In case you didn’t notice, social media is transforming life as we know it. The old laws of business, supply and demand, and even gravity, no longer apply.
In the world of business, our longstanding adherence to something we call GAAP (Generally Accepted Accounting Principles) is giving way to SMAAP (Social Media Accepted Accounting Principles). A pioneer in this new world of accounting is Groupon. According to the New York Times, the firm has developed the ACSOI metric:
“Short for adjusted consolidated segment operating income, Acsoi is a yardstick that Groupon recommends investors use to determine how it is performing. It is essentially operating profit minus the company’s online marketing and acquisition expenses — a highly nonstandard approach that has many scratching their heads.”
My take: A brilliant idea. And there’s no reason why Groupon — or any other start-up looking to capitalize on the social media bubble — should stop at that metric.
Here are my suggestions for new metrics for the social media bubble:
1. Temporarily Unconverted Revenue from Fans (TURF)
During the Dot Com boom, many start-ups focused on “eyeballs” — i.e., how many site visitors they got during a reporting period. The problem, they discovered, was that eyeballs didn’t equal revenue, and this hurt their ability to maintain their initially high valuations.
SMubbles (social media bubble start-ups) need not let this happen to them. They should encourage investors to focus on a metric called TURF — temporarily unconverted revenue from fans. There’s simply no reason why a SMubble should have to rely on real and realized revenue when proving its value to the market.
The question, of course, is how much does that Facebook fan represent in unrealized revenue? Adweek says $3.60. Sound’s good to me. Let’s move on to the next metric.
2. Cumulative Revenue to Periodic Expense Ratio (CRePE Ratio).
Under the ancient GAAP method of accounting, profitability is calculated by comparing revenue to expenses for a given reporting period.
For a SMubble, this form of accounting can be detrimental to its valuation if expenses are rising faster than revenue (e.g., in periods when TURF is rising, called TURFing).
Instead, a SMubble should report profitability by using the CRePE Ratio — its cumulative revenue over the course of the year divided by the current period’s expense.
Here’s how it works:
Let’s say a SMubble brings in $1 million a quarter and spends $2 million per quarter. Under GAAP (Grievously Archaic Accounting Principles), that SMubble would be operating unprofitably. But using the CRePE Ratio, in the 2rd quarter of the year it would break even, and show a profit in Q3! Hooray for the CRePE Ratio!
3. Earnings Before Interest, Taxes, and Expenses (EBITEX).
SMubbles who generate no revenue during a particular reporting period won’t like the CRePE Ratio if expenses increase from the last period to the current one.
Their measure of profitability should be EBITEX — Earnings before interest, taxes, and expenses.
In the age of social media, there’s simply no reason to let something like operating expenses bring down your profits, and get in the way of a high valuation.
(h/t to @AtomicTango for alerting me to the NYTimes article)