Accounting for Groupon
In the class that I teach at Georgetown, we assigned a midterm where our students had to build a media plan to promote a local sports team. Costs were assigned to various marketing channels, e.g placing banner ads on a local website cost $5K, building a Facebook page costs $10K, etc. One of the students then asked how much it would cost to run a promotion on Groupon, which got me thinking:
How exactly do you account for the “cost” of using Groupon and other social coupon sites?
The beauty of Groupon, LivingSocial, and other coupon sites is that there is no upfront advertising fee paid by the company offering the deal, and running the promotion leads to increased exposure to new customers, upshot in foot traffic to retail stores and of course incremental revenue, thus garnering an ROI that is essentially infinity. But is that totally accurate?
For companies selling distressed, perishable inventory (such as sports teams, where an unsold seat for a game on Wednesday has no value on Thursday), all revenue is incremental and the ROI pretty much is infinity. But what if the company is a retailer who essentially sells their product for 25% of list price on Groupon, but may have sold it later for full price?
Let’s say company A sells widgets at $100 list price. If they sold 100 of these widgets at full price, the revenue will be $10000. But if they run a Groupon promo and sell 100 widgets at 50% off ($50), the total revenue garnered by the deal is $5000, and Groupon and company A will typically split that revenue down the middle, so company A nets $2500. How is this loss in profit margin accounted for on the books? Should you count that $7500 profit margin loss as the advertising cost (rhetorical question, I know that’s wrong)? How can you determine how many widgets you would have sold without Groupon to predict that profit margin loss?
Kinda makes you think, doesn’t it? Does anyone know how retailers who have used Groupon do their accounting? Am I thinking about this correctly or am I off base? Let me know!