______________________________________________________
FORWARD‑LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in “Item 1A: Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
ITEM 1: BUSINESS
Overview
Groupon is a local 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, promotions and the occasional guy dancing on a street corner in a gorilla suit. By bringing the brick and mortar world of local commerce onto the Internet, Groupon is creating a new way for local merchant partners 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.
We started Groupon in October 2008 and have continued to experience significant growth since inception. We believe the growth of our business over the past year demonstrates the power of our solution and the size of our market opportunity:
Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Customers also access our deals directly through our websites and mobile applications. A Daily Deal might offer a $20 Groupon that can be redeemed for $40 in value at a restaurant, spa, yoga studio, car wash or other local merchant partner. Customers purchase Groupons from us and redeem them with our merchant partners. Our revenue is the purchase price paid by the customer for the Groupon less an agreed-upon percentage of the purchase price paid to the featured merchant partner, excluding any applicable taxes and net of estimated refunds. Our gross billings represent the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider revenue to be the strongest top-line indication of our growth and business performance as it measures the total value to Groupon of transactions through our marketplace. Gross billings are not equivalent to revenues or any other metric presented in our consolidated financial statements.
Our Business
The following examples illustrate how our marketplace works and the benefits it can provide our merchant partners and consumers.
Wraps, Sandwiches and Salads at Cranberry Café, Philadelphia, Pennsylvania
After investing in different advertising platforms with very limited success and ways to measure a return on her investments, Cranberry Café owner Susan Han found success with Groupon. Cranberry ran Groupon Now! (real-time deals) in July 2011 and eventually ran a traditional Groupon daily deal feature. The revenue of the business increased more than 35 percent in just one quarter and Han estimates that 90 percent of Groupon customers have become repeat clientele. Cranberry Café is also one of the first merchants in the country to use Groupon's entire three-pronged marketing suite: traditional Groupon feature deals, Groupon Now! and Groupon Rewards, a customer retention and loyalty tool.
Photography Workshop with Chimpsy, Denver, Colorado
Chimpsy co-founders Mark Cafiero and Shaun Worley were looking for a way to increase the visibility of their business and found it through Groupon. Once a small company offering photography workshop classes only in Denver, Chimpsy used Groupon's marketing platform to expand their reach and now offer classes in 30 markets across the country. Approximately 40 additional employees were hired to help support the company's growth.
One or Two Night Getaway at Smithfield Station, Smithfield, Virginia
Located in a quaint river port town with a rich history, Vice President Randy Pack turned to Groupon Getaways to help bring in new customers and raise the profile of his family's historic hotel, restaurant and marina. After running a number of strategically placed deals through Groupon's travel platform, the waterfront oasis was able to successfully reach its target audience of consumers looking for a quick weekend getaway and living within four hours of the establishment. Pack estimates that 85 percent of the business they generated through Groupon was from first-time customers. In addition, the deals helped to spawn a number of positive online guest reviews.
Our Opportunity
We have created a marketplace for connecting local merchants to consumers. Although there are many companies that have tried to replicate our approach, we believe that the customer experience and relevance of our deals, our merchant partner and customer scale and quality, our deep experience and knowledge base that we can draw upon to structure deals effectively, and our brand are sustainable competitive advantages.
Customer Experience and Relevance of Deals. We are committed to providing a great customer experience and maintaining the trust of our customers. Consistent with this commitment, our “Groupon Promise” is core to our customer service philosophy:
"We're confident in the businesses we feature on Groupon and back them with the Groupon Promise. If the experience using your Groupon ever lets you down, we'll make it right or return your purchase. Simple as that."
In addition, we use our technology and scale to target relevant deals based on individual customer preferences. As we increase the volume of transactions through our marketplace, we increase the amount of data that we have about deal performance and customer interests. This data allows us to continue to improve our ability to help merchant partners design the most effective deals and deliver deals to customers that better match their interests. We use information about our current and potential customers to select and send deals via email, and our mobile applications and website can also target deals to current and potential customers based on proximity to the sponsoring merchant partner. Increased relevancy enables us to offer several daily deals, which we believe results in increasing purchases by targeted subscribers, thereby driving greater demand for Groupons. We monitor the relevancy of deals by measuring purchasing rates among targeted subscribers.
Merchant Scale and Quality. Our sales force enables us to work with local, national and online merchant partners in
175 North American markets and 47 countries. We believe that the size of our customer base allows us to attract merchant partners, because ultimately merchant partners want to be able to reach the largest possible audience for their product offerings. We draw on the experience and knowledge we have gained to evaluate prospective merchant partners based on quality, location and relevance to our growing customer base. We maintain a large base of prospective merchant partners interested in our marketplace, which enables us to be more selective and offer our subscribers higher quality deals. Increasing our merchant partner base also increases the number and variety of deals that we offer to customers, which we believe drives higher customer growth and user traffic, and in turn promotes greater merchant interest in offering deals through our marketplace, creating a network effect.
Brand. We believe we have built a trusted and recognizable brand by delivering a compelling value proposition to merchant partners and customers. A benefit of our brand is that a substantial portion of our customers are acquired through word-of-mouth, which we consider sources other than from a paid‑for link to our website. We believe our brand is trusted due to our dedication to our customers and our significant investment in customer satisfaction.
Our Strategy
Our objective is to become an essential part of everyday local commerce for consumers and merchants. Key elements of our strategy include the following:
Grow our subscriber and customer base. We have made significant investments to acquire subscribers through online marketing initiatives, such as search engine marketing, display advertisements, referral programs and affiliate marketing. In addition, our subscriber base has increased by word-of-mouth. We intend to continue to invest in acquiring subscribers so long as we believe the economics of our business support such investments, however we have continued to shift our efforts toward converting subscribers into customers who purchase Groupons. We do so by providing more targeted and real-time deals, delivering high quality customer service and expanding the number and categories of deals we offer. We intend to continue investing in the development of increased relevance of our service as the number and variety of the deals we offer our subscribers increase and we gain more information about our subscribers' interests. Our investment in the growth of our subscriber base and achieving optimal subscriber levels at any given time will be directly linked to the breadth and location of our base of merchant partners. As such, while total subscribers is a key metric to measure our progression over the long term, it is not a key operational metric in the same manner as is our active customer base, which we discuss below.