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Vonage keeps spending more for less

Vonage’s marketing spend is still out of control.

Every quarter since they went public their CEO has spoken to their marketing costs. Yet nothing much has changed.

As Doug Mohney reported, “marketing expense per customer [acquired] – has gone up to $309, despite reducing marketing costs by $3 million from the previous quarter.” At that price Vonage doesn’t turn a profit on a new customer until year two.

Vonage spends 7 times what they should on customer acquisition.

Being well plugged-in and connected has benefits. One is insight into what VoIP providers are spending to acquire new customers. Not surprisingly none spend like Vonage.

Some averages to consider:

  • Monthly recurring revenue: $25 (per account)
  • Customer term: 18 (months)
  • Life time value: $450 (top line revenue)
  • Customer acquisition cost: $45 – $90 (10 – 20% of life time value)

Vonage is spending seven times what a competitors does for the same customer.  But why?

Why Vonage spends more then other VoIP providers

There are two main reasons why Vonage spends way too much on customer acquisition.

    Vonage sells to the wrong customers.When Vonage first launched their service they were catering to the early adopter. Early adopters are generally well educated and have high incomes. They also cost a premium to acquire.Today there are no more early adopters. Yet Vonage still spends to acquire customers like they are all early adopters. They’re “selling” to the early adopter when the average Joe is the one buying.

    You don’t spend the same for an average Joe as an early adopter. Average, price conscious, low educated (about the technology) customers don’t command a $300 acquisition cost.

    They don’t have the best product

    You know Vonage is plain old VoIP service. But they’re customers think it is JUST like their home phone. Which means it has the same quality as their home phone.

    Sometimes it does, sometimes it doesn’t. And that’s the problem.

    Average price conscious consumers who can’t appreciate the limitations of the technology which handcuffs Vonage’s ability to guarantee service quality are a huge support liability. Vonage has been overspending on acquiring tens of thousands of these.

You have to spend proportionate to the premium of your service and customer using it. Vonage is doing the exact opposite. They keep spending more to acquire customers worth less and less.

Vonage needs to get back to the basics.

Vonage needs to start at square one – figure out a way to guarantee a high level of service quality.

While figuring that out, Vonage should kill the spray and pray advertising. It’s way to costly. Instead they should get small and flesh out niches through education and interaction.

Finally they should give up the quest for “innovation” and come out with a solid hosted VoIP PBX offering. There’s more money in business customers then pleasing the VoIP industry with a new bell or whistle.

I know. Easier said then done. Reality is it must be done.

Otherwise Vonage won’t be around for long.

Garrett Smith

Garrett Smith is a Technology Marketing and Sales Professional

This Post Has 2 Comments

  1. Michael Graves

    Vonage needs to take some notes from Magic Jack. I bet that their cost per new end-user is trivially low. So low that they may not care much about churn after a few months.

  2. Garrett Smith

    @ Michael

    It has to be that low. There isn’t a lot of money in their service.

    …and they use very effective marketing tools (online, direct mail, 2 minute spots) that have a better ROS then brand campaigns.

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