[ebbv]

What I don't get is this; how does Living Social do ~$500mm in revenue and still fail to be in the black? It's not like they have any physical merchandise. All their expenses should be personnel, servers and bandwidth right? How are they bleeding through over $500mm in a year then? All the employees are overpaid? Paying too much for servers?

[itsprofitbaron]

The ~$500M number doesn’t consider that 50% of that goes to the merchant leaving ~$250M.

After that they have a "team of more than 4,500 employees includes LivingSocial professionals in every city where we offer deals"[1], 19 offices[2] plus another office/shop thing called 918F Street[3] and they have a 5 month training program[4] which adds costs to their hosting, software design etc.

Once they've paid out for its 4,500 employees, offices, hosting, software design, training programme, legal costs etc they also have significant marketing costs as well. Although companies like Ampush have helped them to lower it recently[5]

[1] http://corporate.livingsocial.com/bythenumbers

[2] http://corporate.livingsocial.com/ourcompany

[3] http://www.918fstreet.com

[4] http://hungryacademy.com/

[5] http://ampush.com/ampush-lowers-livingsocials-cpa-costs-on-f...

[lawdawg]

They count it as revenue before paying the merchant. Their true revenue is probably much lower than $500mm.

[zpconn]

It's amazing how many companies have tried to pull this little accounting trick, or variations of it. Most of them have failed or else fallen from glory.

[ebbv]

Ahhhh, ok. That seems like shady accounting to me, then. Calling any money "revenue" before the merchants get their share.

[jordo37]

That's not shady accounting, revenue is the income a company receives before handling any expenses, which in this case would include payment of merchants. This is why revenue is called the top-line - it represents the first number on any balance sheet before you subtract anything away.

[thetrb]

If they keep ~50% of the coupon price wouldn't that just mean $250mm then? Still a big number.

[endtime]

They have 4000 employees. If they cost (salary + benefits + taxes + etc.) $100k a year each, on average, then that'd be $400m.

[mattmaroon]

It's gross revenue rather than net. Take 50% off the top for paying merchants. Then the expenses you mentioned (sales cost, software design, hosting, etc.).

My guess though is that their major cost is customer acquisition. That seems to be the norm in this space. They're buying customers for $5 and making $2.50 off them (numbers theoretical, as an example) hoping to make the rest back later when they've won the market.

[kjackson2012]

They can't claim the merchants' money as gross revenue, if they are using GAAP. It's the same issue that Groupon ran into and got slapped for.

[mattmaroon]

Groupon changed from "gross revenue" (which did not deduct money paid to merchants) to "net revenue" (which did). I believe they did this willingly because they were going to IPO, not because they were "slapped" or due to GAAP.

Living Social is private and can do whatever they want, but they probably are using net if they're comparing themselves to Groupon. Otherwise they're making themselves look half the size when they are really a quarter, which I suppose could be purposeful.

[hinathan]

There's so e serious irony there if those are the numbers, given that that's what the merchants are supposed to be doing.

[doktrin]

There are a couple disparate pieces to their earning puzzle that don't quite add up to me :

1. Many here seem to feel that taking 50% is unfair to their merchant partners. Yet, they are nonetheless struggling to turn a profit

2. Like any other coupon, LS deals run the risk of un-use. Speaking for myself, I have forgotten about at least 4 separate deals, and am not an active "daily deals" consumer.

How can LS ever be profitable? It feels like they are already absorbing as much net revenue as they can, and have the deck as reasonably stacked as possible. Is it a question of needing to run leaner (they do spend hand over fist, in my experience)?

[datasage]

By growing and getting into new markets you can stay ahead of the curve. But once you hit saturation, its going to catch up with you. On top of that there is fatigue for this model all together.

[bruceboughton]

What is the issue with un-use? If you don't use it, you've already paid for it.

[AntiRush]

If we look at Groupon as a model, it becomes clear that SG&A is the major expense for a deals company like Living Social.

Earlier in its existence, marketing was also a huge cash sink for Groupon. This has improved for them as their product matured, but it's likely that Living Social is still spending a huge amount here, too.

http://investor.groupon.com/releasedetail.cfm?ReleaseID=7002...

[wallawe]

Acquiring similar companies at peak value then having to write them down or off [1]. Since that problem has been taken care of, profitability is not only attainable but within short reach.

[1] http://articles.washingtonpost.com/2012-10-25/business/35501...

[phpnode]

marketing.