SAN FRANCISCO Groupon spends millions of dollars enticing new subscribers, but the largest daily deal company wants to slash that cost to zero in less than three years, a big part of its quest for profitability, according to two people familiar with the company.
Groupon spent $345.1 million in the first half of this year to acquire subscribers through online efforts including search- engine marketing, display ads, referral programs and affiliate marketing.
The company plans to get subscriber-acquisition spending down to zero by the end of 2013, the people said on condition of anonymity because Groupon is a private company.
The company will still spend money on other types of marketing, such as ads that encourage existing subscribers to purchase deals, they added.
Groupon also expects to keep spending money to reacquire subscribers who leave. But that will cost a lot less than what the company is currently spending to attract new subscribers, the people explained.
Groupon is racing toward a $750 million initial public offering, but regulators and some on Wall Street have questioned its accounting and heavy spending.
The daily deals industry that Groupon helped create has been experiencing growing pains recently. Facebook ended its Deals business after only four months, while Yelp's Chief Executive said this week that some types of popular local businesses think daily deals are "uneconomic," raising questions about the sustainability of the model.
Groupon's IPO filing in June revealed a company growing quickly, but losing a lot of money. Marketing spending on new subscribers has been a big source of those losses and some analysts worry that Groupon may have to keep spending heavily to attract and retain customers.
However, in the second quarter of 2011, marketing costs fell to $170.5 million from $208 million in the previous three months, according to Groupon's latest IPO filing.
A plan to eliminate subscriber-acquisition spending by the end of 2013 suggests that is when Groupon expects it will have collected all the potential customers it can.
In a memo to employees last week, Groupon Chief Executive Andrew Mason wrote that the company will eventually "run out of people we can add to our e-mail list."
"We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and make sure our customers keep buying from us," he said in the memo.
Groupon's current plan is to be profitable by the end of 2011, based on consolidated segment operating income, or CSOI, the people familiar with the company said.
This is operating profit excluding stock-based compensation costs and acquisition-related expenses. But the CSOI metric includes subscriber-acquisition spending.
Groupon reported a loss of more than $60 million on this basis during the second quarter. Most of these losses were from Asia, while Europe was profitable and the United States and Latin America had small losses. The company expects all regions to be profitable by the end of this year, the people said.
A spokesman for Groupon declined to comment.
(Reporting by Alistair Barr, editing by Maureen Bavdek and Gunna Dickson)