will have an even harder time in light of the natural barriers to entry that are needed to build a real-time local deals marketplace.” You can read Mason's full e-mail at AllThingsD. Follow me @LouisBedigian