Groupon may be one of the hottest consumer internet startups ever, but its credibility in the tech community has fallen substantially in recent months on the heels of the company’s IPO filing.

The reason: to many, Groupon’s financials look downright questionable, leading some to question whether it’s a company built in the mold of .com failures that imploded little more than a decade ago or worse — a Ponzi scheme.

Groupon has been forced by the SEC to revise certain portions of the picture it has painted for prospective investors, but the company can’t mount a strong public defense because it’s in the quiet period.

But that isn’t stopping Groupon’s CEO from defending his company internally to the thousands of people it employs.

In a strongly worded and very detailed email to his staff, Mason took aim at everyone from the company’s critics to its competitors. The most interesting thing about Mason’s email: the discussion around the company’s email list, which it is essentially betting the farm on.

On this, Mason wrote:

Our marketing — at least the customer acquisition marketing that we remove from ACSOI — is designed to add people to our own long-term marketing channel — our daily email list. Once we have a customer’s email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald’s, or most other companies.

If I’m a Johnson, and I’m trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you’ve bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid.

There is no cost of reacquisition — that’s unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.

He went on:

Eventually, we’ll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we’re acquiring as many subscribers as we can as quickly as we can.

We aren’t paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we’ll run out of people we can add to our email 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 to make sure our customers keep buying from us.

Long story short:

  • Groupon thinks its email list is the gift that keeps on giving, and thus, it’s the company’s most valuable asset.
  • That has made spending big bucks to grow the list a no-brainer.
  • Eventually, Groupon will have so many subscribers, it won’t have to spend much money on marketing (or so Mason believes).

On one hand, Groupon is perhaps one of the best examples of how an ‘old-school‘ channel — email — can drive the growth of a business. A few short years ago, Groupon didn’t exist. Today, it’s a billion-dollar company, thanks in large part to email.

On the other hand, anyone who has been involved in email marketing for some time will point out that Mason’s beliefs seem unrealistic, if not naive. Subscriber acquisition is just one part of the email marketing equation; keeping subscribers and converting them is just as important.

Here, there’s evidence that Groupon is going to increasingly face some challenges:

  • As the number of Groupon subscribers has grown to over 115m, the number of actual customers as a percentage of subscribers has slipped. In Q1 2010, this number stood at just over 25%. In Q2 2011, it dropped to just over 19%.
  • The number of coupons sold to subscribers is dropping even faster. In Q1 2010, coupons sold/subscribers was a healthy 51%; in Q2 2011 it fell to just under 34%. In other words, more subscribers aren’t buying.

Qualitatively, Groupon’s challenges aren’t surprising: the ‘daily deal‘ has been largely commoditized and Groupon has lots of competition. Groupon is an ecommerce play, so there are few if any network effects. And because Groupon is location-based, it will, in theory, one day ‘run out‘ of new merchants to sell groupons for.

So what does this mean?

Groupon doesn’t need to worry about subscriber acquisition; it needs to worry about keeping its emails relevant and maximizing conversions. Without investment in subscriber retention and targeting, its email list will inevitably deliver declining returns.

Unfortunately, Mason’s email hints that the Groupon leader has an overly simplistic view of email marketing, one in which lists take care of themselves and continue to produce with minimal investment.

That’s not the case, and thus, unless Groupon figures out that subscriber acquisition is not the end-all and be-all of email marketing, it may become the poster child for both email marketing success and failure.